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/ 7
PROBLEM 3: FOR CLASSROOM DISCUSSION
Business combination 5
1. In which of the following instances is a business con,
least likely to occur?
a. Entity A acquires all the assets and assumes 4,
liabilities of Entity B in exchange for Entity 4’s shang
stocks. ee
b. Entity A purchases 80% of Entity B’s outstanding
shares. 7
¢. Entity A acquires 30% interest in Entity B's voting
All the other shares of Entity B are held by Vat
shareholders in very small denominations. Accords
Entity A has the power to appoint the majority o/
board of directors of Entity B.
a. Entity A acquires a group of assets from Entity B that dm
not constitute a business.
Acquisition method
2. PFRS 3 requires the use of the acquisition method :
accounting for all business combinations. Which of t
: following is not an application of the acquisition method?
‘ a. Identifying the acquirer which is the entity that obtis
control over another business in a business combination
b. Determining the acquisition date which is the dat
i acquirer obtains control over the acquiree.
| ©. Measuring the consideration transferted at fair value
|S Measuring the non-controlling interest at the NC
proportionate share in the acquiree's net identifiable a
or fair value, whichever is higher.
Goodwill
3. Entity A acquired all the assets and assumed all the libilt®
' of Entity B for ®1,800,000, Information on Entity B's as”
f liabilities as at the acquisition date is shown below:
> ms (Part 1) 1
a aes Dhl 5
Assets Carrying amounts Fair values
Receivables ~ net 200,000 100,000
ieiory ‘opm nt
Building ~ net 1,200,000 1,800,000
Goodwill 100,000 20,000
Total assets 2,100,000 2,370,000
Liabilities
Payables
900,000 700,000
Requirement: Compute for the goodwill (gain on bargain
purchase).
Non-controlling interest
Use the following information for the next two items:
Entity A acquired 75% of the outstanding voting shares of Entity B
for 2,000,000. On acquisition date, Entity B’s identifiable assets
and liabilities have fair values of 4,000,000 and 1,600,000,
respectively.
4. How much is the goodwill if Entity A opts to measure the
non-controlling interest at the NCI’s proportionate share in
Entity B’s net identifiable assets?
5. Entity A opts to measure the non-controlling interest at fair
value. An independent valuer assessed the NCI's fair value to
be 540,000. How much is the goodwill?
Acquisition-related costs and Restructuring provisions
6. Entity A acquired all the assets and liabilities of Entity B by
issuing 18,000 shares with par value of P10 per share and fair
value of #100 per share. On acquisition date, Entity B's
identifiable assets and liabilities have fair values of 3,800,000
and 1,900,000, respectively.
Entity A incurred stock issuance costs of ®36,000 and finder's
fees related to the business combination of 60,000. Moreover, Entity A expects to incur liquidation costs of 280,009 in
terminating Entity B’s activities.
Requirement: Compute for the goodwill (gain on bargain
purchase).
Operating leases and Intangible assets
7. Entity A acquired all the assets and assumed all the liabilities
of Entity B for 2,800,000. On acquisition date, Entity B%
identifiable assets and liabilities have fair values of 4,000,009
and P 1,600,000, respectively.
Additional information:
Entity B has an unrecorded patent with fair value of 100,000,
Entity B has research and development (R&D) projects with
fair value of 160,000. Entity B charged the R&D costs as
expenses when they were incurred.
Entity A is renting out a property to Entity B under an
operating lease. The terms of the lease compared with market
terms are favorable. The fair value of the differential is
‘40,000.
Requirement: Compute for the goodwill.
Contingent liabilities
8. Entity A acquired 75% of the outstanding voting shares of
Entity B for 1,800,000. On acquisition date, Entity B's
identifiable assets and liabilities have fair values of 4,000,000
and 1,600,000, respectively.
‘Additional inf
* Entity A replaces Entity B as a guarantor on a loan of a third
party. As at the acquisition date, the third party has defaulted
on the loan, However, because negotiations for debt
restructuring are ongoing with the lender and Entity B
strongly believes that the lender will agree on the proposed
bee ees terms, no provision was recognized. The fai
: . The fair value of the
guarantee is ®200,000, is
+ Entity A chose to measure the non-controlling interest at the
nate proportionate share in the acquiree’s net identifiable
assets.
Requirement: Compute for the goodwill.
Deferred taxes
9. Entity A acquired all the assets and assumed all the liabilities
of Entity B for 4,000,000. Information on Entity B’s
identifiable assets and lial S as at the acquisition date is
shown below:
Fair values
Assets 5,800,000 6,100,000
Liabilities 2,100,000 2,300,000
All fair value adjustments to the identifiable assets acquired and
liabilities assumed have deferred tax consequences, but do not
affect their tax bases. The income tax rate is 30%.
Requirement: Compute for the goodwill.
Consideration transferred
10. On October 26, 20x1, Entity A acquired 100% interest in Entity
B for 2,800,000. On this date, Entity B’s identifiable assets and
liabilities have fair values of 4,000,000 and 1,600,000,
respectively. Included in Entity B's liabilities are cash
dividends of 280,000 declared on October 1, 20x1, to
shareholders of record on November 1, 20x1, and payable on
December 1, 20x1
Requirement: Compute for the goodwill \ Chapter 1
PROBLEM 4: EXERCISES
1. ACo. issued bonds with face amount of 91M and fair value of
1.2M in exchange for all the assets and liabilities of B Co. 4
Co, incurred bond issue costs of 990,000 and legal fees of
10,000 in negotiating the business combination. The carrying
amounts and fair values of B’s assets and liabilities at the
acquisition date are shown below:
Fair values
am Carrying amounts Fair values
Receivables — net a aon
aa 00,000 "1,000,000
Goodwill . 0,000, _ 50,000
Total assets 1,780,000, 1,700,000
ee
Liabilities
Payables 320,000 390,000
Requirement: Compute for the goodwill (gain on bargain
purchase).
Use the following information for the next two requirements:
‘A Co, acquired 80% interest in B Co, for #1,200,000. On acquisition
date, B’s identifiable assets and liabilities have fair values of
1,700,000 and 400,000, respectively.
2. How much is the goodwill if A Co, opts to measure the non-
controlling interest at the NCI’s proportionate share in B Co.'s
net identifiable assets? &
3, How much is the good to measure the non-
controlling interest at fair
valued the NCI at #300;
/ 4. ACo. acquired all the assets hs of B Co. by issuing
10,000 shares with par value of ®20 per share and fair value of
aad
one A Co. incurred 40,000 in issuing the shares Requirement: Compute for the good .
purchase). Goodwill (gain on bargain
5. A Co. acquired 60% interest in the net assets of B Co. for
1,500,000. On acquisition date, B Co.'s identifiable assets and
liabilities have fair values of 95,000,000 and 2,800,000,
respectively.
Additional information:
+ B Co. has an unrecorded customer list with fair value of
80,000. The customer list is separable.
+ A Co. is renting out a license to B Co. under an operating
lease. The terms of the lease compared with market terms are
unfavorable. The fair value of the differential is 30,000.
+ ACo. opted to measure the NCI at fair value. An independent
valuer assessed the fair value of the NCI to be 800,000.
Requirement: Compute for the goodwill.
6 A Co, acquired all the assets and liabilities of B Co. for
1,600,000, Information on B's identifiable assets and liabilities
as at the acquisition date is as follows:
Carrying amounts —_ Fair values
Assets 3,800,000 ame
Liabilities, 2,000,000 1,900,
* Asat the acquisition date, B Co. has breached a contract with a
customer, The customer is seeking damages amounting to
250,000, However, B Co. is currently disputing the customer's claim and B Co's legal counsel believes they yi
win the case. Accordingly, B Co. did not recognize ,
provision. The fair value of setting the claim is 100,000,
Fair value adjustments to the assets acquired and liabilg,
assumed have deferred tax consequences, but do not affect yy,
tax bases of the assets and liabilities. The tax rate is 30%,
Requirement: Compute for the good’ will.
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. This distinguishes a business combination from other types of
investment transactions.
a. acquisition of assets
b. acquisition of stocks
_-& obtaining of control
d.all of these
2. The entity that obtains control over another business in a
business combination is called the"
a. controller. -
