MULTIPLE CHOICE QUESTIONS

PROB. 4-1 (AICPA)

A business combination may legally structure as a merger, a consolidation, an investment
in stock, or a direct acquisition of assets which of the following describes a business combination
that is legally structure as a merger?
a. The surviving company is one of the combining companies.
b. The surviving company is neither of the two combining companies
c. An investor-investee relationship is established.
d. A parent- subsidiary relationship is established

. PROB. 4-2 (AICPA)
Business combinations are accomplished either through a direct acquisition of assets and
liabilities by a surviving corporation or by stock in one or more companies. A parent-subsidiary
relationship always arise from a
a. Tax-free reorganization
b. Vertical combination
c. Horizontal combination
d. Greater than 50% stock investment in another company.
PROB. 4-3 (IFRS 3)
Should the following cost be include in the consideration transferred in a business
combination, according to IFRS 3, Business Combination?
1- Cost of maintaining an acquisitions department
2- Fees paid to accountants to effect the combination.
Cost(1) Cost(2)
a. No No
b. No Yes
c. Yes No
d. Yes Yes

PROB. 4-4 (AICPA)

Which of the following cost should be a capitalized and amortized over their estimated
useful lives?
Cost of good will
from purchase
business Cost of developing
combination good will internally
a. No No
b. Yes No
c. No Yes
d. Yes Yes

PROB. 4-5 (AICPA)

Company P acquired the assets (net of liabilities) of company S in exchange for cash. The
acquisition price exceeds the fair value of the net assets acquired. How should Company P
determine the amounts to be reported for the plant and equipment, and for long-term debt of the
acquired Company S?
Plant and Equipment Long-term Debt
a. Fair value Ss carrying amount
b. Fair value Fair value
c. Ss carrying amount Fair value
d. Ss carrying amount Ss carrying amount

PROB. 4-6 (Adapted)

In a purchase business combination, the direct acquisition, indirect acquisition, and
security issuance cost are accounted for as follows:

Direct Acquisition Indirect Acquisition Security Insurance
a. Added to price paid Added to price paid Added to price paid
b. Added to price paid Expensed Deducted from the value
Of security issued
c. Expensed Expensed Deducted from value
Of security issued
d. Expensed Expensed Expensed




PROB. 4-7 (Adapted)

A business combination is accounted for as purchase. Which of the following expenses
related to the business combination should be included, in total, in the determination of net
income of the combined corporation for the period in which the expenses are incurred?
Fees of finders and Registration fees for
Consultants equity securities issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No


PROB. 4-8 (Adapted)

On August 31, 2009, Wood Corp. issued 100,000 shares of its P20 par value common
stock for the net assets of Pine, Inc., in a business combination accounted for by the purchase
method. The market value of Woods common stock on August 31 was P36 per share. Wood
paid a fee of P160, 000 to the consultant who arranged this acquisition. Cos of registering and
issuing the equity securities amounted to P80, 000. No goodwill was involved in the purchase.
What amount should Wood capitalize as the cost of acquiring Pines net assets?
a. 3,600,000
b. 3,680,000
c. 3,760,000
d. 3,840,000

PROB. 4-9 (IFRS)

100% of the he equity share capital of the Roman Co. was acquired by the Sweet Co. on
July 30, 2009. Sweet Co. issued 500, 000 new P1 ordinary shares which had a fair value of P8
each at the acquisition date. In addition, the acquisition resulted in Sweet incurring fees payable
to external advisers of P200, 000 and share issue cost of P80, 000. In accordance with IFRS3,
Business Combination, goodwill at the acquisition date is measured by subtracting the
identifiable assets acquired and the liabilities assumed from
a. 4,000,000
b. 4,180,000
c. 4,200,000
d. 4,380,000
PROB. 4-10 (AICPA)

In a business combination, Dire Co. purchased Wall Co. at a cost that result in
recognition of goodwill having an expected 10-year benefit period. However, Dire plans to make
additional expenditure to maintain goodwill for a total of 40 years. What cost should be
capitalized and over how many years should they be amortized?
Cost capitalized Amortization period
a. Acquisition cost only 0 years
b. Acquisition cost only 40 years
c. Acquisition cost and
Maintenance cost 10 years
d. Acquisition cost and
Maintenance cost 40 years


PROB. 4-11 (AICPA)

PDX Corp. acquired 100% of the outstanding common stock. Of Sea Corp. in a purchase
transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and
assumed liabilities. The general guidelines for assigning amounts to the inventories acquired
provide for.
a. Raw materials to be valued at original cost
b. Work in process to be valued at the estimated selling prices of finished goods, less both
costs to complete and cost of disposal.
c. Finished goods to be valued at replacement cos.
d. Finished to be valued at estimated selling prices, less both cost of disposal and a
reasonable profit allowance.


PROB. 4-12 (AICPA)

In accounting for business combination, which of the following intangibles should not be
recognized as an asset apart from goodwill?
a. Trademarks
b. Lease agreements
c. Employee quality
d. Patents



PROB. 4-13 (AICPA)

With respect to the allocation of the cost of a business acquisition, PFRS 3 requires.
a. Cost to be allocated to the assets based on their carrying values.
b. Cost to be allocated based on fair values.
c. Cost to be allocate based on original cost
d. None of the above


PROB. 4-14 (IFRS 3)

In a business combination, an acquirers interest in the fair value of the net assets
acquired exceeds the consideration transferred in the combination. Under IFRS 3, Business
Combination, the acquirer should
a. Recognize the excess immediately in profit or loss.
b. Recognize the excess immediately in other comprehensive income.
c. Reassess the recognition and measurement of the net assets acquired and the
consideration transferred, and then recognize any excess immediately in profit or loss.
d. Reassess the recognition and measurement of the net assets acquired and the
consideration transferred, and then recognize any excess immediately in other
comprehensive income.


PROB. 4-16 (Adapted)

On April 7, 2009, Dart Co. paid P620,000 for all the issued and outstanding common
stock of Wall Corp. in a transaction properly accounted as a purchase. The recorded assets and
liabilities of Wall Corp. on April 1, 2009 are:

Cash 60,000
Inventory 180,000
Property and equipment (net of accumulated
Depreciation of P220,000) 320,000
Goodwill 100,000
Liabilities (120,000)
Net assets 540,000

On April 1, 2009, Walls inventory had a fair value of P150,000 and the property and equipment
(net) had a fair value of P380,000. What is the amount of goodwill resulting from the business
combination?
a. 150,000
b. 120,000
c. 50,000
d. 20,000


PROB. 4-16 (Adapted)

On January 1, 2009, Dragons Corp. acquired the net assets of Blue Marlins Corp. in a
business combination. At the date, the property, plant and equipment of Blue Marlins had a book
value of P21,000,000 and a fair value of P22,500,000. These assets were originally acquired at a
cost of P30,000,000, but would presently cost P12,000,000. Using the purchase method, what
amount should be combined entity report its property. Plant, and equipment account?
a. 36,000,000
b. 30,000,000
c. 22,500,000
d. 21,000,000


PROB. 4-17 (Adapted)

Star Co. has property treated as expense, P200,000 of research and development cost that
resulted in a patent. When Victory Co. acquired Star Co., it was determined that the patent had a
fair value of P500,000. Which of the following statement is true?
a. On the book of Victory Co., the patent should be recorded at P200,000 because that was
the cost to produce it.
b. The cost of the patent of the book of Victory Co. should be P500,000
c. The cost of the patent of the book of Victory Co. should be the same as on the book of
Star Co.
d. The cost of the patent of the book of Victory Co. should be represented by the legal cost
involved in the patent process.

PROB. 4-18 (Adapted)

An entire acquired quantity is sold. The goodwill remaining from the acquisition should
be
a. Including the carrying amount of the net assets sold.
b. Charge to retained earnings of the current period.
c. Expensed in the periodic sold
d. Charge to retained earnings of prior periods.
PROB. 4-19 (RPCPA)

The Dub Co. had these accounts at the time it was acquired by Bush Co.

Cash 36,000
Accounts receivable 457,000
Inventories 120,000
Plant, property and equipment 696,400
Liabilities 350,800

Bush paid P1,400,000 for 100% of the stock of Dub Co. it was determined that fair market
values of inventories and plant, property and equipment were P133,000 and P900,000,
respectively.
a. In the books of Bush Co., this transaction resulted to:
a. Goodwill recorded at P441,4000
b. Goodwill recorded at P224,800
c. Current asset decreased by P224,800
d. Current assets increased by P224,800

b. The net assets (excluding goodwill, if any) recorded in the books of the acquiring company
was:
a. 1,400,000
b. 1,175,200
c. 1,309,000
d. 958,200

c. Compared with the unadjusted values recorded in the books if Dub Co. this transaction
resulted for.
a. P224,800 more than recorded owners equity
b. P666,200 more than recorded owners equity
c. P441,400 more than recorded owners equity
d. P224,800 less than recorded owners equity

d. Assuming Bush Co. paid P1000,000 for the net assets of Dub Co. the excess of fair market
value over cost was:
a. 152,614
b. 175,200
c. 162,200
d. 157,334

PROB. 4-20 (AICPA)

The Chief Executive Officer (CEO) of buy- It Company is contemplating selling the
business to new interest. The cumulative earnings for the past 5 years amounted to P800,000.
The annual earnings, based on an average rate of return of investment for this industry, would
have been P145,000. If excess earnings are to be capitalized at 8%, what would be the implied
goodwill in this transaction?
a. Ock,937,500
b. 800,000
c. 187,500
d. 52,400


PROB. 4-21 (RPCPA)

On July 1, 2009, the balance sheet of Com Co. and Pol Co. are as follows:

Com Co. Pol Co.
Assets P4,000,000 P2,500,000
Liabilities 1,500,000 800,000
Capital stock, no par 2,000,000
Capital stock, 100 par 1,000,000
Additional paid in capital 700,000 300,000
Retained earnings (200,000) 400,000

Com Co. on this date, agreed to acquire all the assets and assume all the liabilities of Pol Co. in
exchange to shares of stock that it will issue. The stock of Com Co. is in the market at P50 per
share. The assets of Pol Co. are to be appraised, and Com Co. is to issue shares of its stock with a
market value equal to that of the net assets transferred by Pol Co. The value of the assets of Pol
Co. per appraisal, increased by P300,000

a. On the assumption that the purchase method is applied, the total liabilities and stockholders
equity of Com Co. reflecting the combination is:
a. 6,800,000
b. 6,500,000
c. 6,200,000
d. 6,000,000

b. The capital stock reflecting the combination under purchase method is:
a. 3,000,000
b. 3,300,000
c. 3,500,000
d. 4,000,000


PROB. 4-22 (Adapted)

In a business combination accounted as purchased, Major Corp. issued non-voting, non-
convertible preferred stock a fair value of P800,000,000 in exchange for all the outstanding
common stock of Minor Co. on the acquisition date, Minor had tangible net assets with a
carrying amount of P4,000,000 and a fair value of P,5,000,000. In addition, Major issued
preferred stock valued at P800,000 to an individual as finders fee in arranging the transaction.
As a result of this transaction, Major should record an increase in net assets of
a. 4,000,000
b. 5,000,000
c. 5,800,000
d. 8,000,000


PROB. 4-23 (IFRS)

The National Co. acquired 80% of the Local Co. for a consideration transferred of
P1000,000,000. The consideration was estimated to include a control premium of P24,000,000.
Locals net assets were P85,000,000 at the acquisition date. Are the following statements TRUE
or FALSE, according to IFRS 3, Business Combination.

1.-Goodwill should be measured at P32,000,000 if the non-controlling interest is measured as it
share of Locals net assets.
2- Goodwill should be measured at P34,000,000 if the non-controlling interest is measured at fair
value.

Statement (1) Statement (2)
a. False False
b. False True
c. True False
d. True True




PROB. 4-24 (IFRS)

The Lamp Co. acquired a 70% interest in the Ohau Co. for P1,960,000 when the fair value of
Ohaus identifiable assets and liabilities was P700,000 and elected to measure the non-
controlling interest at its share of the identifiable net assets. Annual impairment reviews of
goodwill have not resulted in any impairment losses being recognized.

Ohaus current statement of financial position shows share capital of P100,000 revaluation
reserve at P300,000 and retained earnings P1,400,000

Under IFRS 3, Business Combination, what figure is respect of goodwill should be carried in
Lamps consolidated statement of financial position?
a. 1,470,000
b. 160,000
c. 1,260,000
d. 700,000


PROB. 4-25 (IFRS 3)

The Moon Co. acquired a 70% percent interest in the Swain Co. for P1,420,000 when the fair
value of Swains identifiable assets and liabilities was P1,200,000, Also Moon acquired a 65%
interest in the Hadji Co. for P300,000 when the fair value of Hadjis identifiable assets and
liabilities was P640,000 Moon Co. measures non-controlling interest at the relevant share of the
identifiable net assets at the acquisition date.

Neither Swain nor Hadji had any contingent liabilities at the acquisition date and the above fair
values were the same as the carrying amounts in their financial statements. Annual impairment
reviews have not resulted in any impairment losses being recognized. Under IFRS 3, Business
Combination what figures in respect of goodwill and of gains on bargain purchase should be
included in Moons consolidated statements of financial position.
a. Goodwill: P580,000
Gain on bargain purchased :P116,000
b. Goodwill: None
Gain on bargain purchased :P116,000
c. Goodwill: None
Gain or bargain purchased: None
d. Goodwill: P580,000
Gain on bargain purchased :None

PROB. 4-26 (IFRS 3)

On October 1, 2009, the Tingling Co. acquired a 100% of the Green Co. when the
fair value of Greens net assets was P116,000,000 and their carrying amount was
P120,000,000. The consideration transferred comprises of P200,000,000 in cash
transferred at the acquisition date, plus another P60,000,000 in cash to be transferred 11
months after the acquisition date if specified profit target was meet by Green. At the
acquisition date, there was only a low probability of the profit target being meet, so the
fair value of the additional consideration liability was P100,000,000. In the event, the
profit target was met and the P60,000,000 cash was transferred.

What amount should Tingling present for goodwill in its statement of consolidated
financial position at December 31, 2010, according to IFRS 3, Business Comination.
a. 94,000,000
b. 80,000,000
c. 84,000,000
d. 114,000,000


PROB. 4-27 (IFRS)

On July 9, 2009, the Magna Co. acquired 100% of the Natural Co. for a consideration transferred
of P160,000,000. At the acquisition date, the carrying amount of Naturals net assets was
P100,000,000

At the acquisition date, a provisional fair value of P120,000,000 was attributed to the net assets.
An additional valuation receive on May 31, 2010 increased this provisional fair value to
P135,000,000 and on July 30, 2010, this fair value was finalized at P140,000,000

What amount should Magna present for goodwill in its statement of financial position at
December 31, 2010, according to IFRS 3, Business Combination?
a. 25,000,000
b. 40,000,000
c. 20,000,000
d. 60,000,000






PROB. 4-28 (IFRS)

The Germ Corp. acquired 100% of the Koala Co. for a consideration transferred of
P112,000,000. At the acquisition date, the carrying amount of the Koalas net assets was
P100,000,000 and their fair value was P120,000,000. How should the difference between the
consideration transferred and the net assets acquired be presented in Germs financial statements,
according to IFRS 3, Business Combination?
a. Gain on bargain purchased of P8,000,000 recognized in other comprehensive income.
b. Gain on bargain purchased of P8,000,000 deducted from other intangible assets.
c. Gain on bargain purchased of P8,000,000 recognized on profit or loss.
d. Goodwill of P12,000,000 as an intangible asset.


PROB. 4-29 (IFRS 3)

on July 1, 2010, Centre Co. acquired Asia Corp. the resulted to goodwill in the amount of
P4,800,000. By December 31, 2010, the end of its 2010 reporting period, Centre Co. had
provisional fair values for the following items:

Trademarks effective in certain foreign of P400,000. These had an average remaining
useful life of 5 years at the acquisition date.
The acquisition date fair value was finalized at P500,000 on March 31, 2011.

Trading rights in other foreign territories of P600,000. These had an average remaining
useful life of 5 years at the acquisition date.
The acquisition date fair value was finalized at P300,000 on September 30, 2011.

By what amount the 2010 net income, be increased or decreased by the provisional fair
values of trademarks and trading rights.
a. No effect to 2010 net income, since the finalization acquired in 2011
b. Decreased by P5,000
c. Increased by P25,000
d. Increased by P30,000






SOLUTI ONS AND EXPLANATI ONS

PROB. 4-1 Suggested answer (a)r

In a business combination legally structured as merger, one enterprise acquires all of the net
assets of one or more other enterprises through an exchange of stock, payment of cash or other
property, or the issue of debt instruments. Under which, the surviving company is one of the two
combining companies.


PROB. 4-2 Suggested answer (d)

According to PFRS 3 (Revised), a business combination is the bringing together of separate
entities or businesses into one reporting entity. The result of all nearly business combination is
that one entity, the acquirer obtains control of one or more other businesses, the acquire. A
combining entity shall be presumed to have obtain control of another combining entity when it
acquire more than on-half (greater than 50%) of that other entities voting rights unless it can be
demonstrated that such ownership does not constitute control.


PROB. 4-3 suggested answer (a) No No


According to PFRS 3 (Revised), all acquisition related cost should not form part of the
consideration transferred, instead should be recognized in the profit or loss in the period in
which they are incurred. The exception to this general requirements is that the cost of issuing
equity instruments, which are an integral part of the equity issue transaction, should reduce the
proceeds from the equity issue.


PROB. 4-4 suggested answer (a) No No


As a general rule, purchased goodwill is capitalized; while internally developed goodwill is
expensed. In addition PFRS 3 (Revised) provides that goodwill is no longer amortize but tested
for impairment.




PROB. 4-5 suggested answer (b) Fair Value Fair Value

PFRS 3 (Revised) provides that the identifiable assets, liabilities and contingent liabilities, where
the fair value can be measured reliably shall be recorded initially at use fair value, irrespective
of the extent of any minority interest.


PROB. 4-6 suggested answer (c) Expensed
Expensed
Deducted from the value of security issued

Again, in accordance with PFRS 3 (Revised), all acquisition related cost should not form part of
the consideration transferred, instead should be recognized in the profit or loss in the period in
which they are incurred. The exception to this general requirement is that the cost of issuing
equity instruments. Which are an integral part of the equity issue transaction, should reduce the
proceeds from the equity issue.


PROB. 4-7 suggested answer (b) Yes No

Again, in accordance with PFRS 3 (Revised), all acquisition related cost should not form part of
the consideration transferred, instead should be recognized in the profit or loss in the period in
which they are incurred. The exception to this general requirement is that the cost of issuing
equity instruments. Which are an integral part of the equity issue transaction, should reduce the
proceeds from the equity issue.


PROB. 4-8 suggested answer (b) 3,600,000

Market value of stock issued (100,000 x 36) 3,600,000

Again, in accordance with PFRS 3 (Revised), all acquisition related cost should not form part of
the consideration transferred, instead should be recognized in the profit or loss in the period in
which they are incurred. The exception to this general requirement is that the cost of issuing
equity instruments. Which are an integral part of the equity issue transaction, should reduce the
proceeds from the equity issue.

Thus the consideration transferred in a business combination is the total fair value at the
acquisition date of the consideration given by the acquirer.

PROB. 4-9 suggested answer (b) 4,000,000

Market value of stock issued (500,000 x 8) 4,000,000

Again in accordance with PFRS 3 (Revised), all acquisition related cost are expensed while the
cost of issuing equity securities should reduce the proceeds from the equity issue.


PROB. 4-10 suggested answer (a)

PFRS 3 (Revised) provides that all the acquisition date; the acquirer should recognized goodwill
acquired in a business combination as an asset, and initially measure that goodwill at its cost,
being excess of the cost of the business combination over the acquirers interest in the fair value
of the identifiable assets, liabilities, and contingent liabilities. Furthermore, goodwill acquired
shall test it for impairment annually or more frequently if events or change in circumstance
indicate that it might be impaired.


PROB. 4-11 suggested answer (d)

The new standard on business combination requires an acquirers identifiable assets, liabilities,
and contingent liabilities that satisfy the relevant recognition criteria at their fair values at the
date of acquisition. For the purpose of allocating the cost of a business combination, the
acquirer should treat the following inventories: finished goods at selling price less the sum of
cost disposal and reasonable profit allowance; work in process at selling price of finished goods
less the sum of cost to complete and dispose and reasonable profit allowance; and raw materials
at current replacement cost.


PROB. 4-12 suggested answer (c)

PFRS 3 (Revised) provides that the acquirer should recognize intangible as assets separate from
goodwill if they are separable and arise from: contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity or from other rights and
obligation. Trademarks, lease agreement, and patents arise from contractual or legal rights,
while employee quality does not arise from contractual or legal rights and is not separable,




PROB. 4-13 suggested answer (b)

PFRS 3 (Revised) requires the use of purchase method for all business combinations. Under the
purchase method, the acquisition: costs allocated to acquire assets and liabilities based on their
fair values. Any excess of cost over the fair value of net assets is allocated to goodwill.



PROB. 4-14 suggested answer (c)

The term bargain purchase or negative goodwill is issued to describe the excess of the
identifiable net assets recognized in a business combination over the consideration transferred
and the non-controlling interest in the acquirer. It is generally unusual for a discount to arise,
since it means that the acquirer paid less than net assets value for the business. PFRS 3
(Revised) assume that such an amount will not normally arise and therefore may have arisen as
a result of an error in the measurement of the acquirers net assets, the non-controlling interest
or the consideration transferred. It requires the acquirer to reassess the recognition or the
identifiable net assets acquired. If a discount still remains after the reassessment has been
completed, then it should be recognized in profit or loss in the period in which the business
combination took place. This treatment is required since only discount reflects the reality that
bargains purchase was made.



PROB. 4-15 suggested answer (a) P150,000

Acquisition cost 620,000
Less market value of the net assets required:
Cash 60,000
Inventory at fair value 150,000
Property and equipment (net) at fair value 380,000
Liabilities (120,000) 470,000
Goodwill 150,000

In a business combination appropriately accounted as purchase, the consideration given to
acquire the other company may be cash, or it may include other assets or the purchasers own
securities. If the aggregate purchase price (cash purchase) exceeds the market value of
identifiable assets less liabilities assumed, the difference is attributed to goodwill. It should be
pointed out that goodwill is recorded only when purchased, and represents an intangible asset
on the book of the purchaser. In addition, under PFRS 3, goodwill shall no longer be amortized
but tested for impairment.

PROB. 4-16 suggested answer (a) P22,500

Again, the net assets of the subsidiary acquirer shall be recognized at fair values. Specifically,
the fair value of the property, plant and equipment shall be the market value the amount which
an entity will pay, say, assets whet n it is exchanged between unrelated and willing parties, not in
forced sale. The asset at fair value is being added to similar asset of the acquirer.


PROB. 4-17 suggested answer (b)

The new standard on business combination requires the acquirer to recognize separately an
intangible asset of the acquiree at the acquisition date only if it meets the definition of an
intangible asset and its fair value can be measured reliability. The fair value of intangible assets
shall be determined by reference to an active market and if no active market exist, on a basis that
reflects the amounts the acquirer would have paid for the assets in arms length transactions
between knowledge willing parties and not in forced sale.

PROB. 4-18 suggested answer (a)

When a reporting unit is disposed of in its entirety, goodwill of that reporting unit (to the extent
an impairment loss has not been recognized) is included in the carrying amount of the reporting
unit for purpose of determining the gain or loss on disposal. Consequently, the unimpaired
goodwill of each reporting unit of acquired entity is include in the total carrying amount of that
entity.

PROB. 4-19

a. Suggested answer (b) Goodwill recorded at P224,800

Acquisition cost 1,400,000
Less fair value of the net assets acquired:
Cash 36,000
Accounts receivable 457,000
Inventories 133,000
Plant, property & equipment 900,000
Liabilities (350,800) 1,175,200
Goodwill 224,800
Again, if the aggregate amount paid for the purchase exceeds the market value of the identifiable
assets less liability assumed, the difference is attributed to goodwill.

b. Suggested answer (b) P1,175,200

at the time of purchase transaction, it is necessary to determine the current fair values of the
assets acquired and liabilities assumed. The purpose of estimating these values is to provide a
basis for allocating the total cost involve to individual balance sheet items. The aggregate value
assigned to the net assets acquired (including goodwill) will be equal to the cost involved in the
purchased transaction. Therefore, the net assets (excluding goodwill) to be recorded in the books
of the acquiring company should be P1,175,200 (1,400,000 224,800). Stated differently, what
is to be recorded by the acquiring company should be the fair value of the net assets acquired as
shown in a.

c. Suggested answer (c) P441,400 more than owners equity

Acquisition cost 1,000,000
Less fair value of the net assets acquired:
Cash 36,000
Accounts receivable 457,000
Inventories 133,000
Plant, property & equipment 900,000
Liabilities (350,800) 1,175,200
Excess of fair value over cost (175,200)

In this case, what is being asked is the excess of market fair value over cost, which according to
PFRS 3 (Revised) is regarded as gain or bargain purchase; thus the correct answer is P175,200





PROB. 4-20 Suggested answer (c) P187,500

Average earnings (800,000/5) 160,000
Less normal earnings 145,000
Excess earnings 15,000
Multiply by capitalization rate 8%
Goodwill 187,500

Goodwill maybe computed using either direct valuation approach or indirect valuation
approach. Under the direct valuation approach, the excess of acquisition cost over the market
value of net assets acquired is goodwill; while under the indirect valuation approach, goodwill
maybe determined in various ways. One of which is the capitalization of the excess earning.
Excess earning is the excess of average earnings over the normal earnings.


PROB. 4-21

a. Suggested answer (a) P6,800,000

Total assets of Com Co. and Pol Co. before the
Purchase (4,000,000 + 2,500,000) 6,500,000
Add increased in appraised value of Pol Co.s assets 300,000
Total assets/liabilities & stockholders equity 6,800,000

When a business combination is appropriately accounted under purchase method, there is a new
basis of accountability for the assets acquired. With the acquisition of the assets through
purchase, assets should be recorded at current fair values, which is their cost to the buyer that
need no coincide with the values reported on the books of the seller.


b. Suggested answer (d) P4,000,000

Com Co.s capital stock before purchase 2,000,000
Capital stock issued by Com Co. in the combination
[(2,500,00 + 300,000) 800,000)] 2,000,000
Com Co.s capital stock reflecting the combination 4,000,000

Since Com Co.s capital stock is no par/ stated value, the capital stock to be issued by Com Co.
for purpose of business combination is equal to the fair market value of Pol Co.s net assets (as
mentioned in the problem).








PROB. 4-21 Suggested answer (d) P800,000

Fair value of preferred stock issued Minor Co. 8,000,000

In applying the purchase method, the cost to the purchasing entity of acquiring another entity is
the amount of cash paid or thee fair value of the other assets given up, liability assumed, or
equity instruments issue.

PFRS 3 (Revised) provides that all acquisition related cost shall expense, except the cost of
issuing equity securities which reduce the proceeds from equity issue.

Therefore, the fair value of preferred stock given up used to measure this transaction, except the
preferred shared issued to an individual as finders fee, which is expensed. Accordingly, the
acquirer should recognize an increase in net assets at the acquisition date, because of the
issuance of preferred stock.


PROB. 4-23 Suggested answer (d) True True

Acquisition cost 100,000,000
Non-controlling interest share in net asset:
(85,000,000 x 20%) 17,000,0000
Total 117,000,000
Less fair value of net assets of acquired company 85,000,000
Goodwill (NCI measured at its proportionate share) 32,000,000


Acquisition cost 100,000,000
Fair value of non-controlling interest
(10,000,000 24,000,000/80% x 20%) 19,000,000
Total 119,000,000
Less fair value of net assets of acquired company 85,000,000
Goodwill (NCI measured at fair value) 34,000,000


Under PFRS 3 (Revised), the acquire shall, at the acquisition date, measure the acquirees
identifiable assets and liabilities at their fair value. In additional to the identifiable net assets
acquired, the acquirer should recognize any non-controlling interest in the acquire at either fair
value or at the non-controlling interests proportionate share of the acquirees identifiable net
assets.

PROB. 4-24 Suggested answer (a) 1,470,000

Acquisition cost 1,960,000
Non-controlling interest share in net assets:
(700,000 x 30%) 210,000
Total 2,170,000
Less fair value of net assets of acquired company 700,000
Goodwill 1,470,000
\
The computation of goodwill if the non-controlling interest is measured at this share of the
identifiable net assets is similar with the approach of measuring goodwill under the PFRS 3
before the its revision of January 2008; as shown below :

Acquisition cost 1,960,000
Less market value of net assets acquired
(700,000 x 70% 490,000
Goodwill 1,470,000


PROB. 4-25 Suggested answer (d)

Swain Hadji
Acquisition cost 1,420,000 300,000
Less market value of net assets acquired
(70% x 1,200,000) 840,000
(65% x 640,000) _______ 416,000
Goodwill (Gain on bargain purchase) 580,000 (116,000)

Since the computation of goodwill if the non- controlling interest is measured at its share of
identifiable net assets is similar with the approach of measuring goodwill under the PFRS 3
before its revision in January 2008, that approach was used for purposes of simplicity.

According to PFRS 3 (Revised), goodwill is the excess of the consideration transferred plus the
amount of any non-controlling interest in the acquire over the identifiable net assets and
liabilities recognized. It is to be recognized as an assets of the acquiring entity in the statement
of financial position.

The term gain or bargain purchase or negative goodwill is issued to describe the excess of the
identifiable net assets recognized in a business combination over the consideration transferred
and the non-controlling interest in the acquiree. It is recognized in profit or loss (statement of
comprehensive income) in the period in which the business combination took place; thus, no
amount of which shall be presented in the statement of financial position.




PROB. 4-26 Suggested answer (a) 94,000,000

Acquisition cost
Consideration transferred 200,000,000
FV of contingent consideration 10,000,000 210,000,000
Less MV of net assets acquired 116,000,000
Goodwill 94,000,000


PFRS 3 (Revised) provides that the consideration transferred should include any contingent
consideration payable, e.g, additional cash or equity shares to be transferred by the acquirer if
specified future events or condition if agreed profit targets are met by the acquire in the post-
acquisition date and recognized by acquirer as either a liability or as equity according to its
nature.



PROB. 4-24 Suggested answer (a) 25,000,000

Acquisition cost 160,000,000
Less increase in provisional fair value 135,000,000
Goodwill 25,000,000


The standard requires the acquirer should asses the identifiable assets and liabilities acquired
by the end of the reporting period in which the combination takes place. However, if its not
practicable for the assessment to be finalized in this time scale, the acquirer is required to make
a provisional assessment at the end of the reporting period and adjustment should be made,
which may result to increase/decrease in goodwill or gain on bargain purchase.




PROB. 4-24 Suggested answer (c) Gain on bargain purchase of P8,000,000
Recognize in profit or loss.

Acquisition cost 112,000,000
Less MV of the net assets acquired (100%) 120,000,000
Gain on bargain purchase 8,000,000


The term bargain purchase (negative goodwill) is issued to describe the excess of the identifiable
net assets recognized in a business combination over the consideration transferred and the non-
controlling interest in the acquiree. Since such an amount will not normally arise and therefore
may have arisen as a result of an error in the measurement of the acquires net assets, the non-
controlling interest or the consideration transferred, IFRS 3 requires the acquirer to reassess the
identifiable of the net assets acquired. And if the discount still remains after the reassessment has
been completed, then it should be recognize in profit or loss in the period in which the business
combination took place. This treatment is required since any discounts reflects the reality that a
bargain purchase was made.



PROB. 4-24 Suggested answer (b) Decrease by P5,000

Trademark amortization (100,000/10 x 6/2) 5,000

The identifiable assets and liabilities acquired by an acquirer should be reassessed by the end of
the reporting period in which the combination takes place however, when it is not practicable for
the assessment to be finalized in this time scale, the acquirer is required to make a provisional
assessment at the end of the first reporting period. These provisional values should subsequently
be finalized within the measurement period and adjustment should be made directly to the
identifiable net assets, the consideration transferred and goodwill as well. The measurement
period end as soon as the acquirer obtains enough information to finalize the provisional
amounts, but in any event does not exceed one year from the date acquisition. Adjustment that
arise after the end of the measurement period should be recognized as revision of estimates and
therefore recognized in profit or loss in current future periods. Where error is identified,
retrospective treatment is required.

Given the finalization of the fair value of the trading rights is made after the end of the
measurement date (more than 12months), so it is recognized in profit or loss prospectively from
September 30, 2011 and has no effect in 2010 net income.

On the other hand, the finalization of the fair value of the trademarks is made within 12 months
from the acquisition date, so it is considered to be related to that date. Accordingly, the increase
in carrying amount by P100,000 (500,000- P400,000) will reduce the recorded goodwill by the
same amount, and amortization of which in the amount of P5,000 will decrease the 2010 net
income. Note that under the current standards, goodwill is no longer amortized but tested for
impairment.

















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