THEORIES

1. This occurs when one company acquires another or when two or more companies merge into one. After which, one
company gains control over the other.
a. Business combination
b. Investment in associate
c. Asset acquisition
d. None of the above

2. What are the two essential elements of a business combination?

a. Acquirer and acquiree
b. Consideration transferred and net identifiable assets of acquiree
c. Business and control
d. Acquisition date and consideration transferred

3. Control is normally presumed to exist when the acquirer holds how many percentage of interest in the acquiree’s
voting rights?
a. More than 50%
b. At least 50%
c. More than 20%
d. At least 20%

4. Business combination are accounted for using the acquisition method. This method requires the following:
I. Identifying the acquirer
II. Determining the acquisition date
III. Recognizing and measuring goodwill
IV. Analyzing the structure of business combination
V. Obtaining financial records of the acquiring entity

a. I, II, III, IV and V

b. II, III, and IV only
c. I, II, and III only
d. III, IV, and V only

5. On acquisition date, the acquirer recognizes either a resulting goodwill or gain on bargain purchase as an
GOODWILL GAIN ON BARGAIN PURCHASE
a. asset in acquiree’s balance sheet gain in acquiree’s profit or loss
b. asset in acquirer’s balance sheet gain in acquirer’s profit or loss
c. gain in acquirer’s profit or loss asset in acquirer’s balance sheet
d. gain in acquiree’s profit or loss asset in acquiree’s balance sheet
PROBLEMS

Items 6-8 are based on the following information

Riego Corporation and Del Fierro Corporation are two family-owned construction companies in Cebu. It is agreed by the
two families that Riego Corp. should take over the net assets of Del Fierro Corp. on January 1, 2021. The balance sheet
of Del Fierro Corp. immediately prior to the takeover is as follows:

Del Fierro
ACCOUNT TITLES Riego
Carrying Amount Fair Values
Cash 50,000,000 3,500,000 3,500,000
Accounts Receivable 3,000,000 1,500,000 1,500,000
Land 15,000,000 7,500,000 8,750,000
Buildings (net) 7,500,000 5,200,000 4,300,000
Construction Equipment 35,000,000 12,800,000 15,250,000
Construction Machines 42,000,000 22,000,000 23,500,000
Delivery Trucks 36,000,000 13,650,000 15,680,000

Accounts Payable 3,500,000 1,250,000 1,250,000

Loan – Banco de Oro 5,200,000 5,200,000
Loan – Metro Bank 17,500,000
Share Capital (1,000,000 shares at P50 par) 50,000,000 30,000,000
Share Premium 42,000,000 15,000,000
Revenues 85,250,000 7,000,000
Expenses 40,750,000 2,000,000
Net Income 44,500,000 5,000,000
Retained Earnings, January 1, 2021 32,350,000 10,700,000
Net Income 44,500,000 5,000,000
Dividends paid 1,350,000 1,000,000
Retained Earnings, December 31, 2021 75,500,000 14,700,000

The takeover agreement specified the following details:

 Riego Corp. is to acquire all the assets of Del Fierro Corp. except one of the delivery trucks (having a carrying
amount of P4,300,000 and fair value of P4,850,000) and assume all the liabilities except for the loan from
Banco de Oro.
 Cash of P75,000,000, half to be paid on the date of acquisition and half on December 31, 2025 thru note. The
incremental borrowing rate is 5% per annum. (Present value factor is rounded off to the nearest 4 decimals).
 Riego Corp. is to issue 150,000 shares with P50 par value and of P60 fair value per share, these to be
distributed to the former shareholders of Del Fierro Corp together with a land having a fair value of
P5,000,000.
 Riego Corp. is to supply sufficient cash to enable the debt to Banco de Oro to be paid off. It will also give
P500,000 to be distributed directly to the former shareholders of Del Fierro Corp to cover the liquidation costs.
 In addition, Riego Corp. assessed an unrecorded research and development project of Del Fierro Corp.
having a fair value of P125,000. Riego paid legal and accounting fees of P75,000 and P116,000 in stock
issue and registration costs.
REQUIREMENTS:
6. How much is the goodwill or gain on bargain purchase?
7. How much is the total assets after combination?
8. How much is the total shareholders’ equity after combination?
9. On January 1, 2021, Rad issues 150,000 shares with a market value of P80 per share to acquire the assets and
liabilities of Kid. Stock registration fees are P45,000. Consulting, accounting and legal fees connected with the merger
are P18,000. P12,000, and P9,000 respectively. In addition, Rad enters into an earnings contingency agreement,
whereby Rad will pay the former shareholders of Kid an additional amount if Kid performance meet certain minimum
levels. Present value of the contingency is estimated at P218,000 at the acquisition date. However, this value
increases by P50,000 on December 12, 2021. Kid's balance sheet at January 1, 2021 is as follows:
Cash 1,500,000
Receivables 235,000
Inventories 5,600,000
Property, plant and Equipment (net) 3,450,000
Current liabilities 1,245,000
Long-term debt 985,000
Capital Stock 6,000,000
Retained Earnings 2,555,000
An analysis of Kid's net assets and liabilities reveals that book values of some reported items do not reflect their
market values at the date of acquisition:
Inventories are undervalued by P150,000.
Property, plant and equipment is overvalued by P1,200,000.
Long-term debt is overvalued by P75,000.
In addition, the following items are not currently reported on Kid's balance sheet:
Customer list 32,000
Customer contract 15,000
Order backlog 25,000
Internet domain name 36,000
Trademark 42,000
Trade secret processes 25,600
Mask works 35,880
Subscriber list 14,250
Goodwill 75,210
Assembled workforce 123,500
Potential contracts with prospective customers 48,560
In process research and development 62,300
Completed technology 14,785
Broader customer base 22,530
Technically skilled workforce 47,510
Advertising jingles 16,300
Future cost savings 36,230
Moreover, fair value adjustments to the assets acquired and liabilities assumed have deferred tax consequence, but
do not affect the tax bases of the assets and liabilities. The tax rate is 30%.

REQUIRED: Compute for the goodwill or gain on bargain purchase upon acquisition.
10. On January 1, 2021, Connie Co. acquired 75% of controlling interest on Abel Co. by paying cash of P5,200,000. On
this date identifiable assets and liabilities assumed have fair value of P8,520,000 and P5,680,000 respectively.
Connie has estimated restructuring provisions of P1,020,000 representing exit cost of Abel's activities, as well as the
relocation and termination costs of Abel's employees. The said restructuring plan is conditional until the business
combination process is done. If the combination will not happen, no restructuring will happen.

Additional information:

 Connie Co. is renting out a license to Abel Co. under an operating lease. The terms of the lease compared with
market terms are unfavorable. The fair value of the differential is P75,000.
 Abel Co. has an unrecorded customer list of P85,000.
 Connie Co. opted to measure the NCI at P250,000.

REQUIRED: How much is the goodwill or gain on bargain purchase?

11. On January 1, 2021, Annie Co. acquired all of the identifiable assets and assumed all liabilities of Aldrin Inc. by paying
P3,600,000. On this date, identifiable assets and liabilities assumed have fair value of P6,780,000 and P1,340,000
respectively. Terms of the agreement are as follows:
a) 40% of the price shall be paid on January 1, 2025 and the balance on December 31, 2026. The prevailing market
rate on the same date is 10%. (Present value factor is rounded off to the nearest 4 decimals).
b) The acquirer shall transfer its piece of land with book value and fair value of P420,000 and P640,000 respectively
c) Annie shall issue 20,000 shares for an appraised value of P10 per share. An additional valuation of issued shares
was received on May 31, 2021 and June 30, 2022 of P14 and P16 per share respectively.

Additional information:

 Included in the liabilities assumed is an estimated warranty liability with a fair value amounted to P864,000.
 Annie has estimated a restructuring provision due to relocating the non-continuing employees of Aldrin amounting
to P165,000. Aldrin Inc. has a present obligation to settle the said restructuring cost since it has been already
developed a detailed formal plan and such plan is publicly announced.

REQUIREMENT: How much is the goodwill or gain on bargain purchase?

12. Ashley Co. acquired 75% controlling interest on Noe Co. for P2,000,000. Ashley Co. also is to issue 25,000 share for
P40 per share. On this date the fair value of Noe's net identifiable assets is P3,720,000. Ashley Co. incurred the
following transaction costs.
Finder's fees P 22,000
Accountant's fees 16,000
Legal fees 12,500
Cost of registering the stocks in SEC 3,500
Cost of issuing stock certificates 7,200

REQUIRED: Compute for the amount of goodwill if Ashley Co. uses the PFRS for SMEs.
13. Sol Co. will issue shares of P25 par common stock for the net assets of Duke Co. Sol's common stock has a current
market value of P55 per share. Duke's balance sheet accounts follow:
Current assets P 465,000
Property and equipment 920,000
Liabilities 300,000
Common stock, par P4 240,000
Additional paid in capital 445,000
Retained earnings 400,000
Duke's current assets and property and equipment, respectively, are appraised at P545,000 and P1,640,000; its
liabilities are fairly valued. Accordingly, Sol Co issued shares of its common stock with total market value equal to that
of Duke's net assets.

REQUIRED: To recognize goodwill of P590,000 how many shares were issued?

14. Chin Corp. acquired 80% of Troy Corp. on July 1 for P600,000. Legal fees and accountants fee amounted to P26,000.
On that date Troy Corp. had the following book values and market values.
Book Value Market Value
Cash P 70,000 P 70,000
Inventory 140,000 220,000
Plant assets (net) 590,000 640,000
Cost of Goods Sold 210,000
Depreciation Expense 50,000
Liabilities (260,000) (260,000)
Common Stock (20,000)
Retained Earnings (460,000)
Sales (310,000)

REQUIRED: Compute for the amount of goodwill or gain on bargain purchase if non-controlling interest is to be
valued at fair value.

15. Mitzie Company acquires 75% of Sean Company’s common stock for P325,000 cash. At that date, the non-controlling
interest in Sean’s has a book value of P62,500 and a fair value of P92,000. Also on that date, Sean reports
identifiable assets with a book value of P450,000 and a fair value of P525,000, and it has liabilities with a book value
and fair value of P210,000.

REQUIRED: Compute for the amount of goodwill or gain on bargain purchase if non-controlling interest is to be
valued at proportionate basis.
ANSWER KEYS – THEORIES

1. Answer: A. As per the definition of business combination, this typically occurs when one company acquires another or
when two or more companies merge into one. After which, one company gains control over the other. The company
that obtains control over the other is referred to as the parent or acquirer. The other company that is controlled is the
subsidiary or acquiree.

2. Answer: C. A business combination is also defined as a transaction or other event in which an acquirer obtains control
of one or more businesses. Based on this definition, the essential elements of a business combination are business
and control. If the assets acquired (and related liabilities assumed) do not constitute a business, the entity accounts
for the transaction as a regular assets acquisition and not a business combination.

3. Answer: A. Control is normally presumed to exist when the acquirer holds more than 50% (or 51% or more) interest in
the acquiree’s voting rights. However, this is only a presumption because control can be obtained in some other ways
(1)
such as when – the acquirer has the power to appoint or remove the majority of the board of directors of the
(2)
acquiree; the acquirer has the power to cast the majority of votes at board meetings or equivalent bodies within the
(3)
acquiree; the acquirer has power over more than half of the voting rights of the acquiree because of an agreement
(4)
with other investors; or the acquirer controls the acquiree’s operating and financial policies because of a law or an
agreement.

4. Answer: C. Business combination are accounted for using the acquisition method. This method requires the following:
I. Identifying the acquirer;
II. Determining the acquisition date; and
III. Recognizing and measuring goodwill. This requires recognizing and measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquiree
c. Previously held equity interest in the acquiree
d. Identifiable assets acquired and liabilities assumed on the business combination.

5. Answer: B. On acquisition date, the acquirer recognizes a resulting:

a. Goodwill as an asset
b. Gain on bargain purchase as gain in profit or loss (also referred to as negative goodwill). However, before
recognizing a gain on bargain purchase, the acquirer shall reassess whether it has correctly identified all of
the assets acquired and of all the liabilities assumed.
ANSWER KEYS – PROBLEMS

Item 6

Consideration Transferred:
Cash (75,000,000 x 50%) 37,500,000
(75,000,000 x 50% x 0.7835) 29,381,250
Shares (150,000 shares x P60) 9,000,000
Land 5,000,000
Cash to be used in paying the loan from BDO 5,200,000
Cash to be used in paying liquidation costs 500,000 86,581,250
Less: Fair Value of Net Identifiable Assets Acquired:
Cash 3,500,000
Accounts Receivable 1,500,000
Land 8,750,000
Buildings (net) 4,300,000
Construction Equipment 15,250,000
Construction Machines 23,500,000
Delivery Trucks (15,680,000-4,850,000) 10,830,000
Total Assets 67,630,000
Less: Accounts Payable 1,250,000 66,380,000
GOODWILL 20,201,250

Item 7

Cash 6,609,000 * 3,500,000 10,109,000

Accounts Receivable 3,000,000 1,500,000 4,500,000
Land 10,000,000 * 8,750,000 18,750,000
Buildings (net) 7,500,000 4,300,000 11,800,000
Construction Equipment 35,000,000 15,250,000 50,250,000
Construction Machines 42,000,000 23,500,000 65,500,000
Delivery Trucks 36,000,000 10,830,000 46,830,000
Goodwill 20,201,250 - 20,201,250
TOTAL ASSETS 227,940,250

Cash of Riego Corp. before acquisition 50,000,000

Less: Cash paid 37,500,000
Cash paid for BDO loan 5,200,000
500,000
191,000
Cash of Riego Corp. after acquisition 6,609,000

Land of Riego Corp. before acquisition 15,000,000

Less: Land given as part of consideration 5,000,000
Land of Riego Corp. after acquisition 10,000,000
Item 8

Share Capital
Share Capital, Riego 50,000,000
Shares issued upon acquisition 7,500,000 57,500,000
Share Premium
Share Premium, Riego 42,000,000
Share premium on shares issued upon acquisition 1,500,000
Less: Stock Issuance Cost 116,000 43,384,000
Retained Earnings, December 31, 2021
Retained Earnings, January 1, 2021 32,350,000
Net Income
Revenues 85,250,000
Expenses (40,750,000+75,000) 40,825,000 44,425,000
Dividends paid 1,350,000 75,425,000
TOTAL SHAREHOLDERS' EQUITY 176,309,000

Item 9 Consideration transferred:

Shares (150,000 x P80) 12,000,000
Contingent performance liability (218,000 + 50,000) 268,000 12,268,000
Less: Fair value of net identifiable assets acquired
Cash 1,500,000
Receivables 235,000
Inventories 5,750,000
Property, plant and Equipment (net) 2,250,000
Customer list 32,000
Customer contract 15,000
Order backlog 25,000
Internet domain name 36,000
Trademark 42,000
Trade secret processes 25,600
Mask works 35,880
Subscriber list 14,250
In process research and development 62,300
Completed technology 14,785
Deferred tax assets* 360,000
Current liabilities - 1,245,000
Long-term debt - 910,000
Deferred tax liabilities** - 158,345 8,084,470
GOODWILL 4,183,530
Item 10

Consideration Transferred 5,200,000

Non-controlling Interest 250,000
Total 5,450,000
Less: Fair value of net identifiable assets acquired
Assets (8,520,000+85,000) 8,605,000
Less: Liabilities (5,680,000+75,000) 5,755,000 2,850,000
GOODWILL 2,600,000

Item 11

Consideration transferred:
Deffered Payment (3,600,000 x 40% x 0.6209) 894,096
Deffered Payment (3,600,000 x 60% x 0.5645) 1,219,320
Land 640,000
Shares (20,000 x P14) 280,000 3,033,416
Less: Fair value of net identifiable assets acquired
Assets 6,780,000
Less: Liabilities (1,340,000 + 165,000) 1,505,000 5,275,000
GAIN ON BARGAIN PURCHASE 2,241,584

Item 12

Consideration transferred:
Cash 2,000,000
Shares (25,000 x P40) 1,000,000 3,000,000
Add: Acquisition-related costs
Finder's fees 22,000
Accountant's fees 16,000
Legal fees 12,500 50,500
Total 3,050,500
Less: Interest in net assets of acquiree (3,720,000 x 75%) 2,790,000
GOODWILL 260,500

Item 13

Consideration transferred (squeeze) 2,475,000

Non-controlling interest -
Previously held equity interest -
Total 2,475,000
Less: Fair value of net identifiable assets acquired
Assets (545,000 + 1,640,000) 2,185,000
Less: Liabilities 300,000 1,885,000
GOODWILL 590,000

Consideration transferred 2,475,000

Fair Value per share 55
Number of shares issued 45,000
Item 14

Consideration transferred 600,000

Non-controlling interest (600,000 / 80% x 20%) 150,000
Total 750,000
Less: Fair value of net identifiable assets acquired
Cash 70,000
Inventory 220,000
Plant Assets (net) 640,000
Less: Liabilities 260,000 670,000
GOODWILL 80,000

Item 15

Consideration transferred 325,000

Non-controlling interest (315,000 x 25%) 78,750
Total 403,750
Less: Fair value of net identifiable assets acquired
Assets 525,000
Less: Liabilities 210,000 315,000
GOODWILL 88,750