Quiz 1

Part II

1. Solutions:
Case #1:
(1) Consideration transferred (8,000 sh. x P250) 2,000,000

(2) Non-controlling interest in the acquiree -

(3) Previously held equity interest in the acquiree -

Total 2,000,000

Fair value of net identifiable assets acquired (1,400,000)

Goodwill 600,000

2. Case #2:
(1) Consideration transferred (fair value of bonds) 2,000,000

(2) Non-controlling interest in the acquiree -

(3) Previously held equity interest in the acquiree -

Total 2,000,000

Fair value of net identifiable assets acquired (1,400,000)

Goodwill 600,000

3. Solutions:
Requirement (a): Number of shares issued

CONJUNCTION Co. Combined entity Increase

Share capital 1,200,000 1,400,000 200,000

Share premium 600,000 2,400,000 1,800,000

Totals 1,800,000 3,800,000 2,000,000

The fair value of the shares transferred as consideration for the business combination is
P2,000,000.

The number of shares issued in the business combination is computed as follows:

Fair value of shares transferred 2,000,000

Divide by: CONJUNCTION’s fair value per share 200

Number of shares issued 10,000

4. Requirement (b): Par value per share

The par value per share of the shares issued is computed as follows:

Increase in share capital account (see table above) 200,000

Divide by: Number of shares issued 10,000

Par value per share 20

5. Requirement (c): Acquisition-date fair value of the net identifiable assets acquired

(1) Consideration transferred (see previous computation) 2,000,000

(2) Non-controlling interest in the acquiree -

(3) Previously held equity interest in the acquiree -

Total 2,000,000

Fair value of net identifiable assets acquired

(squeeze) (1,400,000)

Goodwill (given information) 600,000

6. Solutions:
Method #1: Multiples of average excess earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Normal earnings in the industry (20M x 12%) (2,400,000)

Excess earnings 200,000

Multiply by: Probable duration of excess earnings 5

Goodwill 1,000,000

7. Method #2: Capitalization of average excess earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Normal earnings in the industry (20M x 12%) (2,400,000)

Excess earnings 200,000

Divide by: Capitalization rate 25%

Goodwill 800,000

8. Method #3: Capitalization of average earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000
Divide by: Capitalization rate 12.5%

Estimated purchase price 20,800,000

Fair value of acquiree’s net assets (20,000,000)

Goodwill 800,000

9. Method #4: Present value of average excess earnings

Average earnings (13.8M – .8M expropriation gain) ÷ 5 years 2,600,000

Normal earnings in the industry (20M x 12%) (2,400,000)

Excess earnings 200,000

Multiply by: PV of an ordinary annuity @10%, n=5 3.79079

Goodwill 758,158

Answers:

1. ₱600,000
2. ₱600,000
3. 10,000
4. ₱20
5. ₱1,400,000
6. ₱1,000,000
7. ₱800,000
8. ₱800,000
9. ₱758,158