MODULE 2

BUSINESS COMBINATION: SPECIFIC CASES

TRUE OR FALSE
1. FALSE 11. FALSE
2. TRUE 12. TRUE
3. FALSE 13. FALSE
4. FALSE 14. TRUE
5. TRUE 15. TRUE
6. FALSE 16. TRUE
7. TRUE 17. TRUE
8. TRUE 18. TRUE
9. FALSE 19. TRUE
10. TRUE 20. TRUE

STRAIGHT PROBLEMS

1. Requirement. How many shares did Frown issue on the business combination?
Consideration transferred (squeeze) P4,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill (gain on bargain purchase) P200,000

Consideration transferred 4,200,000

Divided by: Fair value per share 100
SHARES ISSUED 42,000

2. Requirement. How much is the goodwill?

Consideration transferred P300,000
Non-controlling interest in the acquiree (690K x 40%) 276,000
Previously held equity interest in the acquiree 138,000
Total 714,000
Fair value of net identifiable assets acquired (690,000)
GOODWILL (GAIN ON BARGAIN PURCHASE) P24,000

3. Requirement. How much is the goodwill?

Consideration transferred -
Non-controlling interest in the acquiree (1.8M x 100%) P1,800,000
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired (1,800,000)
GOODWILL (GAIN ON BARGAIN PURCHASE) -
4. Requirement. Provide the adjusting entry to restate the goodwill.
PROVISIONAL ADJUSTED
Consideration transferred P2,000,000 P2,000,000
Non-controlling interest in the acquiree - -
Previously held equity interest in the acquiree - -
Total 2,000,000 2,000,000
Fair value of net identifiable assets acquired (1,980,000) (1,900,000) *
Goodwill (gain on bargain purchase) P20,000 P100,000
* 1,980.000 - 220,000 provisional amount + 140,000 fair value
Apr. 1, 2021 Goodwill P80,000
Machine P80,000
Accumulated depreciation* 278
Retained earnings 278
*Provisional amount (220,000/6) x 2/12 6,111
Fair value (140,000/4) x 2/12 (5,833)
Decrease in accumulated depreciation 278

5. Requirement. Compute for the goodwill.

Consideration transferred (800K - 30K - 50K) P720,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 720,000
Fair value of net identifiable assets acquired (600,000)
GOODWILL (GAIN ON BARGAIN PURCHASE) P120,000

6. Requirement. Compute for the goodwill.

Consideration transferred (2M - 200K off-market value) P1,800,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired (4M + 100K intangible
assets on reacquired rights - 150K franchise - 2.2M) (1,750,000)
GOODWILL (GAIN ON BARGAIN PURCHASE) P50,000

7. Requirement (a). How much is the goodwill recognized on acquisition date?

Consideration transferred (10,000 x 200) + 280K contingent
consideration P2,280,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired (1,900,000)
GOODWILL P380,000

Requirement (b). Entity B's 2020 profit is P3,800,000. Entity A issues the additional shares on
January 14, 2021. Provide the journal entries.
Dec. 31, 2020 NO ENTRY

Jam. 14, 2021 Share premium – contingent consideration P280,000

Share capital (2,000 x 20) P40,000
Share premium 240,000

Requirement (c). Entity B's 2020 profit is P2,800,000. Provide the journal entries.
Dec. 31, 2020 Share premium – contingent consideration P280,000
Share premium P280,000

8. Requirement (a). Number of shares issued by Entity A.

ABC Co. Combined entity Increase
Share capital (20 par) 800,000 976,000 176,000

176,000 / 20 = 8,800 shares

Requirement (b). Goodwill.

Consideration transferred (a) P968,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 968,000
Fair value of net identifiable assets acquired (b) (800,000)
GOODWILL P168,000

(a)
ABC Co. Combined entity Increase
Share capital 800,000 976,000 176,000
Share premium 300,000 1,092,000 792,000
968,000

(b)
ABC Co. Combined entity Increase
Identifiable assets 2,200,000 3,600,000 1,400,000
Liabilities 700,000 1,300,000 (600,000)
Fair value of net identifiable assets P800,000

Requirement (c). Retained earnings of the combined entity immediately after the business
combination.
= P400, 000

9. Requirement (a). Compute for the goodwill.

Consideration transferred (80,000 x 8) P640,000
 Non-controlling interest in the acquiree (665,000 x 10%) 66,500
Previously held equity interest in the acquiree (10K x 8) 80,000
Total 786,500
Fair value of net identifiable assets acquired (665,000)
GOODWILL P121,500

Requirement (b). Provide all the journal entries on July 1, 2021.

July 1, 2021 Investment in subsidiary (80,000 x 8) P640,000
Cash P640,000

FVPL financial assets [(8-5) x 10K] 30,000

Unrealized gain – P/L 30,000

Investment in subsidiary 80,000

FVPL financial assets 80,000

10. Requirement (a). Compute for the unadjusted and adjusted goodwill.
PROVISIONA
L ADJUSTED
Consideration transferred P1,800,000 P1,800,000
Non-controlling interest in the acquiree - -
Previously held equity interest in the acquiree - -
Total 1,800,000 1,800,000
Fair value of net identifiable assets acquired (1,700,000) (1,600,000) *
Goodwill (gain on bargain purchase) P100,000 P200,000
* 2.6M - 300K provisional amount + 200K fair value – 900K

Requirement (b). Provide the adjusting entry.

Aug. 31, 2021 Goodwill P100,000
Trademark P100,000

11. Requirement (a). Compute for the gain or loss on the settlement of the pre - existing
relationship. Provide the journal entry.

Settlement loss (360K - 170K at market = 190 off-market) P190,000

CA of related asset or liability recognized -
ADJUSTED SETTLEMENT LOSS P190,000

Jan. 1, 2020 Settlement loss P190,000

Cash P190,000

Requirement (b). Compute for the goodwill.

Consideration transferred (2.2M - 190K off-market) P2,010,000
 Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,010,000
Fair value of net identifiable assets acquired (3.6M - 1.8M) (1,800,000)
GOODWILL P210,000

12. Requirement (a). How much is the goodwill recognized on acquisition date?
Consideration transferred (10K x 200) + 280K contingent consideration P2,280,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired (1,920,000)
GOODWILL P360,000

Requirement (b). Entity B's 2020 profit is P3,800,000. Entity A pays the additional P400,000 on
January 14, 2021. Provide the journal entries.
Dec. 31, 2020 Unrealized loss – P/L * P120,000
Liability for contingent consideration P120,000

Jan. 14, 2021 Liability for contingent consideration 400,000

Cash 400,000

*CA of contingent consideration - 12/31/21 280,000

FV - 12/31/21 400,000
Increase in FV of liability (loss) (120,000)

Requirement (c). Entity B's 2020 profit is P2,800,000. Provide the journal entries.
Dec. 31, 2020 Liability for contingent consideration P280, 000
Gain on extinguishment of liability – P/L P280, 000

13. Requirement. How much is the goodwill?

Consideration transferred (2,000 x 300) P600,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 600,000
Fair value of net identifiable assets acquired (260,000)
GOODWILL P340,000