CHAPTER 65

GOODWILL

Problem 65-1 (IAA)

Wella Company acquired all of the outstanding ordinary shares of an acquiree paying P7,400,000
cash.

The carrying amount and fair value of the assets and liabilities of the acquiree were:

Carrying amount Fair value

Accounts receivable 1,080,000 975,000
Inventory 1,620,000 2,400,000
Property, plant and equipment 5,400,000 6,975,000
Accounts payable (1,800,000) (1,800,000)
Bonds payable (2,700,000) (2,475,000)
Net assets acquired 3,600,000 6,075,000

What amount of goodwill should be reported at year-end?

a. 3,800,000
b. 1,325,000
c. 2,300,000
d. 0

Solution 65-1 Answer b

Acquisition cost 7,400,000
Net assets acquired at fair value (6,075,000)
Goodwill 1,325,000

PAS 38, paragraph 107, provides that goodwill or an intangible in indefinite useful life shall not be
amortized but impairment annually and whenever there is an intangible asset may be impaired.

Problem 65-2 (IAA)

Brewer Company acquired all of the outstanding ordinary shares of an acquiree paying
P12,000,000 cash.

The carrying amount and fair value of the assets and liabilities of the acquiree were:
 Carrying amount Fair value
Accounts receivable 1,800,000 2,000,000
Inventory 2,700,000 5,000,000
Property, plant and equipment 10,000,000 13,000,000
Accounts payable 3,000,000 3,000,000
Bonds payable 4,500,000 3,500,000

What is the gain on bargain purchase?

a. 2,500,000
b. 8,000,000
c. 1,500,000
d. 0

Solution 65-2 Answer c

Accounts receivable 2,000,000
Inventory 5,000,000
Property, plant and equipment 13,000,000
Accounts payable ( 3,000,000)
Bonds payable ( 3,500,000)
Net assets at fair value 13,500,000

Acquisition cost 12,000,000

Net assets at fair value 13,500,000
Gain on bargain purchase 1,500,000

Problem 65-3 (IAA)

Java Company purchased an entity for P6,000,000 cash beginning of the current year.
The carrying amount and fair value of the assets of the acquiree on the date of the acquisition
are as follows:
Carrying amount Fair value
Cash 50,000 50,000
Accounts receivable 500,000 500,000
Inventory 1,000,000 1,500,000
Patent 0 250,000
Property, plant and equipment 2,000,000 3,000,000
Total 3,550,000 5,300,000
In addition, the acquiree had liabilities totaling P2,000,000 at the time of acquisition. The
acquiree had no other separately identifiable intangible assets.

What is the goodwill arising from the acquisition?

a. 2,700,000
b. 2,450,000
c. 4,450,000
d. 700,000

Solution 65-3. Answer a

Acquisition cost 6,000,000
Net assets acquired at fair value (3,300,000)
Goodwill 2,700,000

Total assets at fair value 5,300,000

Total liabilities (2,000,000)
Net assets acquired at fair value 3,300,000

Problem 65-4 (IAA)

Mayer Company purchased Tara Company for P8,000,000 cash Tara Company had total liabilities
of P3,000,000.

Mayer Company's assessment of the fair value it obtained when it purchased Tara Company is as
follows:

Cash 1,000,000
Inventory 500,000
In-process research and development 5,000,000
Assembled workforce 1,200,000

What is the goodwill arising from the acquisition?

a. 4,500,000
b. 3,300,000
c. 1,500,000
d. 300,000

Solution 65-4. Answer a

Cash 1,000,000
Inventory 500,000
In-process R and D (5,000,000)
Total assets at fair value 6,500,000
Total liabilities (3,000,000)
Net assets acquired at fair value 3,500,000

Acquisition cost 8,000,000

Net assets acquired at fair value (3,500,000)
Goodwill 4,500,000

The goodwill includes the fair value of the assembled workforce of P1,200,000.

The assembled workforce is not accounted for separately as an asset.

Problem 65-5 (IAA)

Cassanova Company purchased another entity for P5,000.000 The following carrying amount and
fair value were a the items acquired in this business combination:

Carrying amount Fair value

Account receivable 2,000,000 2,000,000
Inventory 1,000,000 500,000
Government contract 0 1,000,000
Equipment 400,000 500,000
Short-term loan payable (2,000,000) (2,000,000)
Net assets 1,400,000 2,000,000

The fair value associated with the acquired entity's government contract is not based on any
legal or contractual relationship.

In addition, for obvious reason, there is no open market trading for an intangible of this sort.

What is the goodwill arising from the business combination?

a. 3,000,000
b. 3,600,000
c. 4,000,000
d. 0
Solution 65-5 Answer c
Accounts receivable 2,000,000
Inventory 500,000
Equipment 500,000
Short-term payable (2,000,000)
Net assets at fair value 1,000,000

Acquisition cost 5,000,000

Net assets at fair value (1,000,000)
Goodwill 4,000,000

The government contract is not recognized separately because it is not on any legal or
contractual relationship nor is it separately tradable.

The fair value of P1,000,000 is imbedded in the amount of goodwill of P4,000,000.

Problem 65-6 (IAA)

High Company purchased for cash at P50 per share all 150.000 ordinary shares outstanding of
Skyline Company.

The statement of financial position of the acquiree on the date of acquisition showed net assets
with a carrying amount of P6,000,000.

The fair value of property, plant, and equipment on the date of acquisition was P800,000 in
excess of carrying amount.

What amount should be recorded as goodwill on the date of purchase?

a. 1,500,000
b. 800,000
c. 700,000
d. 0

Solution 65-6 Answer c

Acquisition cost (150,000 x P50) 7,500,000
Fair value of net assets acquired 6,800,000
Goodwill 700,000
Carrying amount of net assets 6,000,000
Excess fair value of property, plant and equipment 800,000
Fair value of net assets acquired 6,800,000

Problem 65-7 (IAA)

At year-end, Sky Company reported assets of P5,000,000 and liabilities of P2,000,000. The
carrying amounts of the assets approximate fair value, except for land which has a fair value that
is P300,000 greater than carrying amount.

On same date, Blue Company paid P6,000,000 to acquire Sky Company.

What amount of goodwill should be recorded by the acquirer as a result of this purchase?
a. 1,000,000
b. 3,300,000
c. 2,700,000
d. 3,000,000

Solution 65-7 Answer c

Acquisition cost 6,000,000
Net assets at fair value (3,000,000 + 300,000) 3,300,000
Goodwill 2,700,000

Problem 65-8 (IAA)

Clever Company purchased for P4,000,000 cash all of the ordinary shares of Sun Company when
Sun's statement of fi position showed net assets of P3,200,000.

On the date of acquisition, Sun's assets and liabilities had fair value different from the carrying
amount as follows:

Carrying amount Fair value

Property, plant and equipment, net 5,000,000 5,750,000
Other assets 500,000 0
Long-term debt 3,000,000 2,800,000

What amount should be reported as goodwill in the consolidated statement of financial position
of Clever Company and its wholly-owned subsidiary?
a. 350,000
b. 250,000
c. 750,000
d. 800,000

Solution 65-8 Answer a

Carrying amount of net assets 3,200,000
Undervaluation of property, plant and equipment 750,000
Overvaluation of other assets ( 500,000)
Overvaluation of long-term debt 200,000
Fair value of net assets acquired 3,650,000

Acquisition cost 4,000,000

Fair value of net assets acquired (3,650,000)
Goodwill 350,000

Problem 65-9 (IFRS)

Brisbane Company has recently diversified by taking over the operations of Darwin Company at a
cost of P10,000,000.

Darwin manufactures and sells a cleaning cloth called the “Superswipe" which was developed by
Darwin's highly trained staff.

The unique nature of the coating used on the “Superswipe” has resulted in Darwin Company a
significant share of the South African market.
As a result of the takeover, Brisbane Company acquired the following assets at fair value:

Land and building 3,200,000

Production machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000

In addition, Darwin Company owned, but had not recognized, the following:

• Trademark –“Superswipe” with fair value of P1,000,000.

• Patent - Formula for the special coating with fair value of P500,000.

What amount of goodwill should be recognized on the date of acquisition?

a. 2,300,000
b. 1,300,000
c. 1,800,000
d. 800,000

Solution 65-9 Answer

Acquisition cost 10,000,000
Assets acquired:
Land and building 3,200,000
Production machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
Trademark 1,000,000
Patent 500,000 9,200,000
Goodwill 800,000

Problem 65-10 (IAA)

Easter Company is planning to sell the business cumulative net earnings for the past five years
amounted including expropriation loss of P1,500,000.

The normal rate of return is 20%. The fair value of need asset of the entity currently year-end
P10,000,000.

What is the amount of goodwill if:

1. Excess earnings are purchased for 5 years?

a. 8,000,000
b. 4,000,000
c. 5,000,000
d. 4,500,000

2. Excess earnings are capitalized at 25%?

a. 7,200,000
b. 6,400,000
c. 8,000,000
d. 3,600,000

3. Annual average earnings are purchased for 3 years?

a. 10,800,000
b. 18,000,000
 c. 4,800,000
d. 5,400,000

4. Annual average earnings are capitalized at 25%?

a. 1,600,000
b. 3,600,000
c. 4,400,000
d. 2,000,000

5. Excess earnings are discounted at 12% for 5 years? (The PV of an ordinary annuity of 1 for 5
years at 12% is 3.60)
a. 12,960,000
b. 10,800,000
c. 5,760,000
d. 7,200,000

Solution 65-10
Question 1 Answer a
Cumulative earnings 16,500,000
Add back expropriation loss 1,500,000
Adjusted cumulative earnings 18,000,000

Average annual earnings (18,000,000 / 5 years) 3,600,000

Normal earnings (20% x 10,000,000 2,000,000
Excess earnings 1,600,000

Goodwill (1,600,000 x 5 years) 8,000,000

Question 2 Answer b
Excess earnings 1,600,000
Divide by capitalization rate 25%
Goodwill 6,400,000

Question 3 Answer a
Goodwill (3,600,000 x 3 years) 10,800,000
Question 4 Answer c
Average annual earnings 3,600,000
Divide by capitalization rate 25%
Net assets including goodwill 14,400,000
Net assets before goodwill 10,000,000
Goodwill 4,400,000

Question 5 Answer c
Excess earnings 1,600,000
Multiply by PV factor 3.60
Goodwill 5,760,000

Problem 65-11 (PHILCPA Adapted)

Sarrah Company is interested in computing the goodwill to he recognized in the purchase of ABC
Company in January 2019, The following information was taken from the records of ABC.

Net income Net assets

2014 360,000 1,600,000
2015 388,000 1,800,000
2016 288,000 1,900,000
2017 380,000 2,000,000
2018 394,000 2,100,000
1,810,000 9,400,000

Goodwill is measured by capitalizing excess earnings at 40% with normal return on average net
assets at 10%.

What is the acquisition cost of ABC Company?

a. 2,535,000
b. 2,100,000
c. 2,315,000
d. 2,305,000

Solution 65-11 Answer a

Average net assets (9,400,000 /5) 1,880,000

Average annual earnings ( 1,810,000/5) 362,000

Normal earnings (10% x 1,880,000) (188,000)
Excess earnings 174,000
Divide by capitalization rate 40%
Goodwill 435,000

If the excess earnings are capitalized, the resulting amount is goodwill.

Net assets – 2018 2,100,000

Goodwill 435,000
Total acquisition cost 2,535,000

The acquisition cost or purchase price includes the payment for the 2018 net assets at fair value
and the goodwill.