Accounting for Business Combination – BADVAC1X

Interim Assessment – Summative Test

BSA 181BA

Part II (Problem Solving)

1. ABC Co. acquired all the assets and liabilities of JMS Co. for P 2,600,000. On acquisition
date, JMS’ identifiable assets and liabilities have fair values of P 5,900,000 and P
3,500,000, respectively. Relevant information are as follow:
• ABC Co. is renting out a building to JMS Co. on an operating lease. The terms of the
lease compared with market terms are favorable. The fair value of the differential is P
90,000.
• JMS Co. is a defendant on a pending lawsuit. No provision was recognized because
JMS’s legal counsel believes they will successfully defend the case. The fair value of
settling the lawsuit is P 10,000.
Requirement: Compute for the goodwill.
FV of Identifiable Assets (5,900 + 10,000) 5,910,000
FV of Liabilities Assumed (3,500,000)
FV of Net Identifiable Assets Acquired 2,410,000

Computation of Goodwill
Consideration Transferred 2,600,000 Formatted: Left
Non-Controlling Interest, Acquiree 0
Previously Held Equity Interest in the Acquiree 0
FV of net Identifiable Assets Acquired (2,410,000)
Goodwill 190,000 Formatted: Font: Bold, Highlight

2. ABC Co. acquires 80% of the controlling interest in JMS Co. for P 1,200,000. JMS Co.’s
identifiable assets and liabilities have fair values of P 3,300,000 and P 1,700,000,
respectively. Included in JMS Co.’s assets is a web press machine with fair value of P
90,000 which ABC Co. intends to sell immediately. The machine qualifies for classification
as “held for sale”. The cost to sell are P 150,000. ABC Co. opts to measure the non-
controlling interest at fair value. (Assume the fair value of the NCI equal to the grossed-up
value of the consideration transferred multiplied by the NCI percentage.
Requirement: Compute for the goodwill.
Consideration Transferred, NCI (1,200,000 / 80%) x 20% 1,200,000
Previously Held Equity Interest in the Acquiree 300,000
Total 1,500,000
Less: FV of Net Identifiable Assets Acquired 1,450,000 Formatted: Font color: Red
Goodwill 50,000 Formatted: Font color: Red
Supporting Computations: Formatted: Font: Bold, Highlight

Identifiable Assets 3,300,000 Formatted: Left

Less: Identifiable Liabilities 1,700,000
Cost to Sell 150,000
FV of Net Identifiable Assets Acquired 1,450,000 Formatted: Font color: Red
3. On January 1, 2021, ABC Co. acquired 30% ownership interest in JMS Co. for ₱200,000.
Because the investment gave ABC Co. significant influence over JMS Co. the investment
was accounted for under the equity method in accordance with PAS 28.

From 2021 to the end of 2023, ABC Co. recognized ₱100,000 net share in the profits of
the associate and ₱20,000 share in dividends. Therefore, the carrying amount of the
investment in associate account on January 1, 2023, is ₱280,000.

On January 1, 2024, ABC Co. acquired additional 60% ownership interest in JMS Co. for
₱1,600,000. As of this date, ABC Co. has identified the following:
• The previously held 30% interest has a fair value of ₱360,000.
• JMS Co.’s net identifiable assets have a fair value of ₱2,000,000.
• ABC Co. elected to measure non-controlling interests at the non-controlling
interest’s proportionate share of JMS Co. identifiable net assets.

Requirement: Compute for the goodwill.

Consideration Transferred 1,600,000
Non-Controlling Interest in the Acquiree 200,000
Previously Held Equity Interest in the Acquiree 360,000
Total 2,160,000
Less: Fair Value of Net Identifiable Assets Acquired 2,000,000
Goodwill 160,000
4. On January 1, 2021, ABC Co. acquired all of the identifiable assets and assumed all of the
liabilities of JMS, Co. 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.

Additional information:
In addition to the business combination transaction, the following have also transcribed
during the negotiation period:

• After the business combination, JMS, Co. will enter into liquidation and ABC Co.
agreed to reimburse JMS, Co. for liquidation costs estimated at ₱40,000.
• ABC Co. agreed to reimburse JMS, Co. for the appraisal fee of a building included
in the identifiable assets acquired. The agreed reimbursement is ₱20,000.
• ABC Co. entered into an agreement to retain the top management of JMS, Co. for
continuing employment. On acquisition date, ABC Co. agreed to pay the key
employees signing bonuses totaling ₱200,000.
• To persuade, Mr. Kang, the previous major shareholder of JMS, Co., to sell his
major holdings to ABC Co., ABC Co. agreed to pay an additional ₱100,000 directly
to Mr. Kang.
• Included in the valuation of identifiable assets are inventories with fair value of
₱180,000. Ms. Hyejin, a former major shareholder of JMS, Co., shall acquire title
to the goods.
 Requirement: Compute for the goodwill.
Cash Payment on Business Combination 2,000,000
Additional Payment to subsidiary's former owner 100,000
Consideration transferred on the business combination 2,100,000

Fair Value of Identifiable Assets 3,200,000

Less: Fair Value of Inventory not transferred to ABC Co. 180,000 Formatted: Indent: Left: 0.5", No bullets or
Adjusted Fair Value of Identifiable Assets acquired 3,020,000
Less: Fair Values of Liabilities Assumed 1,800,000 Formatted: Indent: Left: 0.5", No bullets or
Adjusted Fair Value of Net Identifiable assets acquired 1,220,000

Consideration Transferred 2,100,000

Non-Controlling Interest in the Acquiree 0
Previously held Equity Interest in the acquiree 0
Total 2,100,000
Less: Fair Value of Net Identifiable Asset acquired 1,220,000 Formatted: Font: (Default) Arial
Goodwill 880,000 Formatted: Normal, Indent: Left: 0.25", No bullets or
numbering
5. ABC Co. is contemplating on acquiring JMS Co. The following information was gathered
through a diligence audit: Formatted: Font: Bold, Highlight
• The actual earnings of JMS Co. for the past 5 years are shown below: Formatted: Font: Bold
Year Earnings
2016 2,400,000
2017 2,600,000
2018 2,700,000
2019 2,500,000
2020 3,600,000
Total 13,800,000

• Earnings in 2020 included an expropriation gain of ₱800,000.

• The fair value of JMS Co.’s net assets as of the end of 20x5 is ₱20,000,000.
• The industry average rate of return is 12%.
• Probable duration of “excess earnings” is 5 years.

Requirements:
a. How much is the estimated goodwill under the multiples of average excess earnings
method?

Total Earning for the last 5 years 13,800,000

Less: Expropriation Gain 800,000
Normalized Earnings for the last 5 years 13,000,000
Divided by: 5
(x) Average Annual Earnings 2,600,000
 Fair Value of Acquiree’s net assets 20,000,000
Multiply by: Normal rate of return 12%
(y) Average Annual Earnings 2,400,000

Excess Earnings (x) – (y) 200,000

Multiply by: Probable duration of excess earnings 5
Goodwill 1,000,000

b. How much is the estimated goodwill under the capitalization of average excess
earnings method? Use a capitalization rate of 25%.

Average Earnings [(13.8M – 800K Expropriation Gain) / 5 Years] 2,600,000

Less: Normal Earnings (20M x 12%) 2,400,000
Excess Earnings 200,000
Divided by: Capitalization Rate 25%
Goodwill 800,000

c. How much is the estimated goodwill under the capitalization of average earnings
method? Use a capitalization rate of 12.5%.

Average Earnings [(13.8M – 800K Expropriation Gain) / 5 Years 2,600,000

Divide by: Capitalization Rate 12.5%
Estimated purchase price 20,800,000
Less: Fair Value of JMS Co.’s net assets 20,000,000
Goodwill 800,000

d. How much is the estimated goodwill under the present value of average excess
earnings method? Use a discount rate of 10%.

Average Earnings [(13.8M – 800K Expropriation Gain) / 5 Years] 2,600,000

Less: 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 3.7908
Goodwill 758,160`