Chapter 14

Problem I
1. Consideration transferred : FMV of shares issued by Robin (80,000 sh P28) = P2,240,000

2. Consideration trasnferred P2,240,000

Less: Fair value of Hopes net assets (P2,720,000+P200,000P1,200,000) 1,720,000
Goodwill P 520,000

Problem II
1.. Accounts Receivable 180,000
Inventory 400,000
Land 50,000
Building 60,000
Equipment 70,000
Patent 20,000
Goodwill 10,000
Acquisition Expense 20,000
Current Liabilities 70,000
Long-term Debt 160,000
Cash 580,000
Consideration trasnsferred : Cash P560,000
Less : Fair value of Wests net assets
(P180,000 + P400,000 + P50,000
+ P60,000 + P P70,000 + P20,000
P70,000 - P160,000) 550,000
Goodwill P 10,000

2. Acquisition Expense 20,000

Accounts Receivable 180,000
Inventory 400,000
Land 50,000
Building 60,000
Equipment 70,000
Patent 20,000
Current Liabilities 70,000
Long-term Debt 160,000
Cash 520,000
Gain on Acquisition 50,000

Consideration trasnsferred : Cash P500,000

Less : Fair value of Wests net assets
(P180,000 + P400,000 + P50,000
+ P60,000 + P P70,000 + P20,000
P70,000 - P160,000) 550,000
Bargain Purchase Gain (P 50,000)

Problem III
Accounts Receivable 231,000
Inventory 330,000
Land 550,000
Buildings and Equipment 1,144,000
 Goodwill 848,000
Allowance for Uncollectible Accounts (P231,000 - P198,000) 33,000
Current Liabilities 275,000
Bonds Payable 450,000
Premium on Bonds Payable (P495,000 - P450,000) 45,000
Preferred Stock (15,000 x P100) 1,500,000
Common Stock (30,000 x P10) 300,000
Other Contributed Capital (P25 - P10) x 30,000 450,000
Cash 50,000

Consideration transferred: (P1,500,000 + P750,000

+ P50,000) P2,300,000
Less: Fair value of net assets (198,000 + 330,000 +
550,000 + 1,144,000 275,000 495,000) = 1,452,000
Goodwill P 848,000

Problem IV
Current Assets 960,000
Plant and Equipment 1,440,000
Goodwill 336,000
Liabilities 216,000
Cash 2,160,000
Estimated Liability for Contingent Consideration 360,000

Problem V
The amount of the contingency is P500,000 (10,000 shares at P50 per share)
1. Goodwill 500,000
Paid-in-Capital for Contingent Consideration - Issuable 500,000

2. Paid-in-Capital for Contingent Consideration Issuable 500,000

Common Stock (P10 par) 100,000
Paid-In-Capital in Excess of Par 400,000
Platz Company does not adjust the original amount recorded as equity.

Problem VI
1. January 1, 20x4
Accounts Receivable 72,000
Inventory 99,000
Land 162,000
Buildings 450,000
Equipment 288,000
Goodwill 54,000
Allowance for Uncollectible Accounts 7,000
Accounts Payable 83,000
Note Payable 180,000
Cash 720,000
Estimated Liability for Contingent Consideration 135,000

Consideration transferred (P720,000 + P135,000) P855,000

Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000
Goodwill P 54,000
2. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Cash 135,000

3. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Gain on Contingent Consideration 135,000

Problem VII
1. Accounts Receivable 240,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 30,000
Allowance for Uncollectible Accounts 20,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000

Goodwill 200,000
Estimated Liability for Contingent Consideration 200,000

Consideration transferred P2,600,000

Fair value of net assets acquired
(P3,440,000 P870,000) 2,570,000
Goodwill P 30,000

2. Estimated Liability for Contingent Consideration 200,000

Gain on Contingent Consideration 200,000

Problem VIII

Current Assets 362,000

Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000
Goodwill * 395,000
Liabilities 119,000
Long-term Debt 491,000
Common Stock (144,000 P5) 720,000
Other Contributed Capital (144,000 x P15 - P5)) 1,440,000

* (144,000 P15) [P362,000 + P2,013,000 (P119,000 + P491,000)] = P395,000

Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000

Fair value of stock issued (144,000P15) = P2,160,000

Problem IX

Case A
Consideration transferred P130,000
Less: Fair Value of Net Assets 120,000
Goodwill P 10,000
Case B
Consideration transferred P110,000
Less: Fair Value of Net Assets 90,000
Goodwill P 20,000

Case C
Consideration transferred P15,000
Less: Fair Value of Net Assets 20,000
Gain (P 5,000)

Assets Liabilities Retained

Goodwill Current Assets Long-Lived Assets Earnings (Gain)
Case A P10,000 P20,000 P130,000 P30,000 0
Case B 20,000 30,000 80,000 20,000 0
Case C 0 20,000 40,000 40,000 5,000

Problem X
1. Fair Value of Identifiable Net Assets
Book values P500,000 P100,000 = P400,000
Write up of Inventory and Equipment:
(P20,000 + P30,000) = 50,000
Consideration transferred above which goodwill would result P450,000

2. Equipment would not be written down, regardless of the purchase price, unless it was
reviewed and determined to be overvalued originally.
3. A gain would be shown if the purchase price was below P450,000.
4. Anything below P450,000 is technically considered a bargain.
5. Goodwill would be P50,000 at a purchase price of P500,000 or (P450,000 + P50,000).

Problem XI

Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = P187,080

Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = 344,098
Total Present value 531,178
Par value 600,000
Discount on bonds payable P68,822

Cash 114,000
Accounts Receivable 135,000
Inventory 310,000
Land 315,000
Buildings 54,900
Equipment 39,450
Bond Discount (P40,000 + P68,822) 108,822
Current Liabilities 95,300
Bonds Payable (P300,000 + P600,000) 900,000
Gain on Acquisition of Stalton (ordinary) 81,872
Computation of Excess of Net Assets Received Over Cost
Consideration transferred (P531,178 plus liabilities assumed of P95,300
and P260,000) P886,478
Less: Total fair value of assets received P968,350
Excess of fair value of net assets over cost (P 81,872)

Problem XII
In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated to
each identifiable asset and liability acquired with any remaining excess attributed to goodwill.

Consideration transferred (shares issued) P750,000

Fair value of net assets acquired:
Cash P29,000
Receivables 63,000
Trademarks 225,000
Record music catalog 180,000
In-process R&D 200,000
Equipment 105,000
Accounts payable (34,000)
Notes payable (45,000) 723,000
Goodwill P27,000

Entry by NT to record combination with OTG:

Cash 29,000
Receivables 63,000
Trademarks 225,000
Record Music Catalog 180,000
Capitalized R&D 200,000
Equipment 105,000
Goodwill 27,000
Accounts Payable 34,000
Notes Payable 45,000
Common Stock (NewTune par value) 60,000
Additional Paid-in Capital 690,000
(To record merger with OTG at fair value)

Additional Paid-in Capital 25,000

Cash 25,000
(Stock issue costs incurred)

Post-Combination Balance Sheet:

Assets Liabilities and Owners Equity

Cash P 64,000 Accounts payable P 144,000
Receivables 213,000 Notes payable 415,000
Trademarks 625,000
Record music catalog 1,020,000
Capitalized R&D 200,000 Common stock 460,000
Equipment 425,000 Additional paid-in capital 695,000
Goodwill 27,000 Retained earnings 860,000
Total P 2,574,000 Total P 2,574,000
Problem XIII
Stockholders Equity:
Common Stock, P1 par P1,100,000
Other Contributed Capital 4,090,000 [P2,800,000 + (100,000 x P13) P10,000]
Retained Earnings 600,000
Total stockholders Equity P 5,790,000

Problem XIV
Entry to record the acquisition on Pacificas records:
Cash 85,000
Receivables and inventory 180,000
PPE 600,000
Trademarks 200,000
IPRD 100,000
Goodwill 77,500
Liabilities 180,000
Common Stock (50,000 x P5) 250,000
Additional Paid-In Capital (50,000 x P15) 750,000
Contingent performance obligation 62,500

The goodwill is computed as:

Consideration transferred: 50,000 shares x P20 P1,000,000
Contingent consideration:
P130,000 payment x 50% probability x 0.961538 62,500
Total P1,062,500
Less: Fair value of net assets acquired
(P85,000 + P180,000 + P600,000 + P200,000
+ P100,000 - P180,000) 985,000
Goodwill P 77,500

Acquisition expenses 15,000

Cash 15,000

APIC 9,000
Cash 9,000

Note: The following amounts will appear in the income statement and statement of retained
earnings after business combination:
PP Inc.
Revenues (1,200,000)
Expenses (P875,000 + P15,000) 890,000
Net income (310,000)
Retained earnings, 1/1 (950,000)
Net income (310,000)
Dividends paid 90,000
Retained earnings, 12/31 *(1,170,000)
* or, P1,185,000 P15,000 = P1,170,000
Problem XV
Acquisition MethodEntry to record acquisition of Sampras
Consideration transferred P300,000
Contingent performance obligation 15,000
Consideration transferred (fair value) 315,000
Fair value of net identifiable assets 282,000
Goodwill P33,000

Receivables 80,000
Inventory 70,000
Buildings 115,000
Equipment 25,000
Customer list 22,000
IPRD 30,000
Goodwill 33,000
Current liabilities 10,000
Long-term liabilities 50,000
Contingent performance liability 15,000
Cash 300,000

Acquisition expenses 10,000

Cash 10,000

Problem XVI
1.
a. The computation of goodwill is as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Total P 966,000
Less: Fair value of identifiable assets acquired and
liabilities assumed:
Cash P 24,000
Receivables net 48,000
Inventories 72,000
Land 240,000
Buildings net 360,000
Equipment net 300,000
In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess - Goodwill P 102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows:

Cash 24,000
Receivables net 48,000
Inventories 72,000
Land 240,000
 Buildings net 360,000
Equipment net 300,000
In-process research and development 60,000
Goodwill 102,000
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent Consideration 36,000
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

Acquisition-related expenses 78,000

Cash 78,000
Acquisition related costs direct costs.

Paid-in capital in excess of par 32,400

Cash 32,400
Acquisition related costs costs to issue and
register stocks.

Acquisition-related expenses 27,600

Cash 27,600
Acquisition related costs indirect costs.

c. The balance sheet of Pure Corporation immediately after the acquisition is as follows:

Pure Corporation
Balance Sheet
December 31, 20x4

Assets
Cash P 162,000
Receivables net 144,000
Inventories 360,000
Land 348,000
Buildings net 840,000
Equipment net 732,000
In-process research and development 60,000
Goodwill 102,000
Total Assets P2,748,000

Liabilities and Stockholders Equity

Liabilities
Accounts payable P 288,000
Other liabilities 408,000
Notes payable 180,000
Estimated liability for contingent consideration 36,000
Total Liabilities P 912,000
Stockholders Equity
 Common stock, P10 par P 1,020,000
Paid-in capital in excess of par1 657,600
Retained earnings2 158,400
Total Stockholders Equity P1,836,000
Total Liabilities and Stockholders Equity P2,748,000
1 P240,000 + P446,400 P32,400
2 P264,000 - P78,000 P27,600

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the
acquisition date. This requirement does not extend to R&D in contexts other than business combinations.

2.
a. Assets that have been provisionally recorded as of the acquisition date are retrospectively
adjusted in value during the measurement period for new information that clarifies the
acquisition-date value. The adjustments affect goodwill since the measurement period is
still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill to
be reported then on the acquisition should be P78,000 (P102,000 P24,000).

b.
Buildings 24,000
Goodwill 24,000
Adjustment to goodwill due to measurement date.

3.
a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 +
P24,000).

b. The adjustment is still within the measurement period, the entry to adjust the liability would
be:
Goodwill 24,000
Estimated liability for contingent consideration 24,000
Adjustment to goodwill due to measurement date.

c.
c.1. The goodwill remains at P126,000, since the change of estimate should be done only
once (last August 31, 20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration

amounted to P48,000, the entry to adjust the liability would be:

Estimated liability for contingent consideration 12,000

Gain on estimated contingent consideration 12,000
Adjustment after measurement date.

In this case, the measurement period ends at the earlier of:

one year from the acquisition date, or
the date when the acquirer receives needed information about facts and
circumstances (or learns that the information is unobtainable) to consummate
the acquisition.
 c.3.
c.3.1. The goodwill remains at P126,000, since the change of estimate should be done
only once (last August 31, 20x5).

c.3.2. On December 15, 20x5, the entry would be:

Loss on estimated liability contingent 30,000

consideration
Estimated liability for contingent consideration 30,000
Adjustment after measurement date.

c.3.3.
c.3.3.1. P126,000.
c.3.3.2. On January 1, 20x7, Sauls average income in 20x5 is P270,000 and 20x6
is P260,000, which means that the target is met, Peter Corporation will
make the following entry:

Estimated liability for contingent consideration 78,000

Loss on estimated contingent consideration 42,000
Cash 120,000
Settlement of contingent consideration.

4.
a. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables net 48,000
Inventories 72,000
Land 240,000
Buildings net 360,000
Equipment net 300,000
In-process research and development 60,000
Goodwill 106,386
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent Consideration 40,385
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 P10) x 30,000 shares] 450,000
 c.
c.1. Goodwill remains at P106,385.
c.2. The entry for Pure Corporation on December 31, 20x5 to record such occurrence would
be:

Estimated liability for contingent consideration 40,385

Gain on estimated contingent consideration 40,385
Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the
conditions that prevent the target from being met occurred in a subsequent period
and that Peter had the information to measure the liability at the acquisition date
based on circumstances that existed at that time. Thus the adjustment will flow through
income statement in the subsequent period.

d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent
consideration would be:

Estimated liability for contingent consideration 36,000

Loss on estimated contingent consideration 66,000
Cash [(P78,000 + P84,000)/2 P30,000] x 2 102,000
Settlement of contingent consideration.

5.
a. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Contingent consideration (stock contingency) 18,000
Total P 984,000
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess Goodwill P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables net 48,000
Inventories 72,000
Land 240,000
Buildings net 360,000
Equipment net 300,000
In-process research and development 60,000
Goodwill 120,000
Accounts payable 72,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent Consideration 36,000
Paid-in capital for Contingent Consideration
18,000
 Common stock (P10 par x 30,000 shares) 300,000
Additional paid-in capital [(P25 P10) x 30,000 450,000
shares]
Acquisition of Saul Company.

c. Pure Corporation will make the following entry for the issuance of 1,200 additional shares:
Paid-in capital for Contingent Consideration 18,000
Common stock (P10 par x 1,200 shares) 12,000
Paid-in capital in excess of par 6,000
Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event
occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original
consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to
contingency) would be:

Paid-in capital in excess of par 60,000

Common stock (P10 par x 6,000 shares) 60,000
Settlement of contingent consideration.

7. On January 1, 20x7, the contingent event happens since the fair value per share fall below
P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original
consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to
contingency) would be:

Paid-in capital in excess of par 75,000

Common stock (P10 par x 7,500 shares) 75,000
Settlement of contingent consideration.
* Deficiency: (P25 P20) x 25,000 shares issued to acquire..P150,000
Divide by fair value per share on January 1, 20x7.P 20
Added number of shares to issue. 7,500

8. The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (stock contingency):
[(P750,000 P510,000) x 40% probability
x (1/[1 + .04]*) 92,308
Total P1,022,308
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess Goodwill P 158,308
* present value of P1 @ 4% for one period.

The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables net 48,000
Inventories 72,000
Land 240,000
Buildings net 360,000
Equipment net 300,000
 In-process research and development 60,000
Goodwill 158,308
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Paid-in capital for Contingent Consideration 92,308
Common stock (P10 par x 25,000 shares) 300,000
Paid-in capital in excess of par
[(P25 P10) x 30,000 shares] 450,000

On December 31, 20x5, the contingent event occurs, wherein Peters stock price had fallen to
P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul
Corporation. The entry for Peter Corporation on December 31, 20x5 to record such
occurrence such event to reassign the P750,000 original consideration to 37,500 shares (30,000
original shares issued + 7,500* additional shares due to contingency) would be:

Paid-in capital for Contingent Consideration 92,308

Common stock, P10 par 75,000
Paid-in capital in excess of par 17,308
Settlement of contingent consideration.
* Deficiency: (P25 P20) x 30,000 shares issued to acquire....P150,000
Divide by fair value per share on December 31, 20x5P 20
Added number of shares to issue 7,500

Problem XVII
1. The computation of bargain purchase gain is as follows:
Consideration transferred;
Cash P 1,800,000
Common shares: 120,000 shares x P12 1,440,000
Costs of liquidation 12,000
Patent 240,000
Contingent consideration (P12,000 guarantee
+ P14,400 to vendors) 26,400
Total P3,518,400
Less: Fair value of identifiable assets acquired and
liabilities assumed:
Merchandise inventory P1,440,000
Accounts receivable 900,000
Copyrights 240,000
Equipment 1.380,000
Accounts payable ( 300,000)
Loan payable ( 120,000) 3,540,000
Negative Excess Bargain Purchase Gain P ( 21,600)

2. The journal entries by Ponder Corporation to record the acquisition is as follows:

Merchandise inventory 1,440,000
Accounts receivable 900,000
Patent 240,000
Equipment 1,380,000
Accounts payable 300,000
Loan payable 120,000
 Cash 1,812,000
Common stock (P10 par x 120,000 shares) 1,200,000
Paid-in capital in excess of par
[(P12 P10) x 120,000 shares] 240,000
Gain on sale of Patent 240,000
Estimated liability for contingent consideration 26,400
Bargain purchase gain 21,600

Problem XVIII
1.
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000 289,700
Bargain Purchase Gain 29,700

Homer Ltd
Accounts Receivable 34,700
Inventory 39,000
Freehold Land 130,000
Buildings 40,000
Plant and Equipment 46,000
Payable to Tan Ltd 132,000
Common stock, P1 par x 40,000 shares 40,000
Additional paid-in capital 88,000
Gain on acquisition 29,700
(Acquisition of net assets of
Tan Ltd and shares issued)

Payable to Tan Ltd 132,000

Cash 132,000
(Being payment of cash consideration)

Paid-in capital in excess of par 1,200

Cash 1,200
(Being costs of issuing shares)
2.
Tan LTD
General Ledger
Liquidation
P P
Accounts Receivable 34,700 Additional paid in capital 26,800
Inventory 27,600 Retained earnings 32,000
Freehold Land 100,000 Receivable from Homer Ltd 260,000
Buildings 30,000
Plant and Equipment 46,000
Goodwill 2,000
Interest Payable 4,000
Liquidation Expenses 2,400
Premium on Debentures 2,500
Accounts Payable 1,600
Shareholders Distribution 68,000
318,800 318,800

Liquidators Cash
P P
Opening Balance 12,000 Liquidation Expenses 2,400
Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000
Debentures and Premium 52,500
Accounts Payable 45,100
144,000 144,000

Shareholders Distribution
P P
Shares in Homer Ltd 128,000 Common stock 60,000
Liquidation 68,0000
128,000 128,000

Problem XIX
Cash 20,000
Accounts Receivable 112,000
Inventory 134,000
Land 55,000
Plant Assets 463,000
Discount on Bonds Payable 20,000
Goodwill* 127,200
Allowance for Uncollectible Accounts 10,000
Accounts Payable 54,000
Bonds Payable 200,000
Deferred Income Tax Liability 67,200
Cash 600,000

Consideration transferred P600,000

Less: Fair value of net assets acquired
(P784,000 P10,000 P54,000 P180,000 - P67,200*) 472,800
Goodwill P127,200
 * Increase in net assets
Increase inventory, land, and plant assets to fair value
P52,000 + P25,000 + P71,000) P148,000
Decrease bonds payable to fair value ( 20,000)
Increase in net assets P168,000
Establish deferred income tax liability (P168,000 x 40%) P 67,200

Multiple Choice Problems

1. c
Finders fees.P 40,000
Legal fees. 13,000
Total expenses. P53,000

Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect
a business combination. Those costs include finders fee; advisory, legal, accounting,
valuation and other professional or consulting fees; general administrative costs,
including the costs of maintaining an internal acquisitions department; and costs of
registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is
required to recognize acquisition-related costs as expenses in the periods in which the
costs are incurred and the services are received, with one exception, i.e. the costs to
issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and
PAS 39 (for debt).

2. b refer to No. 1 for further discussion.

Audit fees related to stock issuanceP 10,000
Stock registration fees...... 5,000
Stock listing fees......... 4,000
P19,000
3. b
Consideration transferred (fair value).. P80,000
Less: Fair value of net identifiable assets acquired:
Fair value of assets P 98,000
Less: Present value/ Fair Value of liabilities 23,000 75,000
Goodwill P 5,000
A net identifiable asset means net assets excluding goodwill (unidentifiable asset).
An acquisition-related costs are considered outright expenses.
4. a
5. b
Consideration transferred (fair value) P800,000
Fair value of identifiable assets
Cash P150,000
A/R 140,000
Software 320,000
In-process R&D 200,000
Liabilities (130,000)
Fair value of net identifiable assets acquired 680,000
Goodwill P120,000

The application of recognition measurements in business combination means that an

acquirer must, in recognizing separately the acquirers intangible assets, recognize
intangible assets that the acquiree has not recognized in its records, such as in-process
research and development that cannot be recognize under PAS 38 as internally
 generated assets. As noted in par 34, recognition by an acquirer of an acquirees in-
process research and development project only depends whether the project meets the
definition of an intangible asset. It can be seen that intangible assets in a business
combination will be able, and in fact are required, to recognize intangible assets that are
not separately recognizable when acquired by other means. The costs on individual assets
acquired are measured but reference to the fair value of those assets.

Therefore, In-Process Research and Development is capitalized as an asset of the

combination and reported as intangible assets with indefinite lives subject to impairment
reviews.
6. c - [(24,000 shares x P30) P686,400] = P33,600
7. d - [(24,000 shares x P30) (P270,000 + P726,000 P168,000)] = P108,000, gain
8. d [P500,000 (P200,000 + P220,000 P110,000)]= P190,000
9. d -
10. c
A bargain purchase is a business combination in which the net fair value of the identifiable
assets acquired and liabilities assumed exceeds the aggregate of the consideration
transferred.

It should be noted that bargain purchase gain would arise only in exceptional
circumstances. Therefore, before determining that gain has arisen, the acquirer has to:
1. Reassess whether it has correctly identified all of the assets acquired and all of
the liabilities assumed. The acquirer should recognize any additional assets or
liabilities that are identified in that review.
2. Any balance should be recognized immediately in profit or loss.

11. d [P1,600,000 P1,210,000] = P390,000

12. d
13. c [(12,000 shares x P30) P343,200 = P16,800
14. b (P863,000 + P363,000) = P1,226,000
15. a
16. d P215,000 = P130,000 + P85,000

17. b P23,000 = P198,000 (P405,000 - P265,000 + P15,000 + P20,000)

18 c P1,109,000 = Total Assets of TT Corp. P 844,000

.
Less: Investment in SS Corp. (198,000)
Book value of assets of TT Corp. P 646,000
Book value of assets of SS Corp. 405,000
Total book value P1,051,000
Payment in excess of book value
(P198,000 - P140,000) 58,000
Total assets reported P1,109,000

19. c P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000

+P200,000)

20. d P257,500 = The amount reported by TT Corporation

21. a P407,500 = The amount reported by TT Corporation

22. b [(P47 x 12,000 shares) (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 P420,000)
 = P104,000

23. d
APIC: P20,000 + [(P42 P5) x12,000 = P464,000
Retained earnings: P160,000, parent only
24. b
Inventory: PP230,000 + P210,000 = P440,000
Land: P280,000 + P240,000 = P520,000
25. b [P480,000 (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 P420,000)] = P20,000
26. c (P50,000 + P8,000 + P100,000 = P158,000)
The acquirer should recognize, separately from goodwill, the identifiable assets acquired
in a business combination. [PFRS 3 (2008).B31]

A patent that have no useful life is not considered an asset.

An intangible is separable if it capable of being separated or divided from the entity and
sold, transferred, licensed, rented or exchanged, either individually together with a related
contract[PFRS 3(2008).B33]
The amount by which the lease terms are favorable compared with the terms of current
market transactions for the same or similar items is an intangible assets that meets the
contractual-legal criterion for recognition separately from goodwill, even though the acquirer
cannot sell or otherwise transfer the lease contract. [PFRS 3 (2008).B32 (a)]

Customer and subscriber lists are frequently licensed and thus meet the separability criterion.
[PFRS 3(2008).B33].

It may seem that the terms research and development, which may be associated with
such assets as patent and software development, are not applicable to all internally
intangibles, such as brand names. However, it needs to be remembered that all intangible
assets must meet the identifiability criterion, one part of which is separability.
27. c [P400 + (40 shares x P10)] = P800
28. d [P1,080 + (P280 + P10) = P1,370
29. b [P1,260 + (P440 + P60) = P1,760
30. a [P600 + (P360 + P40)] = P1,000
31. e [P480 + P100] = P580
32. b [P330 + (40 shares x P1)] = P370
33. d [P1,080 + 40 shares x (P10 - P1)] P15, stock issuance costs = P1,425
34. a [P180 + P40 P20 P15} =P185
35. c [(50,000 shares x P 35) + P5,000] = P1,755,000
36. d [P1,230,000 + P580,000] = P1,810,000
37. c - [P1,800,000 + P250,000] = P2,050,000
38. e (P1,800,000 + P650,000]= P2,450,000
39. c [P1,755,000 (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000
- P240,000 P60,000 P1,120,000)] = P455,000
40. e [P660,000 + P400,000} = P1,060,000
41. d
Retained earnings Atwood, January 1, 20x4 P1,170,000
Add: Net income 20-x4
Revenues P2,880,000
Less: Expenses 2,760,000
Direct costs 10,000 110,000
Retained earnings Atwood, December 31, 20x4 P1,280,000
42. c P2,880,000, parent only on the date of combination
43. c (P2,760,000 + P10,000) = P2,770,000
44. d [(P870,000 P15,000 P10,000) + P240,000] = P1,085,000
45. a
PFRS 3 (2008 requires that, at the acquisition date, the identifiable assets acquired and
liabilities assumed should be designated as necessary to apply other PFRSs subsequently. The
acquirer makes those classifications or designations on the basis of contractual terms, ... as
they exist at the acquisition date [PFRS 3 (2008).15]

Since, the patent was not recorded separately as identifiable intangible asset on the date of
acquisition, and then no amount of patent should be subsequently recognized.

46. c AA records new shares at fair value

Value of shares issued (51,000 P3) ............................................................... P153,000
Par value of shares issued (51,000 P1) ........................................................ 51,000
Additional paid-in capital (new shares) ....................................................... P102,000
Additional paid-in capital (existing shares) ................................................. 90,000
Consolidated additional paid-in capital ...................................................... P192,000

At the date of acquisition, the parent makes no change to retained earnings.

47. c
Common stock combinedP 160,000
Common Acquirer Zyxel.. . 100,000
Common stock issued...P 60,000
Divided by: Par value of common stock.P 2
Number of Zyxel shares to acquire Globe Tattoo..... 30,000
48. d
Paid-in capital books of Zyxel (P100,000 + P65,000)........P 165,000
Paid-in capital in the combined balance sheet
(P160,000 + P245,000). 405,000
Paid-in capital from the shares issued to acquire Globe Tattoo... P 240,000
Divided by: No. of shares issued (No. 31)..... 30,000
Fair value per share when stock was issued.... P 8

Or,
Par value of common stock of Zyxel P 2
Add: Share premium/APIC per share from the additional
issuance of shares (P245,000 P65,000)/30,000............ 6
Fair value per share when stock was issued....... P 8
49. b
Net identifiable assets of Zyxel before acquisition:
(P65,000 + P72,000 + P33,000 + P400,000 P50,000
- P250,000). P270,000
Net identifiable assets in the combined balance sheet:
(P90,000 + P94,000 + P88,000 + P650,000 P75,000 - P350,000).......... 497,000
Fair value of the net identifiable assets held by Globe Tattoo
at the date of acquisition.... P227,000
50. a
Consideration transferred (30,000 shares x P8) P240,000
Less: Fair value of net identifiable assets acquired (No. 49).... 227,000
Goodwill.. P 13,000
51. c
Retained earnings:
Acquirer Zyxel (at book value).... P105,000
Acquiree Globe Tattoo (not acquired) __ 0
P105,000
It should be noted that, there was no bargain purchase gain and acquisition-related
costs which may affect retained earnings on the acquisition date.

52. b
Consideration transferred (fair value) P400,000
Less: Fair value of net assets acquired
(P60,000 + P175,000 + P200,000 + P225,000 + P75,000 P100,000) 385,000
Goodwill P 15,000

53. a
Only the subsidiarys post-acquisition income is included in consolidated totals.

54. d
Cost P180,000
Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs) 18,000
Net book value P162,000

55. c
Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] P312,000
Less: Shares issued at par (15,000 shares x P10 par) 150,000
APIC P162,000

56. b
PFRS No. 3 par. 62 states that: If the initial accounting for business combination can be
determined only provisionally by the end of the period in which the combination is effected
because either the fair values to be assigned to the acquirees identifiable assets, liabilities, or
contingent liabilities or the cost of the combination can be determined only provisionally, the
acquirer shall account for the combination using those provisional values. The acquirer shall
recognize any adjustments to those provisional values as a result of completing the initial
accounting:
(a) within twelve months of the acquisition date; and

57. c
The consideration transferred should be compared with the fair value of the net
assets acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain
purchase and should be recognized in profit or loss, per PFRS3 par. 34.

58. b
The consideration transferred should be compared with the fair value of the net
assets acquired, per PFRS3 par 32. When provisional fair values have been
identified at the first reporting date after the acquisition, adjustments arising within
the measurement period (a maximum of 12 months from the acquisition date)
should be related back to the acquisition date. Subsequent adjustments are
recognized in profit or loss, unless they can be classified as errors under PAS8
Accounting policies, changes in accounting estimates and errors. See PFRS 3 pars.
45 and 50. The final amount of goodwill is P160 million consideration transferred less
P135 million fair values on May 31, 20x5 = P25 million.
59. c
Fair value of Subsidiary - Homer
Consideration transferredP 200 million
Add: Fair value of contingent consideration 10 million
Fair value of subsidiary P 210 million
Less: Fair value of identifiable assets and liabilities of Homer............... 116 million
Goodwill P 94 million

Note: The consideration transferred should be compared with the fair value of the net
assets acquired, per PFRS3 par. 32. The contingent consideration should be measured
at its fair value at the acquisition date; any subsequent change in this cash liability
comes under PAS 39 Financial instruments: recognition and measurement and should
be recognized in profit or loss, even if it arises within the measurement period. See
PFRS3 pars. 39, 40 and 58.
60. b
61. c
62. c
63. b
64. d
Consideration transferred:
Shares: (100,000 shares x P6.20) P620,000
Contingent consideration. 184,000
Total. P804,000
Less: Fair value of net identifiable assets acquired:
Current assets P100,000
Equipment 150,000
Land 50,000
Buildings . 300,000
Liabilities. ( 80,000) 520,000
Goodwill. P284,000

The P184,000 is one classical example of contingencies is where the future income of the
acquirer is regarded as uncertain; the agreement contains a clause that requires the
acquirer to provide additional consideration to the acquiree if the income of the acquirer is
not equal to or exceeds a specified amount over some specified period.

65. d
Goodwill, 1/1/20x4............ P 284,000
Less: Adjustment on contingent consideration (P184,000 P170,000) 14,000
Goodwill, 8/1/20x4............. P 270,000

Changes that are the result of the acquirer obtaining additional information about facts
and circumstances that existed at the acquisition date, and that occur within the
measurement period (which may be a maximum of one year from the acquisition date)
are recognized as adjustments against the original accounting for the acquisition (and so
may impact goodwill) see Section 11.3.[PFRS 3 (2008) par. 58]

Incidentally, the entry to record the revision of goodwill should be:

Estimated liability for contingent consideration. 14,000
Goodwill 14,000
66. a refer to No. 64 and 65 for further discussion.

67. c
Deficiency: (P16 P10) x 100,000 shares issued to acquireP 600,000
Divided by: Fair value of share...... P 10
Added number of shares to issue..... 60,000

68. (b) (P520,000 P60,000 = P460,000)

Changes resulting from events after (post-combination changes) the acquisition date (e.g.
meeting an earnings target, reaching a specified chare or reaching a milestone on research
and development project) are not measurement period adjustments. Such changes are
therefore accounted for separately from the business combination. The acquirer accounts
for changes in the fair value of contingent consideration that are not measurement period
adjustments as follows:
1. contingent consideration classified as equity is not remeasured and its subsequent
settlement is accounted for within equity; and
2. contingent consideration classified as an asset or liability

The problem on hand falls within No. 1, so no adjustment would be required to goodwill but
accounted for within the equity section.

Incidentally, the entry would be:

Paid-in capital in excess of par.. 60,000
Common stock, P1 par.. 60,000
69. c
Par value of shares outstanding before issuance P200,000
Par value of shares outstanding after issuance 250,000
Par value of additional shares issued P 50,000
Divided by: No. of shares issued* __12,500
Par value of common stock P 4

*Paid-in capital before issuance (P200,000 + P350,000) P 550,000

Paid-in capital after issuance (P250,000 + P550,00) 800,000
Paid-in capital of share issued at the time of exchange P 250,000
Divided by: Fair value per share of stock P 20
Shares issued 12,500

70. a
Consideration transferred: Shares 12,500 shares P250,000
Less: Goodwill 56,000
Fair value of identifiable net assets acquired P194,000

71. c
Depreciation expense:
Building, at book value (P200,000 P100,000) / 10 years P 10,000
Building, undervaluation (P130,000, fair value
P100,000, book value) / 10 years 3,000
Equipment, at book value (P100,000 P50,000) / 5 years 10,000
Equipment, undervaluation (P75,000, fair value
- P50,000, book value) / 5 years 5,000
Total depreciation expense P 28,000
72. d
PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured
at their acquisition-date fair values.

73. c
Selling price P 110,000
Less: Book value of Comb (P50,000 + P80,000 + P40,000
- P30,000) 140,000
Loss on sale of business by the acquiree (Comb) P( 30,000)

74. a
Blue Town:
Stockholders equity before issuance of shares (P700,000 + P980,000) P1,680,000
Issued shares: 34,000 shares x P35 1,190,000
Consolidated SHE/Net Assets P2,870,000

75. No available answer - P115,000

Cost of Investment (100,000 shares x P1.90) P 190,000
Less: Market value of net assets acquired:
Cash P 50,000
Furniture and fittings 20,000
Accounts receivable 5,000
Plant 25,000
Accounts payable (15,000)
Current tax liability ( 8,000)
Liabities ( 2,000) 75,000
Goodwill P 115,000

76. b
Cost of Investment [P20,000 + (16,000 shares x P2.50)
+ P500, incidental costs) P 60,500
Less: Market value of net assets acquired:
Plant P 30,000
Inventory 28,000
Accounts receivable 5,000
Plant 20,000
Accounts payable ( 20,000) 58,000
Goodwill P 2,500

When it liquidates, costs of liquidation paid by the acquiree should be for the liquidation
account of the acquiree and will eventually be transferred to shareholders equity account.
Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of
acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of
the combination.

Any direct costs of acquisition should be capitalizable under the cost model reiterated in
PFRS No. 3 Phase I. This model in PFRS No. 3 will be amended under Phase II (pending
implementation possibly until early 2008), wherein all direct costs will be outright expense.

Costs of issuing shares will be debited to share premium or APIC account.

 Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of
acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of
the combination.

The fair values of liabilities undertaken are best measured by the present values of future
cash outflows.

Intangible assets are recognized when its fair value can be measured reliably.

Assets other than intangible assets must be recognized if it is probable that the future
economic benefits will flow to the acquirer and its fair value can be measured reliably.

77. c
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000 289,700
Bargain Purchase Gain 29,700

78. d
79. c
CC_____ DD_______ EE Total______
Assets, appraised value P375,000 P750,000 P375,000 P1,500,000
Add: Goodwill:
Annual earnings P41,250 P75,000 P33,750 P150,000
Less: Normal earnings
6% x Assets 22,500 45,000 22,500 90,000
Excess earnings P18,750 P30,000 P11,250 P60,000
/ capitalized at 20% 20% _ 20%__ 20%__
Goodwill P93,750 P150,000 P56,250 P300,000
Total stock to be issued P468,750 P900,000 P431,250 P1,800,000
P468,750 P900,000 P431,250
1,800,000 1,800,000 431,250
Percentage 26% 50% 24% (c)

80. a
II ____ _____JJ _ ____Total____
Average annual earnings P 46,080 P 69,120 P 115,200
Divided by: Capitalized at _ 10%
 Total stock to be issued P1,152,000
Less: Net Assets (for P/S) 864,000
Goodwill (for Common Stock) P 288,000
Preferred stock (same with Net Assets):
864,000/P100 par 8,640 shares

81. c

Theories
1. a 6. c 11. d 16. c 21. d 26. d 31 c 36. c
2. a 7. d 12. d 17. c 22. c 27. b 32. b 37. b
3. c 8. d 13. b 18. c 23. b 28. a 33. b 38. c
4. d 9. d 14. d 19. a 24. b 29. d 34. b 39. c
5. d 10, c 15, b 20. d 25. b 30. a 35. b 40. c