ULOc ANSWER KEY

Let’s Check

1. Which of the following is included as part of the consideration given?

a. Contingent considerations
b. All expenses and liabilities relating to the acquisition
c. Direct and indirect acquisition costs attributable to the acquisition
d. Indirect costs and contingent consideration
2. An obligation of the acquirer to transfer additional assets or equity interests to
the former owners of an acquire as part of the exchange for control of the letter if
specified conditions are met:
a. Goodwill
b. Gain from acquisition
c. Acquisition expense
d. Contingent liability

Let’s Analyze
JJ Company acquired the net assets of GTG Company on January 1, 2019. Below are
the account balances of GTG Company as of January 1, 2019:

Current assets ₱400,000

Equipment 600,000
Land 200,000
Building 1,200,000
Liabilities (320,000)
₱2,080,00
Net assets 0

JJ Company paid 2.4 million for the net assets of GTG Company. In addition, additional
cash payment would be made on January 1, 2021 if the average earnings of GTG
Company exceed 100,000 per year. Net income was 200,000 in 2019 and 240,000 in
2020. Assume that the liabilities recorded on January 1, 2019 include an estimated
contingent liability recorded at ₱160,000.

On December 21, 2019, it was noted that GTG Company may generate revenue more
than what is expected, hence, the estimated contingent liability was increased to
₱200,000.

How much goodwill should be recorded as of December 31, 2019?

ANSWER:

January 1, 2019

Consideration ₱2,400,00
transferred 0
Contingent liability 160,000 ₱2,560,000
Net assets 2,080,000
Goodwill ₱480,000

Journal entry to record the acquisition:

Current Assets ₱400,000

Equipment 600,000
Land 200,000
Building 1,200,000
Goodwill 480,000
Liabilities ₱320,000
Cash 2,400,000
Contingent liability 160,000

If there was no change in estimation of contingent liability, goodwill should have been
recorded at 480,000.

December 21, 2019

Revised estimate ₱200,000
Original estimate 160,000
Increase in estimate ₱40,000

Journal entry to record the increase in estimate of contingent liability:

Goodwill ₱40,000
Contingent liability ₱40,000

Needless to say, as of December 31, 2019, goodwill and contingent liability should be
recorded at ₱520,000 and ₱200,000, respectively.