Business Combination (PFRS 3)
Drills
LO1
1. Which of the following is NOT a common reason for business combinations?
a. Achieving economies of scale
b. Expanding market reach
c. Reducing competition
d. Increasing product differentiation
LO2
2. What type of merger occurs when a company acquires another company that produces complementary
products?
a. Horizontal merger
b. Vertical merger
c. Conglomerate merger
d. Market-extension merger
LO3
3. In a statutory merger, what happens to the acquired company?
a. It continues to operate as a separate legal entity
b. It ceases to exist and is absorbed by the acquiring company
c. It forms a new entity along with the acquiring company
d. It retains its legal structure but operates under the acquiring company’s name
LO4
4. Which of the following instances is a business combination least likely to occur?
a. Entity A acquires all the assets and assumes all the liabilities of Entity B in exchange for Entity A's
shares of stocks.
b. Entity A purchases 80% of Entity B's outstanding voting shares.
c. Entity A acquires 30% interest in Entity B's voting shares. All the other shares of Entity B are held by
various shareholders in very small denominations. Accordingly, Entity A has the power to appoint the
majority of the board of directors of Entity B.
d. Entity A acquires a group of assets from Entity B that does not constitute a business.
LO5
5. PFRS 3 requires the use of the acquisition method in accounting for all business combinations. Which of the
following is not an application of the acquisition method?
a. Identifying the acquirer, which is the entity that obtains control over another business in a business
combination.
b. Determining the acquisition date, which is the date the acquirer obtains control over the acquiree.
c. Measuring the consideration transferred at fair value.
d. Measuring the non-controlling interest at the NCI's proportionate share in the acquiree's net
identifiable assets or fair value, whichever is higher.
LO5, LO7, LO9
6. Entity A acquired all the assets and assumed all the liabilities of Entity B for P1,800,000. Information on Entity
B's assets and liabilities as of the acquisition date is shown below:
Carrying Amount Fair Value
Receivables - net 200,000 100,000
Inventory 600,000 450,000
Building-net 1,200,000 1,800,000
Goodwill 100,000 20,000
Total Assets 2,100,000 2,370,000
Payables 900,000 700,000
Requirement:
a. Compute for the goodwill [gain on bargain purchase] 150,000
LO5, LO7, LO9
7. Entity A acquired 75% of the outstanding voting shares of Entity B for P2,000,000. On the acquisition date,
Entity B's identifiable assets and liabilities have fair values of P4,000,000 and P1,600,000, respectively. How
much is the goodwill if Entity A opts to measure the non-controlling interest at the NCI's proportionate share in
Entity B's net identifiable assets? 200,000
8. Entity A opts to measure the non-controlling interest at fair value. An independent valuer assessed the NCI's
fair value to be P540,000. How much is the goodwill? 140,000
LO5, LO9
9. On January 1, 20x1, Entity A acquires 100% interest in Entity B in exchange for Entity A’s 10,000 shares with a
par value per share of P20 and a fair value of P200 per share. Entity B’s net identifiable assets have a fair
value of P1,900,000. In addition, entity A agrees to issue an additional 2,000 shares if entity B’s 20x1 profit will
exceed P3,600,000. The fair value of the contingent consideration is P280,000.
Requirements:
a. How much is the goodwill recognized on the acquisition date?
b. Entity B's 20x1 profit is P3,800,000. Entity A issued the additional shares on January 14, 20x2.
Provide the journal entries.
c. Entity B's 20x1 profit is P2,800,000. Provide the journal entries.
LO6, LO9
10. Entity A acquired all the assets and liabilities of Entity B by issuing 18,000 shares with a par value of P10 per
share and a fair value of P100 per share. On the acquisition date, Entity B's identifiable assets and liabilities
have fair values of P3,800,000 and P1,900,000, respectively.
Entity A incurred stock issuance costs of P36,000 and finder's fees related to the business combination of
P60,000. Moreover, Entity A expects to incur liquidation costs of P280,000 in terminating Entity B's activities.
Requirement: Compute for the goodwill (gain on bargain purchase). (100,000)
LO7, LO9, LO11
11. Entity A acquired all the assets and assumed all the liabilities of Entity B for P2,800,000. On the acquisition
date, Entity B's identifiable assets and liabilities have fair values of P4,000,000 and P1,600,000, respectively.
Additional information:
● Entity B has an unrecorded patent with a fair value of P100,000.
● Entity B has research and development (R&D) projects with a fair value of P160,000. Entity B charged
the R&D costs as expenses when they were incurred.
FINANCE LEASE = NO ADJUSTMENTS
Lessor Lessee
● Entity A is renting out a property to Entity B under an operating lease. The terms of the lease
compared with market terms are favorable. The fair value of the differential is P40,000.
Requirement: Compute for the goodwill.
LO7, LO9, LO11
12. Entity A acquired 75% of the outstanding voting shares of Entity B for P1,800,000. On the acquisition date,
Entity B's identifiable assets and liabilities have fair values of P4,000,000 and P1,600,000, respectively.
Additional information:
● Entity A replaces Entity B as a guarantor on a loan of a third party. As of the acquisition date, the third
party has defaulted on the loan. However, because negotiations for debt restructuring are ongoing
with the lender and the Entity strongly believes that the lender will agree to the proposed terms, no
provision was recognized. The fair value of the guarantee is P200,000.
● Entity A chose to measure the non-controlling interest at the NCI's proportionate share in the
acquiree's net identifiable assets.
Requirement: Compute for the goodwill.
LO7, LO9, LO11
13. Entity A acquired all the assets and assumed all the liabilities of Entity B for P4,000,000. Information on Entity
B's identifiable assets and liabilities as of the acquisition date is shown below:
Carrying Amount Fair Value
Assets 5,800,000 6,100,000
Liabilities 2,100,000 2,300,000
All fair value adjustments to the identifiable assets acquired and liabilities assumed have deferred tax
consequences but do not affect their tax bases. The income tax rate is 30%.
Requirement: Compute for the goodwill.
LO7, LO9, LO11
14. On October 26, 20x1, Entity A acquired 100% interest in Entity B for P2,800,000. On this date, Entity B's
identifiable assets and liabilities have fair values of P4,000,000 and P1,600,000, respectively. Included in
Entity B's liabilities are cash dividends of P280,000 declared on October 1, 20x1, to shareholders of record on
November 1, 20x1, and payable on December 1, 20x1.
Requirement: Compute for the goodwill.
LO8
15.On November 2, 20x1, ABC Co. acquired all the identifiable assets and liabilities of XYZ, Inc. for P2,000,000.
Information on acquisition date:
● XYZ's net identifiable assets were valued at P1,980,000. This amount included a provisional amount
of P220,000 assigned to a specialized machine for which the fair value is not readily determinable.
ABC tentatively depreciated the machine over six years using the straight-line method in 20x1.
Information after the acquisition date:
● On April 1, 20x2, an independent consultant determined that the machine's fair value on the
acquisition date was P140,000 and the remaining useful life as of that date was four years.
● On July 1, 20x2, the stock market crashed. Various held for trading securities acquired from XYZ, Inc.
with an acquisition date fair value of P500,000 now have a fair value of only P20,000.
Requirement: Provide the adjusting entry to restate the goodwill.
LO10
16. Company A acquired the net assets of Company B for $1,500,000 in cash. The fair values of Company B’s
identifiable assets and liabilities are as follows:
Inventory: $200,000
Property, Plant, and Equipment: $1,000,000
Accounts Receivable: $150,000
Accounts Payable: $50,000
Long-term Debt: $300,000
Prepare the journal entries to record the acquisition.
17. Company X acquired 100% of the common stock of Company Y by issuing 10,000 shares of its own stock,
which has a fair value of $100 per share. The fair values of Company Y’s identifiable assets and liabilities are
as follows:
Cash: $200,000
Inventory: $300,000
Equipment: $1,000,000
Accounts Payable: $100,000
Long-term Debt: $400,000
A. Prepare the journal entries to record the acquisition.
B. Prepare the journal entries to record the acquisition assuming only 80% interest is acquired, and NCI
is measured using partial goodwill.
C. Prepare the journal entries to record the acquisition assuming only 80% interest is acquired and NCI
is measured using full goodwill.
LO12
18. Angry Co. acquired a 20% interest in Misery Co many years ago. On January 1, 20x1, Angry acquired an
additional 40% interest in Misery for P300,000. On this date, Misery's net identifiable assets have a fair value
of 690,000, and Angry's PHI has a carrying value of P128,000 and a fair value of P138,000. Angry opted to
measure the NCI at 'proportionate share.
a. How much is the goodwill?
b. Record the transaction if the PHI was classified as Investment in Associate
c. Record the transaction if the PHI was classified as FVOCI
LO13
19. Nag Co. acquired 100% voting rights in Sag Co. by contract alone. No consideration was transferred on the
arrangement. Sag's net identifiable assets have a fair value of P1,800,000. Nag measured the NCI at
'proportionate share. How much is the goodwill?
LO11, LO9
20. Sky Co. acquired 100% interest in Star, Inc.'s net identifiable assets with a fair value of P600,000 for P800,000.
The valuation of the consideration transferred includes the following:
● P30,000 reimbursement for appraisal fees incurred by Star in valuing a patent.
● P50,000 fair value of a trade secret that Sky will grant Star after the business combination. The trade
secret has a carrying amount of P40,000 in Sky's books
Requirement: Compute for the goodwill.
LO11, LO9
21. On January 1, 20x1, Entity A acquires all the assets and liabilities of Entity B for P2,000,000. Entity B's
identifiable assets and liabilities have fair values of P4,000,000 and P2,200,000, respectively.
Additional information:
● Prior to the business combination, Entity B is a franchisee of Entity A. The franchise agreement has a
remaining term of 5 years, which either party can terminate without any penalty.
● The franchise agreement has a fair value of P300,000, of which P100,000 is the "at-market" value.
The "off-market" value is favorable to Entity A, but unfavorable to Entity B.
● Entity A's related 'contract liability' account has a carrying amount of P230,000, while Entity B's
related 'franchise' account has a carrying amount of P150,000.
Requirement: Compute for the goodwill.
LO14
Use the following information for the next four items:
Entity A is contemplating on acquiring Entity B. Relevant information follows:
● Entity B's average annual earnings in the past 5 years were P1,000,000.
● Entity B's net assets as at the current year-end have a fair value of P8,000,000.
● The industry average rate of return on equity is 12%.
● The probable duration of Entity B's "excess earnings" is 5 years.
Requirements:
22. Goodwill is equal to the average excess earnings capitalized at 25%. How much is the goodwill?
23. Goodwill is measured by capitalizing the average earnings at 12%. How much is the goodwill?
24. Goodwill is measured at the undiscounted amount of total excess earnings expected to be earned from the
combination. How much is the goodwill?
25. Goodwill is measured by discounting the average excess earnings at 9%. How much is the goodwill?
LO15
Entity A and Entity B exchanged equity interests in a business combination. Relevant information follows:
● Entity A has 2,000 issued shares. To effect the business combination, Entity A will issue 2 new shares for each
of the 3,000 total outstanding shares of Entity B.
● Entity A's shares have the fair value of P100 per share, while Entity B's shares have a fair value of P300 per
share.
● Entity A's net identifiable assets have a fair value of P260,000 as of the acquisition date.
26. How much is the goodwill?
“The plans of the diligent lead to profit as surely as haste leads to poverty.” (Proverbs 21:5)
