Chapter 14 – Business Combinations (Part 2)

Multiple Choice – Theory

1. C 6. B
2. C 7. D
3. D 8. A
4. A 9. A
5. A

Multiple Choice – Computational

Answers at a glance:
1. A 6. D 11. A 16. C 21. B 26. D
2. D 7. B 12. B 17. D 22. C 27. C
3. A 8. A 13. D 18. C 23. A 28. B
4. B 9. C 14. A 19. D 24. B
5. D 10. C 15. B 20. A 25. C

Solution:
1. A
Solution:
COLLOQUY Co. Combined entity Increase
Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000

The fair value of the shares transferred as consideration for the

business combination is ₱4,000,000 (i.e., total increase in share
capital and share premium accounts).

2. D
Solution:
Increase in COLLOQUY’s share capital account
(see table above) 400,000
Divide by: ABC’s par value per share 40
Number of shares issued 10,000

3. A
Solution:
Fair value of consideration transferred 4,000,000
Divide by: Number of shares issued 10,000
Acquisition-date fair value per share 400

4. B

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Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000

5. D 3,200,000 – COLLOQUY’s retained earnings

6. D
Solution:
COLLOQUY Co. Combined entity Increase
Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000

Fair value of shares transferred 4,000,000

Divide by: ABC’s fair value per share 400
Number of shares issued 10,000

7. B
Solution:
Increase in share capital account (see table above) 400,000
Divide by: Number of shares issued 10,000
Par value per share 40

8. A
Solution:
Consideration transferred (see previous computation) 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (squeeze) (3,700,000)
Goodwill (given information) 300,000

9. C
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 25%) 1,000,000
Previously held equity interest in the acquiree 720,000
Total 4,920,000
Fair value of net identifiable assets acquired (4,400,000)
Goodwill 920,000

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10. C
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 25%) 1,000,000
Previously held equity interest in the acquiree 720,000
Total 4,920,000
Fair value of net identifiable assets acquired (4,400,000)
Goodwill 920,000

11. A
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 10%) 400,000
Previously held equity interest in the acquiree 720,000
Total 4,320,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill 320,000

12. B
Solution:
Consideration transferred -
Non-controlling interest in the acquiree (4M x 100%) 4,000,000
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill -

13. D
Solution:
Consideration transferred (4M x 60%*) 2,400,000
Non-controlling interest in the acquiree (4M x 40%*) 1,600,000
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill -

*After the business combination, the parent’s ownership interest is

increased to 60% (i.e., 36,000 ÷ 60,000). Consequently, the non-
controlling interest is 40%.

14. A

15. B

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16. C

17. D

18. C
Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment on business combination 4,000,000
Additional payment to subsidiary’s former owner 200,000
Consideration transferred on the business combination 4,200,000

The fair value of net identifiable assets acquired is computed as

follows:
Fair value of identifiable assets 6,400,000
Fair value of inventory not transferred to DIAPHANOUS (360,000)
Adjusted fair value of identifiable assets acquired 6,040,000
Fair value of liabilities assumed (3,600,000)
Adjusted fair value of net identifiable assets acquired 2,440,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (2,440,000)
Goodwill 1,760,000

19. D
Solution:
The settlement loss to is computed as follows:
Settlement loss before adjustment (“off-market” value) 320,000
Carrying amount of deferred liability (240,000)
Adjusted settlement loss 80,000

The consideration transferred on the business combination is

computed as follows:
Cash payment 4,000,000
Payment for the settlement of pre-existing relationship
(‘off-market’ value) (320,000)
Consideration transferred on the business combination 3,680,000

The fair value of net identifiable assets acquired is computed as

follows:

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Fair value of subsidiary’s identifiable assets 6,400,000
Intangible asset – reacquired right 160,000
Carrying amount of asset related to the reacquired rights –
(200,000)
prepayment
Adjusted fair value of identifiable assets acquired 6,360,000
Fair value of liabilities assumed (3,600,000)
Fair value of net identifiable assets acquired 2,760,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 3,680,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 3,680,000
Fair value of net identifiable assets acquired (2,760,000)
Goodwill 920,000

20. A
Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment 4,000,000
Payment for the settlement of pre-existing relationship
(360,000)
(‘off-market’ value)
Consideration transferred on the business combination 3,640,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 3,640,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 3,640,000
Fair value of net identifiable assets acquired (2,800,000)
Goodwill 840,000

21. B
Solution:
The settlement gain or loss is computed as follows:
Payment for the settlement of pre-existing relationship
400,000
(fair value)
Carrying amount of estimated liability on pending lawsuit (520,000)
Settlement gain 120,000

The consideration transferred on the business combination is

computed as follows:
Cash payment 4,000,000
Payment for the settlement of pre-existing relationship (400,000)

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 (fair value)
Consideration transferred on the business combination 3,600,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 3,600,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 3,600,000
Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)
Goodwill 800,000

22. C
Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment 4,000,000
Fair value of contingent consideration 40,000
Consideration transferred on the business combination 4,040,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,040,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,040,000
Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)
Goodwill 1,240,000

23. A
Solution:
*The unrealized loss on change in fair value is computed as follows:
Fair value of liability on January 1, 20x1 40,000
Fair value of liability on December 31, 20x1 60,000
[(2.2M – 1.6M) x 10%]
Increase in fair value of liability (loss) (20,000)

Dec. Unrealized loss on change in fair value – P/L 20,000

31, Liability for contingent consideration 20,000
20x1 to recognize loss on change in fair value of liability
assumed for contingent consideration

24. B
Solution:
Dec. Liability for contingent consideration 40,000
31, Gain on extinguishment of liability – P/L
20x1
40,000

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25. C
Solution:
The consideration transferred on the business combination is
computed as follows:
Fair value of shares issued (10,000 sh. x ₱400 per sh.) 4,000,000
Fair value of contingent consideration 360,000
Consideration transferred on the business combination 4,360,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,360,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,360,000
Fair value of net identifiable assets acquired (6.4M –3.6M) (2,800,000)
Goodwill 1,560,000

26. D

27. C
Solution:
Dec. Share premium – contingent consideration 360,000
31,
Share premium 360,000
20x1

28. B
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:

Fair value of identifiable assets acquired 6,400,000

Fair value of liabilities assumed 3,600,000 -
Fair value of contingent liability assumed 400,000 (4,000,000)
Fair value of net identifiable assets acquired 600,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,000,000
Non-controlling interest in the acquiree 320,000
Previously held equity interest in the acquiree -
Total 4,320,000
Fair value of net identifiable assets acquired (2,400,000)
Goodwill 1,920,000

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Exercises
1. Solutions:
Requirement (a): Number of shares issued
CONJUNCTION Co. Combined entity Increase
Share capital 1,200,000 1,400,000 200,000
Share premium 600,000 2,400,000 1,800,000
Totals 1,800,000 3,800,000 2,000,000

The fair value of the shares transferred as consideration for the

business combination is P2,000,000.

The number of shares issued in the business combination is

computed as follows:
Fair value of shares transferred 2,000,000
Divide by: CONJUNCTION’s fair value per share 200
Number of shares issued 10,000

Requirement (b): Par value per share

The par value per share of the shares issued is computed as follows:
Increase in share capital account (see table above) 200,000
Divide by: Number of shares issued 10,000
Par value per share 20

Requirement (c): Acquisition-date fair value of the net

identifiable assets acquired
(1) Consideration transferred (see previous computation) 2,000,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired
(squeeze) (1,400,000)
Goodwill (given information) 600,000

2. Solutions:
Scenario #1: Goodwill (gain on bargain purchase) is computed as
follows:
(1) Consideration transferred 1,600,000
(2) Non-controlling interest in the acquiree (2M x 25%) 500,000
(3) Previously held equity interest in the acquiree 360,000
Total 2,460,000
Fair value of net identifiable assets acquired (2,200,000)
Goodwill 460,000
*100% minus 75%

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Scenario #2: The previously held interest was initially classified
as FVOCI
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred 1,600,000
(2) Non-controlling interest in the acquiree (2M x 25%) 500,000
(3) Previously held equity interest in the acquiree 360,000
Total 2,460,000
Fair value of net identifiable assets acquired (2,200,000)
Goodwill 460,000

3. Solution:
(1) Consideration transferred 1,600,000
(2) Non-controlling interest in the acquiree (2M x 10%*) 200,000
(3) Previously held equity interest in the acquiree 360,000
Total 2,160,000
Fair value of net identifiable assets acquired (2,000,000)
Goodwill 160,000
*100% minus 90%

4. Solution:
(1) Consideration transferred -
(2) Non-controlling interest in the acquiree (2M x 100%) 2,000,000
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (2,000,000)
Goodwill -

5. Solution:
(1) Consideration transferred (2M x 60%) 1,200,000
(2) Non-controlling interest in the acquiree (2M x 40%) 800,000
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (2,000,000)
Goodwill -

6. Solutions:
Case #1:
The unadjusted goodwill is computed as follows:
(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -

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 Total 2,000,000
Fair value of net identifiable assets acquired (1,400,000)
Goodwill (recognized on Sept. 30, 20x1) 600,000

The adjusted fair value of net identifiable assets acquired is computed

as follows:
Fair value of identifiable assets acquired 3,200,000
Provisional amount assigned to building (1,400,000)
Fair value of building per appraisal 1,000,000
Adjusted fair value of identifiable assets acquired 2,800,000
Fair value of liabilities assumed ( 1,800,000)
Adjusted fair value of net identifiable assets acquired 1,000,000

The adjusted goodwill is computed as follows:

(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (1,000,000)
Goodwill 1,000,000

The adjustment to goodwill is computed as follows:

Goodwill recognized on September 30, 20x1 600,000
Adjusted goodwill 1,000,000
Increase in goodwill 400,000

The adjustment to depreciation expense recognized in 20x1 is

computed as follows:
Depreciation recognized (P1,400,000 ÷ 10 years x 3/12) 35,000
Adjusted depreciation (P1,000,000 ÷ 5 years x 3/12) 50,000
Additional depreciation expense for 20x1 15,000

The measurement period adjusting entries are as follows:

July Goodwill 400,000
1,
Building 400,000
20x2
to record adjustment to
provisional amount assigned to building
July Retained earnings 15,000
1,
Accumulated depreciation 15,000
20x2

Of course if monthly depreciation expenses were recognized during

January to June 30, 20x2, the monthly depreciation expenses
recognized shall also be adjusted accordingly.

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Case #2:
INNOCUOUS shall recognize the fair value of the patent as a
retrospective adjustment to the goodwill recognized on September
30, 20x1. Further, the amortization expense that would have been
recognized had the patent been recorded on September 30, 20x1
shall also be recognized as retrospective adjustment.
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired 3,200,000
Fair value of unrecorded patent 200,000
Adjusted fair value of identifiable assets acquired 3,400,000
Fair value of liabilities assumed ( 1,800,000)
Adjusted fair value of net identifiable assets acquired 1,600,000
The adjusted goodwill is computed as follows:
Unadjusted Adjusted
(1) Consideration transferred 2,000,000 2,000,000
Non-controlling interest in the
(2) acquiree - -
Previously held equity interest in the
(3) acquiree - -
Total 2,000,000 2,000,000
Fair value of net identifiable assets
acquired (1,400,000) (1,600,000)
Goodwill 600,000 400,000

The measurement period adjusting entries are as follows:

July 1, Patent 200,000
20x2
Goodwill 200,000
July 1, Retained earnings (200K ÷ 4 x 3/12) 12,500
20x2
Accumulated amortization 12,500

Case #3:
Because the new information is obtained after the measurement
period (i.e., beyond one year from September 30, 20x1),
INNOCUOUS should account for the new information in accordance
with PAS 8 as correction of error. PAS 8 requires the correction of
an error to be accounted for retrospectively and for the financial
statements to be presented as if the error had never occurred by
correcting the prior period’s information.

Adjustments shall be made similar to those in Case #2; however, the

disclosures provided in the notes will vary because of the application
of PAS 8 instead of PFRS 3.

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The correcting entries on the 20x1 financial statements are as
follows:
Nov. 1, Patent 200,000
20x2
Goodwill 200,000
Nov. 1, Retained earnings (200K ÷ 4 x 3/12) 12,500
20x2
Accumulated amortization 12,500

7. The new information obtained on April 1, 20x2 shall be

accounted for as measurement period adjustment because it
provides evidence of facts and circumstances that, if known,
would have affected the measurement of the amounts recognized
as of September 30, 20x1.

The new information obtained on July 1, 20x2 shall not be accounted

for as a measurement period adjustment because it relates to facts
and circumstances that have not existed as of acquisition date.
However, this information may necessitate impairment testing on the
goodwill recognized. Any impairment shall be recognized in profit or
loss (see discussion later in this chapter).
.
The adjusted goodwill is computed as follows:
Unadjusted Adjusted
(1) Consideration transferred 2,000,000 2,000,000
Non-controlling interest in the
(2) acquiree - -
Previously held equity interest in
(3) the acquiree - -
Total 2,000,000 2,000,000
Fair value of net identifiable assets
acquired (1,400,000) (1,600,000)
Goodwill 600,000 400,000

The measurement period adjusting entry on April 1, 20x2 is as

follows:
Apr. 1, Net identifiable assets 200,000
20x2
Goodwill 200,000

8. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment on business combination 2,000,000
Additional payment to TRANSPARENT’s
former owner 100,000
Consideration transferred on the business

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 combination 3,100,000

The fair value of net identifiable assets acquired is computed as

follows:
Fair value of identifiable assets 2,200,000
Acquisition-date fair value of inventory not
transferred to DIAPHANOUS ( 180,000)
Adjusted fair value of identifiable assets acquired 3,020,000
Fair value of liabilities assumed (1,800,000)
Adjusted fair value of net identifiable assets acquired 1,220,000

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 2,100,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,100,000
Fair value of net identifiable assets acquired (1,220,000)
Goodwill 880,000

9. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment 2,000,000
Payment for the settlement of pre-existing relationship
(“off-market value) ( 160,000)
Consideration transferred on the business
combination 1,840,000

The fair value of net identifiable assets acquired is computed as

follows:
Fair value of SLAVE’s identifiable assets 3,200,000
Identifiable intangible asset on reacquired rights 80,000
Carrying amount of asset related to the reacquired
rights – prepayment ( 100,000)
Adjusted fair value of identifiable assets acquired 3,180,000
Fair value of liabilities assumed ( 1,800,000)
Fair value of net identifiable assets acquired 1,380,000

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 1,840,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 1,840,000
Fair value of net identifiable assets acquired (1,380,000)

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 Goodwill 460,000

10. Solution:
Because the settlement of the pre-existing relationship is treated as a
separate transaction, the amount attributed to the settlement loss
(i.e., P180,000) shall be accounted for as payment for the
settlement of the pre-existing relationship. Therefore, the adjusted
consideration transferred on the business combination is
P1,820,000 (P2M – P180,000).

The “at-market” value of P140,000 shall be subsumed in goodwill

because there is no reacquired right.

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 1,820,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 1,820,000
Fair value of net identifiable assets acquired (1,400,000)
Goodwill 420,000

11. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment 2,000,000
Payment for the settlement of pre-existing
relationship (fair value) ( 200,000)
Consideration transferred on the business combination 1,800,000

The settlement gain or loss is computed as follows:

Payment for the settlement of pre-existing
relationship (fair value) 200,000
Carrying amount of estimated liability on pending lawsuit ( 260,000)
Settlement gain 60,000

There is gain because the liability is settled for a lower amount.

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 1,800,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired (1,400,000)

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 Goodwill 400,000

12. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment 2,000,000
Fair value of contingent consideration 20,000
Consideration transferred on the business
2,020,000
combination

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 2,020,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,020,000
Fair value of net identifiable assets acquired (1,400,000)
Goodwill 620,000

13. Solution:
The consideration transferred on the business combination is
computed as follows:
Fair value of shares issued 2,000,000
Fair value of contingent consideration 180,000
Consideration transferred on the business
2,180,000
combination

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 2,180,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,180,000
Fair value of net identifiable assets acquired (1,400,000)
Goodwill 780,000

14. Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired 3,200,000
Fair value of liabilities assumed 1,800,000
Fair value of contractual contingent liability assumed 20,000
Fair value of contractual contingent liability assumed 60,000

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Fair value of noncontractual contingent liability assumed 100,000
Total fair value of liabilities assumed 1,980,000
Fair value of net identifiable assets acquired 1,220,000

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree 160,000
(3) Previously held equity interest in the acquiree -
Total 2,160,000
Fair value of net identifiable assets acquired (1,220,000)
Goodwill 940,000

15. Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:

Fair value of identifiable assets acquired 3,200,000

Fair value of liabilities assumed 1,800,000
Fair value of contractual contingent liability
assumed 200,000 (2,000,000)
Fair value of net identifiable assets
acquired 1,200,000

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree 160,000
(3) Previously held equity interest in the acquiree -
Total 2,160,000
Fair value of net identifiable assets acquired (1,200,000)
Goodwill 960,000

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