QUIZ 1:

Part II

1. On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed all of the
liabilities of OBSCENE, Inc. On this date, the identifiable assets acquired and liabilities
assumed have fair values of ₱3,200,000 and ₱1,800,000, respectively.

SMUTTY incurred the following acquisition-related costs: legal fees, ₱20,000, due
diligence costs, ₱200,000, and general administrative costs of maintaining an internal
acquisitions department, ₱40,000.

Case #1: As consideration for the business combination, SMUTTY Co. transferred 8,000
of its own equity instruments with par value per share of ₱200 and fair value per share
of ₱250 to OBSCENE’s former owners. Costs of registering the shares amounted to
₱80,000.

(1) How much is the goodwill (gain on bargain purchase) on the business
combination?

Case #2: As consideration for the business combination, SMUTTY Co. issued bonds
with face amount and fair value of ₱2,000,000. Transaction costs incurred in issuing
the bonds amounted to ₱100,000.

(2) How much is the goodwill (gain on bargain purchase) on the business
combination?

2. On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a business
combination effected through exchange of equity instruments. The combination resulted
to CONJUNCTION obtaining 100% interest in UNION. Both of the combining entities are
publicly listed. As of this date, CONJUNCTION’s shares have a quoted price of ₱200 per
share. CONJUNCTION Co. recognized goodwill of ₱600,000 on the business combination.
No acquisition-related costs were incurred. Additional selected information at acquisition
date is shown below:

CONJUNCTION Co. Combined entity

(before acquisition) (after acquisition)
Share capital 1,200,000 1,400,000
Share premium 600,000 2,400,000
Totals 1,800,000 3,800,000

Requirements: Compute for the following:

(3) Number of shares issued by CONJUNCTION Co. in the business combination.
(4) Par value per share of the shares issued.
(5) Acquisition-date fair value of the net identifiable assets of UNION.
3. UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The following
information was gathered through a diligence audit:
• The actual earnings of IMMATURE, Inc. for the past 5 years are shown below:
Year Earnings
20x1 2,400,000
20x2 2,600,000
20x3 2,700,000
20x4 2,500,000
20x5 3,600,000
Total 13,800,000

• Earnings in 20x5 included an expropriation gain of ₱800,000.

• The fair value of IMMATURE’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:
(6) How much is the estimated goodwill under the multiples of average excess earnings
method?
(7) How much is the estimated goodwill under the capitalization of average excess
earnings method? Use a capitalization rate of 25%.
(8) How much is the estimated goodwill under the capitalization of average earnings
method? Use a capitalization rate of 12.5%.
(9) How much is the estimated goodwill under the present value of average excess
earnings method? Use a discount rate of 10%.