SURPRISE QUIZ AND REVIEWER FOR BUSINESS COMBINATION

THEORY:
1. Which of the following is not true about Business Combination?
a. Occurs when one entity gains control over another entity either through the acquisition of
net assets (must be 100%), or the acquisition of common shares (more than 50% of
outstanding).
b. Business combination requires the bringing together of businesses into a reporting entity.
A reporting entity can be a single entity (acquisition of net assets), or a group comprising
a parent and all of its subsidiaries (acquisition of shares).
c. The business combination occurs from the stand point of the acquiree.
d. All business combinations must use the purchase method. Pooling of interest method is
no longer permitted.

2. Which of the following are not steps under Purchase Method of Business Combination?
a. An acquirer to be identified
b. The allocation of the cost of expenses for the acquired assets and assumed liabilities and
contingent liabilities.
c. The assets, liabilities and contingent liabilities to be measured initially at fair value.
d. Goodwill acquired to be recognized

3. The acquirer shall measure the cost of business combination as the aggregate of:
I. The fair values at the date of exchange of assets given, liabilities incurred or
assumed and equity instruments issued by the acquirer in exchange for control of
the acquiree;
II. Contingent costs of guarantees made, if measurable and probable at the date of
acquisition on: (1) market value of the shares issued; and/or (2) amount of net
income sustained over a specified period.
III. Direct acquisition costs, if the acquirer is an SME
IV. Cost of issuance of equity or bond costs.
A. I only
B. I and II only
C. I, II, and III only
D. I, II, III and IV.
How do you Treat (included or not included), and measure (fair value, par value, face value,
present value) the following cost in Business Combination?
4. Cash or other monetary assets
5. Non- monetary assets
6. Equity instruments
7. Liabilities undertaken
8. Contingencies
9. Directly attributable costs
 10. Other cost that are not directly attributable to the business combination
COMPUTATION:
11-12. On January 1, 20x1, DOMINIQUE Co. acquired all of the assets and assumed all of the
liabilities of BEA, Inc. As of this date, the carrying amounts and fair values of the assets and
liabilities of BEA acquired by DOMINIQUE are shown below:
Carrying Fair
Assets amounts values
Cash in bank 20,000 20,000
Receivables 400,000 240,000
Allowance for probable losses on
(60,000)
receivables
Inventory 1,040,000 700,000
Building – net 2,000,000 2,200,000
Goodwill 200,000 40,000
Total assets 3,600,000 3,200,000
Liabilities
Payables 800,000 800,000

On the negotiation for the business combination, DOMINIQUE Co. incurred transaction costs
amounting to ₱200,000 for legal, accounting, and consultancy fees.

11. If DOMINIQUE Co. paid ₱3,000,000 cash as consideration for the assets and liabilities of
BEA, Inc., how much is the goodwill (gain on bargain purchase) on the business combination?
12. If DOMINIQUE Co. paid ₱2,000,000 cash as consideration for the assets and liabilities of
BEA, Inc., how much is the goodwill (gain on bargain purchase) on the business combination?
13. On January 1, 20x1, DANIEL Co. acquired 30% ownership interest in KATHRYN, Inc. for
₱200,000. Because the investment gave DANIEL significant influence over KATHRYN, the
investment was accounted for under the equity method in accordance with PAS 28.

From 20x1 to the end of 20x3, DANIEL recognized ₱100,000 net share in the profits of the
associate and ₱20,000 share in dividends. Therefore, the carrying amount of the investment in
associate account on January 1, 20x3, is ₱280,000.

On January 1, 20x4, DANIEL acquired additional 60% ownership interest in KATHRYN, Inc.
for ₱1,600,000. As of this date, DANIEL has identified the following:
a. The previously held 30% interest has a fair value of ₱360,000.
b. KATHRYN’s net identifiable assets have a fair value of ₱2,000,000.
c. DANIEL elected to measure non-controlling interests at the non-controlling interest’s
proportionate share of KATHRYN’s identifiable net assets.

Compute for the goodwill.

14-17. RICHARD Co. is contemplating on acquiring BARBIE, Inc. The following information
was gathered through a diligence audit:
 The actual earnings of BARBIE, Inc. for the past 5 years are shown below:
Year Earnings
20x1 2,400,000
20x2 2,600,000
20x3 2,700,000
20x4 2,500,000
20x5 3,600,000
Tota 13,800,00
l 0

 Earnings in 20x5 included an expropriation gain of ₱800,000.

 The fair value of BARBIE’s net assets as of the end of 20x5 is ₱20,000,000.
 The industry average rate of return is 12%.
 Probable duration of “excess earnings” is 5 years.

Requirements:
14. How much is the estimated goodwill under the multiples of average excess earnings method?
15. How much is the estimated goodwill under the capitalization of average excess earnings
method? Use a capitalization rate of 25%.
16. How much is the estimated goodwill under the capitalization of average earnings method?
Use a capitalization rate of 12.5%.
17. How much is the estimated goodwill under the present value of average excess earnings
method? Use a discount rate of 10%.

18-20. Write the formula for computation of Goodwill.