Name: Ortega, Jacqueline L.

Course & Year: BS Accountancy 3

MODULE 2
BUSINESS COMBINATION: SPECIFIC CASES

PROBLEM 1: TRUE OR FALSE

1. Entity A issues 1,000 shares in exchange for all the outstanding shares of Entity B.
After the transaction, the former owners of Entity B become owners of 1,000 shares out
of the 10,000 outstanding shares of Entity A. Entity A will own all the shares of Entity
FALSE B. This transaction is not a business combination that is accounted for under PFRS 3.

Use the following information for the next three items:

Entity A issues shares in exchange for 100% interest in Entity B's net identifiable assets with fair
value of P80. As a result of the business combination, Entity A's share capital and share premium
increased by P30 and P70, respectively.

TRUE 2. The aggregate par value of the shares issued is P30.

FALSE 3. The fair value of the consideration transferred is P70.
FALSE 4. The business combination resulted to goodwill of P10.

Use the following information for the next four items:

Once upon a time, Entity A acquired 20% interest in Entity B. After sometime, Entity A acquired
additional 50% interest for P100, at which time, Entity B's net identifiable assets have a fair value of
P180, the previous investment of Entity A has a carrying amount of P30 and fair value of P40, and the
NCI has a fair value of P60.

5. The transaction described above is a business combination achieved in stages' or 'step

TRUE acquisition'.
FALSE 6. The 20% previous interest is ignored when computing for goodwill.
TRUE 7. Entity A recognizes a remeasurement gain of P10 in profit or loss.
TRUE 8. The goodwill is P20.
9. Entity A owns 40% interest of Entity B. Entity A enters into agreement with Entity C,
owner of 20% interest in Entity B, whereby Entity A will exercise all of Entity C's
voting interests in Entity B for a period of 25 years. The agreement between Entity A
and Entity C cannot result to a business combination between Entity A and Entity B,
FALSE according to PFRS 3.
TRUE 10. There can be a business combination that results to a 100% non - controlling interest.
11. The measurement period under PFRS 3 is a maximum of 12 months after the end of the
FALSE business combination year.

Use the following information for the next two items:

On November 1, 2020, Entity A acquires all the assets and liabilities of Entity B for P100, Entity B's
assets and liabilities have fair values of P170 and P80, respectively. Entity B assigns a provisional
amount of P70 for a certain asset for which the accounting is incomplete. On February 1, 2021, Entity
A obtains the information it is seeking and confirms that the acquisition - date fair value of asset is
P60.

12. Entity A should restate its 2020 financial statements to incorporate the effects of the
TRUE new information obtained on February 1, 2021.
FALSE 13. The goodwill that is presented in the 2020 restated financial statements is P10.
 14. A transaction that is arranged primarily for the benefit of the acquirer or the combined
entity rather than the acquiree or its former owners is likely to be a separate transaction.
The transaction price is excluded from the consideration transferred when computing
TRUE for goodwill.
15. The acquirer recognizes a reacquired right in a business combination as an intangible
TRUE asset.
16. The acquirer recognizes a settlement gain or loss of a pre - existing relationship with the
TRUE acquiree is settled due to the business combination.
17. A contingent consideration is measured at acquisition date fair value and included in the
TRUE consideration transferred.
18. A contingent consideration that is classified as equity is not adjusted for changes in fair
value subsequent to initial recognition, except for changes in fair value that are
TRUE measurement period adjustments.

Use the following information for the next two items:

On January 1, 2020, Entity A issues shares with total fair value of P100 in exchange for all the assets
and liabilities of Entity B with fair values of P170 and P80, respectively. Entity A agrees to issue
additional shares if Entity A reaches a milestone on the acquired R&D project by December 31, 2020.
The fair value of the additional consideration on January 1, 2020 is P20.

19. Entity A reaches a milestone on the R&D project on December 31, 2020, and therefore
issues the additional shares. Entity A reports goodwill of P30 in its December 31, 2020
TRUE financial statements.
20. Entity A does not reach a milestone on the R&D project on December 31, 2020, and
therefore the contingent consideration is cancelled. Entity A reports goodwill of P30 in
TRUE its December 31, 2020 financial statements.

STRAIGHT PROBLEM
PROBLEM 1
SHARE – FOR - SHARE EXCHANGES
1. How many shares did Frown issue on the business combination?

Consideration transferred (squeeze) P4,200,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill P200,000

Consideration transferred 4,200,000

Divided by: Fair value per share 100
Total shares issued 42,000

BUSINESS COMBINATION ACHIEVED IN STAGES

2. How much is the goodwill?

Consideration transferred P300,000

Non-controlling interest in the acquiree (690,000 x 40%) 276,000
Previously held equity interest in the acquiree 138,000
Total 714,000
Fair value of net identifiable assets acquired (690,000)
Goodwill P24,000
BUSINESS COMBINATION WITHOUT TRANSFER OF CONSIDERATION
3. How much is the goodwill?

 There is no goodwill in this problem.

MEASUREMENT PERIOD
4. Provide the adjusting entry to restate the goodwill.

4/1/2021 Goodwill P80,000

Machine P80,000

4/1/2022 Accumulated depreciation P278

Retained earnings P278

DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION

5. Compute for the goodwill.

Consideration transferred (800,000-30,000-50,000) P720,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 720,000
Fair value of net identifiable assets acquired (600,000)
Goodwill P120,000

REACQUIRED RIGHTS & SETTLEMENT OF PRE-EXISTING RELATIONSHIP

6. Compute for the goodwill.

Consideration transferred [2,000,000-(300,000-100,000)] 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* (1,750,000)
Goodwill P50,000
*(4,000,000-2,200,000+100,000-150,000)

CONTINGENT CONSIDERATION
7. a. How much is the goodwill recognized on acquisition date?

Consideration transferred [(100,000 x 200) + 280,000] P2,280,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired (1,900,000)
Goodwill P380,000
b. Provide the journal entries.

1/14/2021 Share premium-contingent consideration P280,000

Share Capital (2,000 x 20) 40,000
Share premium P240,000
c. Provide the journal entries.
 12/31/2020 Share premium-contingent consideration P280,000
Share premium P280,000

8. a. Number of shares issued by Entity A

Share capital 800,000 976,000 176,000

Share premium 300,000 1,092,000 792,000
Total 1,100,000 2,068,000 968,000

Increase in share capital 176,000

Divided by: Par value 20
Total shares issued 8,800

b. Goodwill

Consideration transferred [(100,000 x 200) + 280,000] P968,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 968,000
Fair value of net identifiable assets acquired (800,000)
Goodwill P168,000

c. Retained earnings of the combined entity immediately after the business combination.

 P400,000

9. a. Compute for the goodwill.

Consideration transferred (80,000 x 8) P640,000

Non-controlling interest in the acquiree (665,000 x 10%*) 66,500
Previously held equity interest in the acquiree** 80,000
Total 786,500
Fair value of net identifiable assets acquired (665,000)
Goodwill P121,500
*[(10,000+80,000)/100,000=90%] ; (100%-90%=10%)
** (10,000 x 8)

b. Provide all the journal entries on July 1, 2021.

7/01/2021 Investment in subsidiary (80,000 x 8) P640,000

Cash P640,000

FVPL-financial asset P30,000

Unrealized gain-P/L P30,000

Investment in subsidiary P80,000

FVPL-financial asset P80,000

10. a. Compute for the unadjusted and adjusted goodwill.

 Provisional Adjusted
Consideration transferred P1,800,000 P1,800,000
Non-controlling interest in the acquiree - -
Previously held equity interest in the acquiree - -
Total 1,800,000 1,800,000
Fair value of net identifiable assets acquired (1,700,000) (1,600,000)*
Goodwill P100,000 P200,000
*(2,600,000-300,000+200,000-900,000)

b. Provide the adjusting entry.

8/31/2021 Goodwill P100,000

Trademark P100,000

11. a. Compute for the gain or loss on the settlement of the pre - existing relationship. Provide the
journal entry

Settlement lost (360,000-170,000) P190,000

Carrying amount of related asset or liability recognized -
Adjusted settlement loss P190,000

1/1/2020 Settlement loss P190,000

Cash P190,000

b. Compute for the goodwill.

Consideration transferred (2,200,000-190,000) P2,010,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,010,000
Fair value of net identifiable assets acquired* (1,800,000)
Goodwill P210,000
*(3,600,000-1,800,000)

12. a. How much is the goodwill recognized on acquisition date?

Consideration transferred [(10,000 x 200) +280,000] P2,280,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired (1,920,000)
Goodwill P360,000

b. Provide the journal entries.

12/31/2020 Unrealized loss-P/L* P120,000
Liability for contingent consideration P120,000

1/14/2021 Liability for contingent consideration P400,000

Cash P400,000
Carrying amount of contingent consideration 280,000
Fair value 400,000
Increase in fair value of liability (120,000)*
c. Provide the journal entries.

12/31/2020 Liability for contingent consideration P280,000

Gain on extinguishment of Liability-P/L P280,000

REVERSE ACQUISITION
13. How much is the goodwill?

Entity A’s currently issued shares 2,000 (2,000/8,000) 25%

Shares issued to Entity B (2 x 3,000) 6,000 (6,000/8,000) 75%
Total shares after combination 8,000 100%

Entity B’s currently issued shares 3,000 75%

Shares issued to Entity A (3,000/75%) x 25% 1,000 25%
Total shares after combination 4,000 100%

Consideration transferred (1,000 x 300) P300,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 300,000
Fair value of net identifiable assets acquired (260,000)
Goodwill P40,000