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 Hope’s net assets (P2,720,000+P200,000–P1,200,000) 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 West’s 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 West’s 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
PIC - par (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
PIC - par (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 (144,000P15) = 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
PIC - par 690,000
(To record merger with OTG at fair value)

PIC - par 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 Paid-in capital - par 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 Pacifica’s 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
Paid-In Capital in excess of par (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

PIC - par 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 Method—Entry 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, Saul’s 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 Peter’s 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, 20x5……P 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

Liquidator’s 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
Finder’s 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 finder’s 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 issuance………………………………P 10,000
Stock registration fees……………………………………………...... 5,000
Stock listing fees…………………………………………………......... 4,000
P 19,000
3. c
4. a – at fair value
5. 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.
6. 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.

7. 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.

8. d – [P1,600,000 – P1,210,000] = P390,000

9. a – [(P1,600,000 – PP390,000) - P1,210,000] = P0
10. 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 acquiree’s 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 …”

11. 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.

12. c
Fair value of Subsidiary - Homer
Consideration transferred………………………………………………………P 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 PFRS
3 pars. 39, 40 and 58.

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

14. d
APIC: P20,000 + [(P42 – P5) x12,000 = P464,000
Retained earnings: P160,000, parent only

15. b
Inventory: PP230,000 + P210,000 = P440,000
Land: P280,000 + P240,000 = P520,000

16. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000

17. a

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 125,000
Accounts payable (15,000)
Current tax liability ( 8,000)
Liabilities ( 2,000) 175,000
Goodwill P 15,000

18. 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.

19. 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.

20. a – at fair value

21. 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

22. c - [(24,000 shares x P30) – P686,400] = P33,600

23. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain
24. 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

25. a - only the subsidiary’s post-acquisition income is included in consolidated totals.

26. 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.

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

28. 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

29. 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.

30. 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

31. d
PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured
at their acquisition-date fair values.

32. 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)

33. d P215,000 = P130,000 + P85,000

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

35. 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

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

+P200,000)

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

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

39. 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.

40. 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

41. a – refer to No. 39 and 40 for further discussion.

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

43. (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

44. b
45. c
46. c
47. b
48. 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

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

50. 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
51. d

52. c
Common stock – combined…………………………………………………………P 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
53. 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

54. 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

55. 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
56. 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.

57. 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

Quiz - XIV
1. P90,000 = P65,000 + P25,000
2. P280,000 = P210,000 + P70,000
3. P180,000
4. P475,000
 5. P100,000 = P600,000 - (P25,000 + P180,000 + P475,000 - P60,000 - P120,000)
6. [P500,000 – (P200,000 + P220,000 – P110,000)]= P190,000
7. Gain of P45,000
8. [(12,000 shares x P30) – P343,200 = P16,800
9. (P863,000 + P363,000) = P1,226,000
10. [P400 + (40 shares x P10)] = P800
11. [P1,080 + (P280 + P10) = P1,370
12. [P1,260 + (P440 + P60) = P1,760
13. [P600 + (P360 + P40)] = P1,000
14. [P480 + P100] = P580
15. [P330 + (40 shares x P1)] = P370
16. [P1,080 + 40 shares x (P10 - P1)] – P15, stock issuance costs = P1,425
17. [P180 + P40 – P20 – P15} =P185
18. [(50,000 shares x P 35) + P5,000] = P1,755,000
19. [P1,230,000 + P580,000] = P1,810,000
20. [P1,800,000 + P250,000] = P2,050,000
21. (P1,800,000 + P650,000]= P2,450,000
22. [P1,755,000 – (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000
- P240,000 – P60,000 – P1,120,000)] = P455,000
23. [P660,000 + P400,000} = P1,060,000
24. P1,280,000
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
25. P2,880,000, parent only on the date of combination
26. (P2,760,000 + P10,000) = P2,770,000
27. [(P870,000 – P15,000 – P10,000) + P240,000] = P1,085,000
28. P46,000 = (P60,000 + P26,000, fair value) – P40,000, cash paid
29. P154,000 = (P100,000 + P54,000, fair value)
30. P7,000 = [P40,000 – (P26,000 + P54,000 – P35,000 – P12,000)]
31. P98,000 = (P90,000 + P8,000), only the stockholders’ equity of acquirer
32. CC, 26%; DD, 50%; EE, 24%
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)
Theories
1. True 21. False 41. True 61. c 81. b 101. c 121 a
2. False 22. True 42. False 62. b 82. a 102. d 122. b
3. True 23. False 43. a 63. c 83. d 103. d 123. b
4. True 24. True 44. c 64. d 84. a 104. d 124. c
5. False 25, True 45, b 65, d 85. c 105. c 125. b
6. True 26. False 46. b 66. a 86. d 106. d 126. c
7. False 27. True 47. d 67. a 87. c 107. d 127. c
8. True 28. False 48. c 68. d 88. a 108. d
9. True 29. True 49. c 69. a 89. c 109. b
10. True 30, True 50, b 70, b 90, d 110, c
11. True 31. False 51. a 71. c 91. b 111. c
12. True 32. True 52. b 72. A 92. a 112. c
13. False 33. True 53. c 73. c 93. C 113. a
14. False 34. False 54. a 74. c 94. B 114. d
15. False 35. True 55. c 75. a 95. D 115. d
16. True 36. True 56. b 76. d 96. A 116. c
17. False 37. False 57. a 77. a 97. A 117. b
18. True 38. True 58. c 78. d 98. c 118. b
19. True 39. False 59. a 79. b 99. d 119. b
20. False 40, False 60, c 80, c 100, d 120. a
Note for the following numbers:
2. A horizontal combination occurs when management attempts to dominate an industry.
5. A vertical combination exists when an entity purchases another entity that could have a
buyer-seller relationship with the acquirer. The combination described here is a
horizontal combination.
7. A conglomerate combination is one where an unrelated or tangentially related business
is acquired. A vertical combination occurs when a supplier is acquired.
13. Greenmail is the payment of a price above market value to acquire stock back from a potential
acquirer.
15. The sale of the crown jewels results when a target sells assets that would be particularly valuable to
the potential acquirer. The scorched earth defense results when a target generally sells large
amounts of assets without regard to the specific desirability to the potential acquirer.
17. Golden parachutes are generally given only to top executives of the acquiree.
20. Control over the net assets of an entity can be accomplished by purchasing the net assets or by
purchasing the acquiree voting common stock that represents ownership of the assets.
21. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the
acquirer book value will not change due to an acquisition.
23. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in
ownership structure of either entity.
26. The acquiree corporation becomes an acquirer stockholder, not the acquiree
stockholders.
28. A combination that results in one of the original entities in existence after the
combination is a statutory merger.
31. The combination results in the stockholders of one entity controlling the other entity. The
Retained Earnings of the entity acquiring control is carried forward to the newly formed
corporation.
34. The stock of the acquiree company must be purchased by the acquirer, but the value
transferred to the acquiree stockholders does not have to be in stock. Payment may be
in another asset or the issuance of debt.
37. The consideration to be given by the acquirer is sometimes not completely known
because the consideration is based partially on acquiree future earnings or the market
value of acquirer debt or stock.
39. Any change in the number of shares of acquirer stock given returns the purchase price to
the agreed level. The adjustment is to stock and additional paid-in capital. The
investment account is unchanged.
40. The acquiree stockholders must continue to have an indirect ownership interest in the
acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect
ownership as well as voting common stock.
42. A net operating loss carryforward cannot be acquired. They are only available to the
acquirer if the combination qualifies as a nontaxable exchange.