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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
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 1,800,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired
(2.37M – 20K goodwill – 700K liabilities) (1,650,000)
Goodwill 150,000
4. Solution:
Consideration transferred 2,000,000
NCI [(4M –1.6M) x 25%] 600,000
Previously held equity interest in the acquiree -
Total 2,600,000
Fair value of net identifiable assets acquired (4M –1.6M) (2,400,000)
Goodwill 200,000
5. Solution:
Consideration transferred 2,000,000
NCI 540,000
Previously held equity interest in the acquiree -
Total 2,540,000
Fair value of net identifiable assets acquired (4M –1.6M) (2,400,000)
Goodwill 140,000
6. Solution:
Consideration transferred (18,000 sh. x ₱100) 1,800,000
Non-controlling interest in the acquire -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired (3.8M –1.9M) (1,900,000)
Gain on bargain purchase (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 2,800,000
Non-controlling interest in the acquire -
Previously held equity interest in the acquiree -
Total 2,800,000
Fair value of net identifiable assets acquired
(4M + 100K patent + 160K R&D + 40K intangible asset on
operating lease w/ favorable terms –1.6M) (2,700,000)
Goodwill 100,000
8. Solution:
Consideration transferred 1,800,000
NCI (2.2M ‘see below’ x 25%) 550,000
Previously held equity interest in the acquiree -
Total 2,350,000
Fair value of net identifiable assets acquired
(4M – 1.6M – 200K contingent liability) (2,200,000)
Goodwill 150,000
9. Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired
(6.1M + 60K DTA –2.3M – 90K DTL) (3,770,000)
Goodwill 230,000
Carrying amt. - fin'l. reptg. Tax base TTD (DTD)
Assets 6,100,000 5,800,000 300,000
Liabilities 2,300,000 2,100,000 (200,000)
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Taxable temporary difference 300,000
Multiply by: Tax rate 30%
Deferred tax liability 90,000
Deductible temporary difference 200,000
Multiply by: Tax rate 30%
Deferred tax asset 60,000
10. Solution:
Consideration transferred (2.8M – 280K dividends on) 2,520,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,520,000
Fair value of net identifiable assets acquired
(4M – 1.6M) (2,400,000)
Goodwill 120,000
PROBLEM 4: EXERCISES
1. Solution:
Consideration transferred 1,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,200,000
Fair value of net identifiable assets acquired
(1.7M – 50K goodwill – 390K liabilities) (1,260,000)
Gain on bargain purchase (60,000)
2. Solution:
Consideration transferred 1,200,000
NCI [(1.7M –.4M) x 20%] 260,000
Previously held equity interest in the acquiree -
Total 1,460,000
Fair value of net identifiable assets acquired (1.7M –.4M) (1,300,000)
Goodwill 160,000
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3. Solution:
Consideration transferred 1,200,000
NCI 300,000
Previously held equity interest in the acquiree -
Total 1,500,000
Fair value of net identifiable assets acquired (1.7M –.4M) (1,300,000)
Goodwill 200,000
4. Solution:
Consideration transferred (10,000 sh. x ₱100) 1,000,000
Non-controlling interest in the acquire -
Previously held equity interest in the acquiree -
Total 1,000,000
Fair value of net identifiable assets acquired (1.8M –.9M) (900,000)
Goodwill 100,000
5. Solution:
Consideration transferred 1,500,000
Non-controlling interest in the acquire 800,000
Previously held equity interest in the acquiree -
Total 2,300,000
Fair value of net identifiable assets acquired
(5M + 80K customer list –2.8M – 30K liability on operating
lease with unfavorable terms) (2,250,000)
Goodwill 50,000
6. Solution:
Consideration transferred 1,600,000
Non-controlling interest in the acquire -
Previously held equity interest in the acquiree -
Total 1,600,000
Fair value of net identifiable assets acquired
(3.5M + 120K DTA – 1.9M – 100K contingent liability – 30K DTL) (1,590,000)
Goodwill 10,000
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Carrying amt. - fin'l. reptg. Tax base TTD (DTD)
Assets 3,500,000 3,800,000 (300,000)
Liabilities 1,900,000 2,000,000 100,000
Contingent liability 100,000 - (100,000)
Deductible temporary difference (DTD) 400,000
Multiply by: Tax rate 30%
Deferred tax asset 120,000
Taxable temporary difference (TTD) 100,000
Multiply by: Tax rate 30%
Deferred tax liability 30,000
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) 1,720,955
NCI (3.4M – 1.7M) x 20% 340,000
Previously held equity interest in the acquiree -
Total 2,060,955
Fair value of net identifiable assets acquired (3.4M– 1.7M) (1,700,000)
Goodwill 360,955
2. C Solution:
Consideration transferred 1,200,000
NCI (1.2M ÷ 80%) x 20% 300,000
Previously held equity interest in the acquiree -
Total 1,500,000
Fair value of net identifiable assets acquired
(3.3M – 150K costs to sell – 1.7M) (1,450,000)
Goodwill 50,000
3. C Solution:
Consideration transferred (2,000 sh. x ₱500) 1,000,000
NCI -
Previously held equity interest in the acquiree -
Total 1,000,000
Fair value of net identifiable assets acquired
(2.8M – 1.6M) (1,200,000)
Gain on bargain purchase (200,000)
4. A Solution:
Consideration transferred 2,600,000
NCI -
Previously held equity interest in the acquiree -
Total 2,600,000
Fair value of net identifiable assets acquired
(5.9M + 90K int. asset on optg. lease – 3.5M – 10K cont. liab.) (2,480,000)
Goodwill 120,000
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5. B Solution:
Consideration transferred 2,400,000
NCI -
Previously held equity interest in the acquiree -
Total 2,400,000
Fair value of net identifiable assets acquired
(2.860M – 20K recorded goodwill + 60K R&D + 99K DTA
– .480M – 78K DTL) (2,441,000)
Gain on bargain purchase (41,000)
Fair Previous
values Carrying
(CA for amounts TTD (DTD)
financial (TB for
reporting) taxation)
Cash 10,000 10,000 -
Receivables – net 280,000 400,000 (120,000)
Inventory 350,000 480,000 (130,000)
Land 2,200,000 2,000,000 200,000
R&D 60,000 - 60,000
Payables 480,000 400,000 (80,000)
Taxable temporary difference (200K + 60K) 260,000
Multiply by: Tax rate 30%
Deferred tax liability 78,000
Deductible temporary difference (120K + 130K + 80K) 330,000
Multiply by: Tax rate 30%
Deferred tax asset 99,000
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PROBLEM 7: MULTIPLE CHOICE – PFRS for SMEs
1. C
2. B
Solution:
Consideration transferred 1,000,000
NCI in the acquiree 200,000
Previously held equity interest in the acquiree -
Total 1,200,000
Fair value of net identifiable assets acquired (800,000)
Goodwill 400,000
3. D
Solution:
Purchase cost 1,000,000
Acquisition-related costs 100,000
Total 1,100,000
Interest in net identifiable assets acquired
(800K x 75%) (600,000)
Goodwill 500,000
4. A
5. C
