Page |1

Chapter 2
Business Combinations (Part 2)
PROBLEM 1: TRUE OR FALSE
1. FALSE – The transaction is a business combination effected
through exchanges of equity interests.
2. TRUE
3. FALSE - ₱100, the total increase in share capital and share
premium
4. FALSE – (₱100 consideration transferred, equal to total
increase in share capital and share premium, minus ₱80 fair
value of net assets) = ₱20 goodwill
5. TRUE
6. FALSE
7. TRUE – The 20% interest is most likely to have been classified
as Investment in associate. Accordingly, the remeasurement
gain of ₱10 (₱40 fair value - ₱30 carrying amount) is
recognized in profit or loss.
8. TRUE – (100 CT + 60 NCI + 40 PHEI) – 180 = 20 goodwill
9. FALSE
10. TRUE

PROBLEM 2: TRUE OR FALSE

1. FALSE – maximum of 12 months from acquisition date
2. TRUE
3. FALSE [100 – (170 – 70 provisional amt. + 60 fair value – 80)] = 20
4. TRUE
5. TRUE
6. TRUE
7. TRUE
8. TRUE
9. TRUE (100 + 20 fair value of contingent consideration) – (170 – 80) = 30
10. TRUE – Goodwill is not affected by fair value changes that are
not measurement period adjustments.
 Page |2

PROBLEM 3: FOR CLASSROOM DISCUSSION

1. Solution:

Step 1
Consideration transferred (squeeze) 4,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (given) (4,000,000)
Goodwill (start) 200,000

Step 2
₱4.2M consideration transferred ÷ ₱100 fair value per share =
42,000 shares issued

2. Solution:
Consideration transferred 300,000
Non-controlling interest in the acquiree (690K x 40%*) 276,000
Previously held equity interest in the acquiree 138,000
Total 714,000
Fair value of net identifiable assets acquired (690,000)
Goodwill 24,000
*100% - (20% + 40%) = 40%

3. Solution:
Consideration transferred -
Non-controlling interest in the acquiree (1.8M x 100%) 1,800,000
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired (1,800,000)
Goodwill -
 Page |3

4. Solution:
Provisional Adjusted
Consideration transferred 2,000,000 2,000,000
NCI - -
Previously held equity interest - -
Total 2,000,000 2,000,000
Fair value of net identifiable assets (1,980,000) (1,900,000)(a)
Goodwill 20,000 100,000

(a) (1.980M – 220K provisional amount + 140K fair value)

The new information obtained on July 1, 20x2 is not a

measurement period adjustment because it does not relate to facts
and circumstances that have existed as at the acquisition date.
This is accounted for as a post-combination event under PFRS 9.

Apr. 1, Goodwill 80,000

20x2
Machine 80,000
Apr. 1, Accumulated depreciation (b) 278
20x2
Retained earnings 278

(b) Depreciation based on:

➢ provisional amount: (220K ÷ 6) x 2/12 = 6,111
➢ fair value: (140K ÷ 4) x 2/12 = 5,833
➢ Decrease in accumulated depreciation: (6,111 – 5,833) = 278

5. Solution:
Consideration transferred (800K – 30K – 50K) 720,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 720,000
Fair value of net identifiable assets acquired (600,000)
Goodwill 120,000
 Page |4

 The reimbursement for the appraisal fees is an acquisition-

related cost. This is expensed.
 The trade secret does not qualify as ‘consideration transferred’
because it is retained in the combined entity after the business
combination.

6. Solution:

Consideration transferred (2M – 200K ‘off-market’ value) 1,800,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired
(4M + 100K intangible asset on reacquired rt. – 150K franchise - 2.2M) (1,750,000)
Goodwill 50,000

Journal entries
Jan. Identifiable assets acquired (4M + 100K – 150K) 3,950,000
1,
Goodwill 50,000
20x1
Liabilities assumed 2,200,000
Cash (2M – 200K) 1,800,000
to record the business combination
Jan. Contract liability 230,000
1,
Cash 200,000
20x1
Settlement gain 30,000
to record the effective settlement of pre-
existing relationship as a separate transaction from
business combination transaction
 Page |5

7. Solutions:
Requirement (a):
Consideration transferred
(10,000 sh. x ₱200) + 280K contingent consideration 2,280,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired (1,900,000)
Goodwill 380,000

Requirement (b):
Dec.
31, No entry
20x1
Jan. 14, Share premium – contingent consideration 280,000
20x2
Share capital (2,000 x ₱20 par) 40,000
Share premium (squeeze) 240,000
to record the issuance of 2,000 additional
shares

Requirement (c):
Dec. Share premium – contingent consideration 280,000
31,
Share premium 280,000
20x1
 Page |6

PROBLEM 4: EXERCISES

1. Solutions:
Requirement (a):
ABC Co. Combined entity Increase
Share capital (₱20 par) 800,000 976,000 176,000

176,000 ÷ 20 par = 8,800 shares

Requirement (b):

Consideration transferred (a) 968,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 968,000
Fair value of net identifiable assets acquired (b) (800,000)
Goodwill 168,000

(a) Combined Increase

ABC Co. entity
Share capital 800,000 976,000
Share premium 300,000 1,092,000
Totals 1,100,000 2,068,000 968,000

(b) Combined Increase

ABC Co. entity
Identifiable assets 2,200,000 3,600,000 1,400,000
Liabilities 700,000 1,300,000 600,000
Fair value of net identifiable assets acquired 800,000

Requirement (c):
Retained earnings = 400,000
 Page |7

2. Solutions:

Requirement (a):
Consideration transferred (80,000 sh. x ₱8) 640,000
Non-controlling interest in the acquiree (665,000 x 10%*) 66,500
Previously held equity interest in the acquiree** 80,000
Total 786,500
Fair value of net identifiable assets acquired (665,000)
Goodwill 121,500

* (10,000 + 80,000) ÷ 100,000 = 90% controlling interest;

(100% - 90%) = 10% NCI

** (10,000 sh. x ₱8) = 80,000

Requirement (b):

7/1/20x2
Investment in subsidiary (80,000 x 8) 640,000
Cash 640,000
to record the newly acquired shares

FVPL financial assets [(8 – 5) x 10,000] 30,000

Unrealized gain – P/L 30,000
to remeasure the previously held equity interest

Investment in subsidiary 80,000

FVPL financial assets 80,000
to reclassify the previously held equity interest
 Page |8

3. Solution:

Requirement (a):
Provisional Adjusted
Consideration transferred 1,800,000 1,800,000
NCI - -
Previously held equity interest - -
Total 1,800,000 1,800,000
Fair value of net identifiable assets (1,700,000) (1,600,000)(a)
Goodwill 100,000 200,000

(a) (2.6M – 300K provisional amount + 200K fair value - .9M)

Requirement (b):
Aug. Goodwill 100,000
31,
Trademark 100,000
20x2
 Page |9

4. Solution:

Requirement (a):
Settlement loss (360K – 170K ‘at-market’ = 190 ‘off-market’) 190,000
Carrying amount of related asset or liability recognized -
Adjusted settlement loss 190,000

Jan. 1, Settlement loss 190,000

20x1
Cash 190,000

Requirement (b):
Consideration transferred (2.2M – 190K ‘off-market’ value) 2,010,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,010,000
Fair value of net identifiable assets acquired (3.6M – 1.8M) (1,800,000)
Goodwill 210,000

The ₱170,000 “at-market” value is subsumed in goodwill and not

recognized as intangible asset because there is no reacquired right.

5. Solution:

Requirement (a):
Consideration transferred
(10,000 sh. x ₱200) + ₱280K contingent consideration 2,280,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired (1,920,000)
Goodwill 360,000
 P a g e | 10

Requirement (b):
Dec. Unrealized loss – P/L (a) 120,000
31,
Liability for contingent consideration 120,000
20x1
Jan. Liability for contingent consideration 400,000
14,
Cash 400,000
20x2

(a) Carrying amount of contingent consideration - 12/31/20x1 280,000

Fair value – 12/31/20x1 400,000
Increase in fair value of liability (loss) (120,000)

Requirement (c):
Dec. Liability for contingent consideration 280,000
31,
Gain on extinguishment of liability – P/L 280,000
20x1

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. B
2. C
3. A
4. B
5. D
6. D
7. A
8. B
9. D
10. D
 P a g e | 11

PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. D
Solution:
Consideration transferred (squeeze) 2,000,000
NCI in the acquiree -
Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (2,000,000)
Goodwill (start) -

(2,000,000 ÷ 20,000 shares) = 100 per share

2. C
Solution:
➢ 2M consideration transferred – 400K increase in share
premium = 1.6M increase in share capital;
➢ 1.6M ÷ 20,000 shares = 80

3. B
Solution:
Outstanding shares of Finger (₱40,000 ÷ ₱4 par) 10,000
Ratio 2:1
No. of shares issued by Point (10,000 sh. x 2) 20,000

Consideration transferred (squeeze) 800,000

NCI in the acquiree -
Previously held equity interest in the acquiree -
Total 800,000
Fair value of net identifiable assets acquired (800,000)
Goodwill (start) -

(800,000 consideration transferred ÷ 20,000 sh. issued by Point) = 40

 P a g e | 12

4. C
Solutions:
Consideration transferred (50,000 sh. x ₱7) 350,000
Non-controlling interest in the acquiree (665,000 x 40%*) 266,000
Previously held equity interest in the acquiree** 70,000
Total 686,000
Fair value of net identifiable assets acquired (665,000)
Goodwill 21,000

* (10,000 + 50,000) ÷ 100,000 = 60% controlling interest; (100% - 60%) = 40%

NCI
** (10,000 sh. x ₱7) = 70,000

5. C
Solution:

Provisional Adjusted
Consideration transferred 800,000 800,000
NCI - -
Previously held equity interest - -
Total 800,000 800,000
Fair value of net identifiable assets (900,000) (720,000)(a)
Goodwill (Negative goodwill) (100,000) 80,000
(a) (1.2M – 200K provisional amt. + 20K fair value - .3M)

Feb. 1, Goodwill 80,000

20x2
Retained earnings* 100,000
Intangible asset 180,000
Feb. 1, Accumulated amortization 7,500
20x2
Retained earnings 7,500

*This represents the reversal of the negative goodwill recognized in

profit or loss in 20x1.

**Amortization recognized in 20x1: (200,000 ÷ 10) x 6/12 = 10,000;

Correct amortization in 20x1: (20,000 ÷ 4) x 6/12 = 2,500;
Excess amortization expense in 20x1 = (10,000 – 2,500) = 7,500