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Chapter 1
Business Combinations (Part 1)
PROBLEM 1: TRUE OR FALSE
1. FALSE – “business” and “control”
2. FALSE – acquisition method
3. FALSE - acquirer
4. TRUE
5. FALSE – fair value or NCI’s proportionate share in the
acquiree’s net identifiable assets
6. TRUE
7. FALSE – recognized in profit or loss after reassessment
8. TRUE
9. FALSE – fair value less costs to sell
10. TRUE
Th
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PROBLEM 2: TRUE OR FALSE
1. FALSE - ₱20
2. TRUE {100 + [(200 – 120) x 10%]} – (200 – 120) = 28
3. FALSE (100 + 10) – (200 – 120) = 30
4. FALSE 100 – (200 -120) = 20
5. TRUE 100 – (200 -120) = 20 (the liquidation costs are ignored
because these are post-combination expenses)
6. FALSE 100 – (200 + 5 intangible asset -120) = 15
7. TRUE 100 – (200 + 30 -120) = (10)
8. TRUE 100 – (200 -120 – 30 contingent liability) = 50
9. FALSE 100 – (200 -120 – 15 DTL*) = 35
*(200 CA for financial reporting – 150 tax base) = 50 TTD;
50 x 30% = 15 DTL
10. TRUE 100 – (200 -120) = 20 The trade secret processes are not
‘consideration transferred’ to Entity B’s former owners.
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PROBLEM 3: FOR CLASSROOM DISCUSSION
1. D
2. D
3. Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(2.37M – 20K goodwill – 700K liabilities)
Goodwill
1,800,000
1,800,000
(1,650,000)
150,000
4. Solution:
5. Solution:
Th
Consideration transferred
NCI
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (4M –1.6M)
Goodwill
6. Solution:
2,000,000
600,000
2,600,000
(2,400,000)
200,000
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Consideration transferred
NCI [(4M –1.6M) x 25%]
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (4M –1.6M)
Goodwill
Consideration transferred (18,000 sh. x ₱100)
Non-controlling interest in the acquire
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (3.8M –1.9M)
Gain on bargain purchase
2,000,000
540,000
2,540,000
(2,400,000)
140,000
1,800,000
1,800,000
(1,900,000)
(100,000)
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The ₱36,000 stock issuance costs are deducted from share
premium. The ₱60,000 finder’s fees are expensed. The ₱280,000
liquidation costs are post-combination expenses. All of these do
not affect the computation of goodwill.
7. Solution:
Consideration transferred
Non-controlling interest in the acquire
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(4M + 100K patent + 160K R&D + 40K intangible asset on
operating lease w/ favorable terms –1.6M)
Goodwill
2,800,000
2,800,000
(2,700,000)
100,000
8. Solution:
(2,200,000)
150,000
(4M – 1.6M – 200K contingent liability)
Goodwill
9. Solution:
Th
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Carrying amt. - fin'l. reptg.
Assets
6,100,000
Liabilities
2,300,000
4,000,000
4,000,000
(3,770,000)
230,000
(6.1M + 60K DTA –2.3M – 90K DTL)
Goodwill
1,800,000
550,000
2,350,000
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Consideration transferred
NCI (2.2M ‘see below’ x 25%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Tax base
5,800,000
2,100,000
TTD (DTD)
300,000
(200,000)
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Taxable temporary difference
Multiply by: Tax rate
Deferred tax liability
300,000
30%
90,000
Deductible temporary difference
Multiply by: Tax rate
Deferred tax asset
200,000
30%
60,000
10. Solution:
Consideration transferred (2.8M – 280K dividends on)
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
2,520,000
2,520,000
(2,400,000)
120,000
(4M – 1.6M)
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Goodwill
PROBLEM 4: EXERCISES
1. Solution:
Th
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(1.7M – 50K goodwill – 390K liabilities)
Gain on bargain purchase
2. Solution:
Consideration transferred
NCI [(1.7M –.4M) x 20%]
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (1.7M –.4M)
Goodwill
1,200,000
1,200,000
(1,260,000)
(60,000)
1,200,000
260,000
1,460,000
(1,300,000)
160,000
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3. Solution:
Consideration transferred
NCI
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (1.7M –.4M)
Goodwill
1,200,000
300,000
1,500,000
(1,300,000)
200,000
4. Solution:
Consideration transferred (10,000 sh. x ₱100)
Non-controlling interest in the acquire
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (1.8M –.9M)
Goodwill
1,000,000
1,000,000
(900,000)
100,000
5. Solution:
6. Solution:
Th
(5M + 80K customer list –2.8M – 30K liability on operating
lease with unfavorable terms)
Goodwill
Consideration transferred
Non-controlling interest in the acquire
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(3.5M + 120K DTA – 1.9M – 100K contingent liability – 30K DTL)
Goodwill
1,500,000
800,000
2,300,000
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Consideration transferred
Non-controlling interest in the acquire
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(2,250,000)
50,000
1,600,000
1,600,000
(1,590,000)
10,000
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Carrying amt. - fin'l. reptg.
Assets
3,500,000
Liabilities
1,900,000
Contingent liability
100,000
Tax base
3,800,000
2,000,000
-
TTD (DTD)
(300,000)
100,000
(100,000)
Deductible temporary difference (DTD)
Multiply by: Tax rate
400,000
30%
Deferred tax asset
120,000
Taxable temporary difference (TTD)
Multiply by: Tax rate
100,000
30%
Deferred tax liability
30,000
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PROBLEM 5: MULTIPLE CHOICE - THEORY
1. C
2. C
3. B
4. C
5. D
6. B
7. D
8. D
9. A
10. D
11. C
12. D
13. B
14. D
15. C
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PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A Solution:
Consideration transferred
1M + (200K x PV of ordinary annuity of 1 @ 12%, n=5)
NCI (3.4M – 1.7M) x 20%
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (3.4M– 1.7M)
Goodwill
1,720,955
340,000
2,060,955
(1,700,000)
360,955
2. C Solution:
Consideration transferred
NCI (1.2M ÷ 80%) x 20%
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(3.3M – 150K costs to sell – 1.7M)
Goodwill
1,200,000
300,000
1,500,000
(1,450,000)
50,000
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3. C Solution:
Consideration transferred (2,000 sh. x ₱500)
NCI
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(2.8M – 1.6M)
Th
Gain on bargain purchase
4. A Solution:
Consideration transferred
NCI
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(5.9M + 90K int. asset on optg. lease – 3.5M – 10K cont. liab.)
Goodwill
1,000,000
1,000,000
(1,200,000)
(200,000)
2,600,000
2,600,000
(2,480,000)
120,000
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5. B Solution:
Consideration transferred
NCI
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(2.860M – 20K recorded goodwill + 60K R&D + 99K DTA
– .480M – 78K DTL)
Gain on bargain purchase
Previous
Carrying
amounts
(TB for
taxation)
10,000
400,000
480,000
2,000,000
400,000
Taxable temporary difference (200K + 60K)
Multiply by: Tax rate
Th
Deferred tax liability
Deductible temporary difference (120K + 130K + 80K)
Multiply by: Tax rate
Deferred tax asset
(2,441,000)
(41,000)
TTD (DTD)
(120,000)
(130,000)
200,000
60,000
(80,000)
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Cash
Receivables – net
Inventory
Land
R&D
Payables
Fair
values
(CA for
financial
reporting)
10,000
280,000
350,000
2,200,000
60,000
480,000
2,400,000
2,400,000
260,000
30%
78,000
330,000
30%
99,000
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PROBLEM 7: MULTIPLE CHOICE – PFRS for SMEs
1. C
2. B
Solution:
Consideration transferred
NCI in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
1,000,000
200,000
1,200,000
(800,000)
400,000
3. D
Solution:
Purchase cost
Acquisition-related costs
Total
1,000,000
100,000
1,100,000
Interest in net identifiable assets acquired
(600,000)
500,000
Goodwill
4. A
Th
5. C
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(800K x 75%)
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