Name: Ortega, Jacqueline L.

Course & Year: BS Accountancy 3

MODULE 1
BUSINESS COMBINATION: RECOGNITION AND MEASUREMENT

PROBLEM 1: TRUE OR FALSE

1. The two important elements in the definition of business combination under PFRS 3 are
FALSE "business" and "combination.
2. PFRS 3 requires the use of the purchase method in accounting for business
FALSE combinations.
FALSE 3. The entity that obtains control in a business combination is called the acquiree.
TRUE 4. The acquisition date in a business combination is normally the closing date.
FALSE 5. Non-controlling interests are measured at fair value only.
TRUE 6. If the controlling interest is 80%, the non-controlling interest is 20%.
7. A gain on a bargain purchase (negative goodwill) is recognized as an allocated
FALSE deduction to the net identifiable assets acquired in the year of business combination.
8. An intangible asset that is unrecorded by the acquiree may nevertheless be recognized
TRUE by the acquirer in a business combination.
9. A noncurrent asset acquired in a business combination that is classified as held for sale
FALSE is measured at fair value
10. If the consideration transferred in a business combination is deferred, the consideration
TRUE may be measured at present value.
11. Entity A acquires 100% interest in the voting shares of Entity for P100. Entity B's
identifiable assets and liabilities have fair values of P200 and P120, respectively. The
FALSE goodwill is P80.

Use the following information for the next two items:

Entity A acquires 90% interest in the voting shares of Entity B for P100. Entity B's identifiable assets
and liabilities have fair value P200 and P120, respectively.

12. If the NCI is measured at its proportionate share in the acquiree's net identifiable assets,
TRUE the goodwill would be P28
FALSE 13. If the NCI is measured at a fair value P10, the goodwill would be P18.

Use the following information for the next seven items:

Entity A acquires all the identifiable assets and assumes all the liabilities of Entity B for P100. Entity
B's identifiable assets and liabilities have fair values of P200 and P120, respectively.

14. Entity A incurred legal fees of P20 in negotiating the business combination. The
FALSE goodwill is P40.
15. Entity A estimates liquidation costs of P10 in exiting the business activities of Entity B.
FALSE The goodwill is P20.
16. Entity A is renting out a license to Entity B under an operating lease. The terms of the
lease compared with market terms are favorable. The fair value of the differential is P5.
TRUE The goodwill is P25.
17. Entity B has an unrecorded patent with fair value of P30. The gain on bargain purchase
FALSE is P10.
18. Entity B has an unrecognized contingent liability with fair value of P30. The contingent
liability is a present obligation but has an improbable outflow of economic resources.
FALSE The goodwill is P50.
 19. Entity B's assets and liabilities have carrying amounts of P150 and P120, respectively.
Fair value adjustments to the acquired assets and liabilities have deferred tax
consequences but do not affect their tax bases. The income tax rate is 30%. The
TRUE goodwill is P53.
20. Entity A agreed to share its trade secret processes with Entity B after the business
FALSE combination. The trade secret processes have a fair value of P25. The goodwill is P20.

STRAIGHT PROBLEM
PROBLEM 1
REQUIRED:
1. Compute for the goodwill (gain on bargain purchase)

Consideration transferred P1,200,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,200,000
Fair value of net identifiable assets acquired* (1,260,000)
Gain on bargain purchase P(60,000)
*(1,700,000-50,000-390,000)

2. How much is the goodwill if A Co. opts to measure the non - controlling interest at the NCI's
proportionate share in B Co.'s net identifiable assets?

Consideration transferred P1,200,000

Non-controlling interest in the acquiree** 260,000
Previously held equity interest in the acquiree -
Total 1,460,000
Fair value of net identifiable assets acquired* (1,300,000)
Goodwill P160,000
*(1,700,000-400,000)
** (1,700,000-400,000) x 20%

3. How much is the goodwill if A Co. opts to measure the non - controlling interest at fair value?
(An independent appraiser valued the NCI at P300, 000.)

Consideration transferred P1,200,000

Non-controlling interest in the acquiree 300,000
Previously held equity interest in the acquiree -
Total 1,500,000
Fair value of net identifiable assets acquired* (1,300,000)
Goodwill P200,000
*(1,700,000-400,000)

4. Compute for the goodwill gain on bargain purchase).

Consideration transferred (10,000 x 100) P1,000,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,000,000
Fair value of net identifiable assets acquired* (900,000)
Goodwill P100,000
*(1,800,000-900,000)
5. Compute for the goodwill.

Consideration transferred P1,500,000

Non-controlling interest in the acquiree 800,000
Previously held equity interest in the acquiree -
Total 2,300,000
Fair value of net identifiable assets acquired* (2,250,000)
Goodwill P50,000
*(5,000,000-2,800,000+80,000-30,000)

6. Compute for the goodwill.

Fair Value Tax Base =

Asset 3,500,000 (3,800,000) (300,000)
Liabilities 1,900,000 (2,000,000) 100,000
Contingent liability 100,000 - (100,000)

Deferred Tax Liability= (300,000+100,000) x 30% Deferred Tax Asset= (100,000 x 30%)
Deferred Tax Liability= 120,000 Deferred Tax Asset= 30,000

Consideration transferred P1,600,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,600,000
Fair value of net identifiable assets acquired* (1,590,000)
Goodwill P10,000
*(3,500,000-1,900,000+120,000-30,000-100,000)

7. Compute for the goodwill (gain on bargain purchase).

Consideration transferred P1,800,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired* (1,650,000)
Goodwill P150,000
* (2,370,000-20,000-700,000)

NON – CONTROLLING INTEREST

8. How much is the goodwill if Entity A opts to measure the non - controlling interest at the NCI
proportionate share in Entity B's net identifiable assets?

Consideration transferred P2,000,000

Non-controlling interest in the acquiree** 600,000
Previously held equity interest in the acquiree -
Total 2,600,000
Fair value of net identifiable assets acquired* (2,400,000)
Goodwill P200,000
* (4,000,000-1,600,000)
** (4,000,000-1,600,000) x 25%
9. Entity A opts to measure the non-controlling interest at fair value. An independent valuer
assessed the NCI fair value to be P540, 000, how much is the goodwill?

Consideration transferred P2,000,000

Non-controlling interest in the acquiree 540,000
Previously held equity interest in the acquiree -
Total 2,540,000
Fair value of net identifiable assets acquired* (2,400,000)
Goodwill P140,000
*(4,000,000-1,600,000)

ACQUISITION-RELATED COSTS AND RESTRUCTURING PROVISIONS

10. Compute for the goodwill (gain on bargain purchase).

Consideration transferred (18,000 x 100) P1,800,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired* (1,900,000)
Gain on bargain purchase P(100,000)
*(3,800,000-1,900,000)

OPERATING LEASES AND INTANGIBLE ASSETS

11. Compute for the goodwill.

Consideration transferred P2,800,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,800,000
Fair value of net identifiable assets acquired* (2,700,000)
Goodwill P100,000
*(4,000,000-1,600,000+100,000+160,000+140,000)

CONTINGENT LIABILITIES
12. Compute for the goodwill.

Consideration transferred P1,800,000

Non-controlling interest in the acquiree** 550,000
Previously held equity interest in the acquiree -
Total 2,350,000
Fair value of net identifiable assets acquired* (2,200,000)
Goodwill P150,000
*(4,000,000-1,600,000-200,000)
** (4,000,000-1,800,000) x 25%