Assignment #1

Topic: Intangible Assets – Goodwill

AEC 120 – Intermediate Accounting I

Instructions:
Provide what is being asked in each problem. Show your solutions in proper format. Write your answers
in your activity/assignment notebook.

Problem 1
On January 1, 2022, the fair values of Troy’s net assets were as follows:

Current Asset P200,000

Equipment 300,000
Land 100,000
Buildings 600,000
Liabilities 160,000

On January 1, 20x5, June Company purchased the net assets of Troy Company by issuing 200,000 shares
of its P1 par value stock when the fair value of the stock was P6.50.

What amount will be recorded as goodwill on January 1, 20x5?

Problem 2
SGV Company purchased an entity for P5,700,000 cash at the beginning of the current year. The carrying
amount and fair value of the assets of the acquired entity on the date of acquisition are:

In addition, the acquired entity had accounts payable only totaling P1,250,000 at the time of acquisition.
The acquired entity has no other separately identifiable intangible assets.

Required:
1. Determine the amount of goodwill using the residual approach.
2. Prepare journal entry to record the purchase of the entity.
Problem 3
KCC Corporation acquired all the assets and liabilities of ACE Corporation by issuing shares of its
common stock on January 1, 2024. Partial balance sheet data for the companies prior to the business
combination and immediately following the combination is provided:

KCC Book Value ACE Book Value Combination

Cash P 65,000 P 25,000 P 90,000
Accounts receivable 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
Buildings and equipment (net) 400,000 150,000 650,000
Goodwill ?
Total Assets P 570,000 P 240,000 P ?

Accounts Payable P 50,000 P 25,000 P 75,000

Bonds payable 250,000 100,000 350,000
Common stock, P2 par 100,000 25,000 160,000
Additional paid-in capital 65,000 20,000 245,000
Retained earnings 105,000 70,000 ?
Total Liabilities and Equities P 570,000 P 240,000 P

KCC Corporation issued 30,000 shares in return for the net assets of ACE Corporation. Each share is
valued at P8.00. Compute the goodwill to be recognized on the date of acquisition.

Problem 4
Bisbane Company has recently diversified by taking over the operations of Darwin Company at a cost of
P9,000,000. Darwin Company manufactures and sells a cleaning cloth called the “Superswipe” which
was developed by highly trained and innovative research staff.
The unique nature of the coating used on the “Superswipe” has resulted in Darwin Company acquiring a
significant share of the South African market.

A recent expansion into the equatorial African market has proved successful.
As a result of the takeover, Brisbane Company acquired the following assets and liabilities at fair value:
Land 3,500,000
Machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
Accounts payable 3,000,000

In addition, Darwing 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.

The research staff of Darwing Company agreed to join the staff of Brisbane Company and will continue
to work on a number of projects aimed at producing specialized version of the “Superswipe”.

Required:
1. Determine the goodwill arising from the acquisition.
2. Prepare journal entry to record the acquisition.
Problem 5
Liliw Company engaged your services to compute the goodwill in the purchase of Calauan Company
which provided the following:

It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on
average net assets at 15%. How much is the purchase price for Calauan Company?

Problem 6
ABC Company is considering buying another entity. The following data relate to the acquiree:
Shareholders’ equity 7,000,000
Earnings for prior three years 2,100,000

The acquiree has a valuable patent which is not recorded. If the entity is sold, the patent would be
transferred to the buyer for P500,000. Other assets are properly appraised. The patent has a remaining life
of 5 years. The earnings of the entity are expected to increase 10% more than the average earnings of the
past three years before taking into consideration the amortization of the patent cost.
Required:
Compute the goodwill under the following methods:
a. Average future earnings are capitalized at 8%
b. Goodwill is measured at the average excess earnings capitalized at 10% with normal rate at 8%.
c. Goodwill is measured at the present value of the average excess earnings discounted at 10% for
four years with normal rate at 8%. The present value of an ordinary annuity of 1 for 4 years at
10% is 3.17.