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Chapter 3
Business Combinations (Part 3)

PROBLEM 1: FOR CLASSROOM DISCUSSION

1. Solution:
Average annual earnings 1,000,000
Normal earnings (8M x 12%) (960,000)
Excess earnings 40,000
Divide by: Capitalization rate 25%
Goodwill 160,000

2. Solution:
Average earnings 1,000,000
Divide by: Capitalization rate 12%
Estimated purchase price 8,333,333
Fair value of Entity B’s net assets (8,000,000)
Co are rce y
Goodwill 333,333
se ia s
sh u tud
ur d v wa
3. Solution:
Average annual earnings 1,000,000
s

Normal earnings (8M x 12%) (960,000)

Excess earnings 40,000
re is

Multiply by: Probable duration 5

Th

Goodwill 200,000
er
o

4. Solution:
s

Average annual earnings 1,000,000

Normal earnings (8M x 12%) (960,000)
Excess earnings 40,000
Multiply by: PV of ord. annuity of 1 @ 9%, n=5 3.88965
Goodwill 155,586

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5. Solution:

Legal form: Entity A issues shares to Entity B.

Entity A’s currently issued shares 2,000 25%

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

Substance: Reverse – Entity B issues shares to Entity A

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 the combination 4,000

Consideration transferred (1,000 sh. x ₱300) 300,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 300,000
Co are rce y
Fair value of Entity A’s net assets (260,000)
se ia s
sh u tud

Goodwill 40,000
ur d v wa
s

PROBLEM 2: MULTIPLE CHOICE - THEORY

1. B
re is

2. A
Th

3. B
4. D
er
o

5. D
s

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PROBLEM 3: MULTIPLE CHOICE - COMPUTATIONAL

1. A
Solution:
Gamer Co. Player Co. Total
Average annual earnings 40,000 39,000
Normal earnings
(500K x 5%); (380K x 5%) 25,000 19,000
Excess earnings 15,000 20,000
Divide by: Capitalization rate 20% 20%
Goodwill 75,000 100,000 175,000

2. D
Solution:
Gamer Player
Co. Co. Total
Total contribution (squeeze) 575,000 480,000 1,055,000
Fair value of net assets 500,000 380,000
Goodwill 75,000 100,000 175,000
Co are rce y
Gamer Player
se ia s
sh u tud

Co. Co. Total

ur d v wa
Total contribution 575,000 480,000 1,055,000
Distribution ratio
(575/1,055); (480/1,055) 54.50% 45.50%
s

Total shares to be issued 100,000 100,000

re is

Distribution of shares 54,500 45,500 100,000

Th

3. A
er
o

Explanation: Since the new entity, App Corporation, will issue equity
s

interests to both Gamer and Player, the acquirer is most likely the
H

entity that receives the most voting rights after the business
combination (i.e., Gamer Co. – 54,500 shares or 54.50% interest).
However, if the newly created entity will transfer cash and
other considerations and assume liabilities to acquire both Gamer and
Player, the acquirer would be the newly created entity.

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4. B
Solution:
Average annual earnings (650K + 40K expropriation loss) ÷ 5 yrs. 138,000
Normal earnings (590K x 12%) (70,800)
Excess earnings 67,200
Multiply by: PV of ordinary annuity of 1 @10%, n=5 3.79079
Goodwill 254,741

Estimated purchase price (squeeze) 844,741

Less: Fair value of Day’s net assets (590,000)
Goodwill 254,741

5. C
Solution:

Legal form: Sunday issues shares to Monday

Co are rce y
Sunday’s currently issued shares 12,000 10%
se ia s
sh u tud

Shares issued to XYZ (12 sh. x 9,000) 108,000 90%

ur d v wa
Total shares after the combination 120,000
s

Substance: Reverse – Monday issues shares to Sunday

Shares %
re is

Monday’s currently issued shares 9,000 90%

Th

Shares issued to Sunday [(9,000 ÷ 90%) x 10%] 1,000 10%

Total shares after the combination 10,000
er
s o

Consideration transferred (1,000 sh. x ₱200) 200,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 200,000
Fair value of Sunday’s net assets (130,000)
Goodwill 70,000

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