Practice Problems

On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of
the liabilities of SMALL, Inc. As of this date, the carrying amounts and fair values of
the assets and liabilities of SMALL acquired by DIMINUTIVE are shown below:
Assets Carrying amount Fair values
Cash in bank 40,000.00 40,000.00
Receivables 800,000.00 480,000.00
Allowance for probable losses on receivables (120,000.00) -
Inventory 2,080,000.00 1,400,000.00
Building – net 4,000,000.00 4,400,000.00
Goodwill 400,000.00 80,000.00
Total assets 7,200,000.00 6,400,000.00
Liabilities - -
Payables 1,600,000.00 1,600,000.00

On the negotiation for business combination, DIMINUTIVE Co. incurred transaction

costs amounting to P400,000 for legal, accounting, and consultancy fees.
1. If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and
liabilities of SMALL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
a. 1,200,000
b. 1,120,000
c. 1,280,000
d. 1,240,000
2. If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and
liabilities of SMALL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
a. (800,000)
b. (720,000)
c. (880,000)
d. 1,200,000