3.

Goodwill is measured at the undiscounted amount of total excess earnings expected to be earned
from the combination. How much is goodwill?

Average annual earnings P 1,000,000

Normal earnings (960,000)
Excess earnings P 40,000
Multiply by: Probable duration 5
Goodwill P 200,000

4. Goodwill is measure by discounting the average excess earnings at 9%. How much is the goodwill?

Average annual earnings P 1,000,000

Normal earnings (960,000)
Excess earnings P 40,000
Multiply by: PV of ordinary annuity at
Of 1 at 9% 3.88965
Goodwill P 155,586

Discussion Problem 2.   (Goodwill - Indirect Valuation)

On December 31, 2015, ABC Corp. enters into a business combination by acquiring the assets and
assumed the liabilities of XYZ Corporation in which the corporation will be dissolved. ABC Corp.
Consideration transferred consists of the following:

a. P25,000 unissued shares of its P10 par common stock, with a market value of P25 per share;

b. P150,000 in long-term 8% notes payable and

c. A contingent payment of P100,000 cash on January 1, 2018, if the average income of during the 2year
period of 2016 - 2017 exceeds P250,000 per year. ABC Corp. estimates that there is a 30 percent chance
or probability that the P100,000 payment will be required.