1.

In a business combination, how should long-term debt of the acquired company generally be
recognized on acquisition date?
a. Fair value
b. Amortized cost
c. Carrying amount
d. Fair value less costs to sell

2. In a business combination accounted for under the acquisition method, the fair value of the net
identifiable assets acquired exceeded the consideration transferred. How should the excess fair
value be reported?
a. As negative goodwill, recognized in profit or loss in the period the business
combination occurred.
b. As an extraordinary gain.
c. As a reduction of the values assigned to noncurrent assets and an extraordinary
gain for any unallocated portion.
d. As positive goodwill.

3. The costs of issuing equity securities in a business combination are

a. expensed
b. treated as direct reduction in equity
c. included in the initial measurement of the credit to share capital account
d. b and c

4. The costs of issuing debt securities in a business combination are

a. expensed
b. included in the initial measurement of the debt securities issued
c. accounted for like a “discount” on liability
d. b and c

5. A business combination is accounted for properly as an acquisition. Direct costs of combination,

other than registration and issuance costs of equity securities, should be:
a. Capitalized as a deferred charge and amortized.
b. Deducted directly from the retained earnings of the combined corporation.
c. Deducted in determining the net income of the combined corporation for the period in
which the costs were incurred.
d. Included in the acquisition cost to be allocated to identifiable assets according to their fair
values.

6. PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition
transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and
assumed liabilities. The general guidelines for assigning amounts to the inventories acquired
provide for:
a. Raw materials to be valued at original cost.
b. Work in process to be valued at the estimated selling prices of finished goods, less both costs
to complete and costs of disposal.
 c. Finished goods to be valued at replacement cost.
d. Inventories to be valued at acquisition-date fair values.

7. A business combination is accounted for as an acquisition. Which of the following expenses

related to the business combination should be included, in total, in the determination of net
income of the combined corporation for the period in which the expenses are incurred?
Fees of finders and Registration fees
consultants for equity securities issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No

8. Easton Company acquired Lofton Company in a business combination. Easton was able to
acquire Lofton at a bargain price. The fair value of the net identifiable assets acquired exceeded
the consideration transferred to Lofton. After revaluing noncurrent assets to zero, there was still
some "negative goodwill." Proper accounting treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

9. Goodwill may be capitalized

a. only when it arises in a business combination.
b. only when it is created internally.
c. only when it is purchased
d. on any of these cases.

10. A contingent liability assumed in a business combination is recognized

a. if it is a present obligation that arises from past events and
b. if its fair value can be measured reliably.
c. even if it has an improbable outflow of resources embodying economic benefits.
d. All of these

PART 2
1. On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of the liabilities
of SMALL, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities
of SMALL acquired by DIMINUTIVE are shown below:
Assets Carrying amounts Fair values
Cash in bank 20,000 20,000
Receivables 400,000 240,000
Allowance for probable losses on
(60,000)
receivables
Inventory 1,040,000 700,000
Building – net 2,000,000 2,200,000
 Goodwill 200,000 40,000
Total assets 3,600,000 3,200,000

Liabilities
Payables 800,000 800,000

On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction costs
amounting to ₱200,000 for legal, accounting, and consultancy fees.

Case #1: If DIMINUTIVE Co. paid ₱3,000,000 cash as consideration for the assets and liabilities of
SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business combination?

Case #2: If DIMINUTIVE Co. paid ₱2,000,000 cash as consideration for the assets and liabilities of
SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business combination?

Fact pattern
2. On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL, Inc. in exchange
for cash. Because the former owners of RASCAL needed to dispose of their investments in
RASCAL by a specified date, they did not have sufficient time to market RASCAL to multiple
potential buyers.

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair values of ₱2,400,000 and
₱800,000, respectively.

Case #1:
KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent
consultant was engaged who determined that the fair value of the 20% non-controlling interest in
RASCAL, Inc. is ₱310,000.

If KNAVE Co. paid ₱2,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how
much is the goodwill (gain on bargain purchase) on the business combination?

Case #2:
KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent
consultant was engaged who determined that the fair value of the 20% non-controlling interest in
RASCAL, Inc. is ₱310,000.

If KNAVE Co. paid ₱1,200,000 cash as consideration for the 80% interest in RASCAL, Inc., how
much is the goodwill (gain on bargain purchase) on the business combination?

Case #3:
KNAVE Co. elects the option to measure non-controlling interest at fair value. A value of ₱250,000 is
assigned to the 20% non-controlling interest in RASCAL, Inc. [(₱2M ÷ 80%) x 20% = 500,000].
If KNAVE Co. paid ₱2,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how
much is the goodwill (gain on bargain purchase) on the business combination?

Case #4:
KNAVE Co. elects the option to measure the non-controlling interest at the non-controlling interest’s
proportionate share of RASCAL, Inc.’s net identifiable assets

If KNAVE Co. paid ₱2,000,000 cash as consideration for the 80% interest in RASCAL, Inc. and, how
much is the goodwill (gain on bargain purchase) on the business combination?

PART 3
Fact pattern
1. On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed all of the
liabilities of OBSCENE, Inc. On this date, the identifiable assets acquired and liabilities assumed
have fair values of ₱3,200,000 and ₱1,800,000, respectively.

SMUTTY incurred the following acquisition-related costs: legal fees, ₱20,000, due diligence costs,
₱200,000, and general administrative costs of maintaining an internal acquisitions department,
₱40,000.

Case #1: As consideration for the business combination, SMUTTY Co. transferred 8,000 of its own
equity instruments with par value per share of ₱200 and fair value per share of ₱250 to OBSCENE’s
former owners. Costs of registering the shares amounted to ₱80,000. How much is the goodwill
(gain on bargain purchase) on the business combination?

Case #2: As consideration for the business combination, SMUTTY Co. issued bonds with face
amount and fair value of ₱2,000,000. Transaction costs incurred in issuing the bonds amounted to
₱100,000. How much is the goodwill (gain on bargain purchase) on the business combination?

2. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets and assumed all of the
liabilities of BEG, Inc. by paying cash of ₱2,000,000. On this date, the identifiable assets acquired
and liabilities assumed have fair values of ₱3,200,000 and ₱1,800,000, respectively.

ENTREAT Co. has estimated restructuring provisions of ₱400,000 representing costs of exiting the
activity of BEG, costs of terminating employees of BEG, and costs of relocating the terminated
employees.

Requirement: Compute for the goodwill (gain on bargain purchase).

Fact pattern
3. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of
the liabilities of THEATRICAL, Inc. by paying cash of ₱2,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of ₱3,200,000 and ₱1,800,000,
respectively.
Case #1:
As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to
THEATRICAL, Inc. under operating leases. HISTRIONAL has determined that the terms of the
operating lease on the building compared with market terms are favorable. The fair value of the
differential is estimated at ₱40,000.

Requirement: Compute for the goodwill (gain on bargain purchase).

Case #2:
As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to
THEATRICAL, Inc. under operating leases. HISTRIONAL has determined that the terms of the
operating lease on the patent compared with market terms are unfavorable. The fair value of the
differential is estimated at ₱40,000.

Requirement: Compute for the goodwill (gain on bargain purchase).

Case #3:
As of January 1, 20x1, HISTRIONAL is renting a building and a patent from THEATRICAL, Inc.
under operating leases. HISTRIONAL has determined that the terms of the operating lease on the
building compared with market terms are favorable. The fair value of the differential is estimated at
₱40,000.

Requirement: Compute for the goodwill (gain on bargain purchase).