UNIVERSITY OF NUEVA CACERES

City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
2020-2021
VARIAS, AIZEL ANN BELEN
BSA 3rd YEAR BLOCK –A FLEXI-KIT
2076 Accounting for Business Combinations

TOPIC 1.1 BUSINESS COMBINATION (PART 1) RECOGNITION AND MEASUREMENT

LEARNING ACTIVITY 1.1.2
Concept-review

PROBLEM 1: TRUE OR FALSE

1. FALSE – it should be “business” and “control”
2. FALSE – PFRS 3 requires the use of the “acquisition method”
3. FALSE – it should be the “acquirer”
4. TRUE
5. FALSE - fair value of NCI’s proportionate share in the acquiree’s net identifiable assets
6. TRUE
7. FALSE – it should be recognized in profit or loss after reassessment
8. TRUE
9. FALSE – measured at fair value less cost to sell
10. TRUE
PROBLEM 5: MULTIPLE CHOICE – THEORY
1. C
2. C
3. B
4. C
5. D
6. B
7. D
8. D
9. A
10. D
11. C
12. D
13. B
14. D
15. C
LEARNING ACTIVITY 1.1.2
Concept-application

PROBLEM 3: FOR CLASSROOM DISCUSSION

1. D
2. D

3. Goodwill - Solution:
Consideration transferred 1,800,000
Non-controlling interest in the acquiree -
Previously held equity equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired
(2.37M - 20K goodwill - 700K liabilities) - 1,650,000
Goodwill 150,000

4. Non-controlling interest - Solution:

Consideration transferred 2,000,000
Non-controlling interest [(4M-1.6M) x25%] 600,000
Previously held equity interest in the acquiree -
Total 2,600,000
Fair value of net identifiable assets acquired (4M-1.6M) - 2,400,000
Goodwill 200,000

5. Non-controlling interest - Solution:

Consideration transferred 2,000,000
Non-controlling interest in the acquiree 540,000
Previously held equity equity interest in the acquiree -
Total 2,540,000
Fair value of net identifiable assets acquired (4M-1.6M) - 2,400,000
Goodwill 140,000

6. Acquisition related cost and Restructuring provisions - Solution:

Consideration transferred (18,000 sh. x ₱100) 1,800,000

Non-controlling interest in the acquiree -
Previously held equity equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired (3.8M-1.9M) - 1,900,000
Gain on bargain purchase - 100,000
7. Operating leases and intangible assets – Solution:

Consideration transferred 2,800,000

Non-controlling interest in the acquiree -
Previously held equity equity interest in the acquiree -
Total 2,800,000
Fair value of net identifiable assets acquired
(4M+100K patent+160K R&D+40K intangible asset on
operating lease with favorable terms - 1.6M) - 2,700,000
Goodwill 100,000

8. Contingent liabilities – Solution:

Consideration transferred 1,800,000

Non-controlling interest in the acquiree (2.2M x 25%) 550,000
Previously held equity equity interest in the acquiree -
Total 2,350,000
Fair value of net identifiable assets acquired
(4M - 1.6M - 200K contingent liability) - 2,200,000
Goodwill 150,000

9. Deferred taxes – Solution:

Fair Values (CA for FR) Tax base TTD (DTD)

Assets 6,100,000 5,800,000 300,000
Liabilities 2,300,000 2,100,000 -200,000

Taxable temporary difference 300,000

Multiply by: Tax rate 30%
Deferred tax liability 90,000

Deductible temporary difference 200,000

Multiply by: Tax rate 30%
Deferred tax asset 60,000

Consideration transferred 4,000,000

Non-controlling interest in the acquiree -
Previously held equity equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired
(6.1M +60K DTA - 2.3M -90K DTL)) - 3,770,000
Goodwill 230,000
10. Consideration transferred – Solution:

Consideration transferred (2.8M - 280K dividends on) 2,520,000

Non-controlling interest in the acquiree -
Previously held equity equity interest in the acquiree -
Total 2,520,000
Fair value of net identifiable assets acquired
(4M - 1.6M ) - 2,400,000
Goodwill 120,000

PROBLEM 4: EXERCISES

1. Consideration transferred 1,200,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,200,000
Fair value of net identifiable assets acquired
(1.7M - 50K goodwill - 390K liabilities) - 1,260,000
Gain on bargain purchase - 60,000

2. Consideration transferred 1,200,000

Non-controlling interest [(1.7M - .4M) x 20%] 260,000
Previously held equity interest in the acquiree -
Total 1,460,000
Fair value of net identifiable assets acquired (1.7M - .4M) - 1,300,000
Goodwill 160,000

3. Consideration transferred 1,200,000

Non-controlling interest in the acquiree 300,000
Previously held equity interest in the acquiree -
Total 1,500,000
Fair value of net identifiable assets acquired (1.7M - .4M) - 1,300,000
Goodwill 200,000

4. Consideration transferred (10,000 sh. x ₱100) 1,000,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,000,000
Fair value of net identifiable assets acquired (1.8M - .9M) - 900,000
Goodwill 100,000
5. Consideration transferred 1,500,000
Non-controlling interest in the acquiree 800,000
Previously held equity interest in the acquiree -
Total 2,300,000
Fair value of net identifiable assets acquired (1.8M - .9M)
(5M + 80K customer list - 2.8M - 30K liability on
operating lease with unfavorable terms - 2,250,000
Goodwill 50,000

6. Fair Values (CA for FR) Tax base TTD (DTD)

Assets 3,500,000 3,800,000 -300,000
Liabilities 1,900,000 2,000,000 100,000
Contingent liability 100,000 - -100,000

Taxable temporary difference 400,000

Multiply by: Tax rate 30%
Deferred tax liability 120,000

Deductible temporary difference 100,000

Multiply by: Tax rate 30%
Deferred tax asset 30,000

Consideration transferred 1,600,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,600,000
Fair value of net identifiable assets acquired
(3.5M + 120K DTA - 1.9M - 100K contingent liab - 30K DTL) - 1,590,000
Goodwill 10,000

PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. A
2. C
3. C
4. A
5. B
Solutions for Problem 6:
1. Consideration transferred
1M+(200K x PV of ordinary annuity
of 1 @12%, n=5) 1,720,955
Non-controlling interest (3.4M - 1.7M) x 20% 340,000
Previously held equity interest in the acquiree -
Total 2,060,955
Fair value of net identifiable assets acquired
(3.4M - 1.7M) - 1,700,000
Goodwill 360,955

2. Consideration transferred 1,200,000

Non-controlling interest (1.2M/80%) x 20% 300,000
Previously held equity interest in the acquiree -
Total 1,500,000
Fair value of net identifiable assets acquired
(3.3M - 150K cost to sell - 1.7M) - 1,450,000
Goodwill 50,000

3. Consideration transferred (2,000 sh. x ₱500) 1,000,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,000,000
Fair value of net identifiable assets acquired
(2.8M - 1.6M) - 1,200,000
Gain on bargain purchase - 200,000

4. Consideration transferred 2,600,000

Non-controlling interest -
Previously held equity interest in the acquiree -
Total 2,600,000
Fair value of net identifiable assets acquired
(5.9M + 90K asset on operating lease - 3.5M
- 10K contingent liability) - 2,480,000
Goodwill 120,000
5. Consideration transferred 2,400,000
Non-controlling interest -
Previously held equity interest in the acquiree -
Total 2,400,000
Fair value of net identifiable assets acquired
(2.860M - 20K recorded goodwill + 60K R&D
+ 99K DTA - .480M - 78K DTL - 2,441,000
Gain on bargain purchase - 41,000

Fair values (CA for Previous CA (TB

TTD (DTD)
financial reporting for taxation

Cash 10,000 10,000 -

Receivables - net 280,000 400,000 - 120,000
Inventory 350,000 480,000 - 130,000
Land 2,200,000 2,000,000 200,000
R&D 60,000 - 60,000
Payables 480,000 400,000 - 80,000

Taxable temporary difference (200K-60K) 260,000

Multiply by: Tax rate 30%
Deferred tax liability 78,000

Deductible temporary difference (120K+130K+80K) 330,000

Multiply by: Tax rate 30%
Deferred tax asset 99,000

LEARNING ACTIVITY 1.1.3

PROBLEM 7: MULTIPLE CHOICE – PFRS for SMEs
1. C
2. B
Solution:
Consideration transferred 1,000,000
Non-controlling interest in the acquiree 200,000
Previously held equity equity interest in the acquiree -
Total 1,200,000
Fair value of net identifiable assets acquired - 800,000
Goodwill 400,000
3. D
Solution:
Purchase costs 1,000,000
Acquisition-related costs 100,000
Total 1,100,000
Interest in net identifiable assets acquired
(800K x 75%) - 600,000
Goodwill 500,000

4. A
5. C

TOPIC 1.2 BUSINESS COMBINATIONS (PART 2) SPECIFIC CASES

LEARNING ACTIVITY 1.2.2
Concept-review

PROBLEM 1: TRUE OR FALSE

1. FALSE – the transaction is a business combination because there is exchange of equity interests.
2. TRUE
3. FALSE – it should be ₱100, the total increase in share capital and share premium
4. FALSE – it should be ₱20 goodwill, (₱100 consideration transferred – ₱80 fair value of net assets)
5. TRUE
6. FALSE
7. TRUE
8. TRUE
9. FALSE
10. TRUE

PROBLEM 5: MULTIPLE CHOICE – THEORY

1. B
2. C
3. A
4. B
5. D
6. D
7. A
8. B
9. D
10. D

LEARNING ACTIVITY 1.2.2

Concept-application

PROBLEM 3: FOR CLASSROOM DISCUSSION

1. Share-for-share exchanges
Step 1:
Consideration transferred (squeeze) 4,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (given) - 4,000,000
Goodwill (Start) 200,000

Step 2:
Consideration transferred 4,200,000
Divide by: fair value per share ₱ 100
Shares issued 42,000

2. Business combination achieved in stages

Consideration transferred 300,000

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 [100%- (20% + 40%)=40] 24,000

3. Business combination without transfer of consideration

Consideration transferred -
Non-controlling interest in the acquiree (1.8M x 100%) 1,800,000
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired - 1,800,000
Goodwill -
4. Measurement period
Provisional Adjusted
Consideration transferred 2,000,000 2,000,000
Non-controlling interest in the acquiree - -
Previously held equity interest - -
Total 2,000,000 2,000,000
Fair value of net identifiable assets acquired - 1,980,000 - 1,900,000 (a)
Goodwill 20,000 100,000

(a) 1.980M - 220K provisional amount +140K fair value

Apr 1, Goodwill 80,000

20x2 Machine 80,000

Apr 1, Accumulated depreciation (b) 278

20x2 Retained earnings 278

Depreciation based on:

Provisional amount (220K/6) x 2/12 6,111
Fair value (140K/4) x 2/12 5,833
Decrease in accumulated depreciation 278

5. Determining what is part of the business combination

Consideration transferred (800K-30K-50K) 720,000
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 120,000

6. Reacquired rights & settlement of pre-existing relationship

Consideration tranferred 2M-200K of f-market value) 1,800,000
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 asset on reacquired right - 150K
franchise - 2.2M) - 1,750,000
Goodwill 50,000
7. Contingent consideration

Requirement a:
Consideration transferre
(10,000sh. X ₱200)+ 280K Cont. conideration 2,280,000
Non-controlling interest in the acquiree -
Previouly held equity interest in the acquiree -
Total 2,280,000
Fair value of net identifiable assets acquired - 1,900,000
Goodwill 380,000

Requirement b
Dec. 31
No entry
20x1

Jan. 14 Share premium - contingent consideration 280,000

20x2 Share capital (2,000 x ₱20par) 40,000
Share premium (squeeze) 240,000

Requirement c:
Dec. 31 Share premium - contingent consideration 280,000
20x1 Share premium 280,000

PROBLEM 4: EXERCISES
1. Solution:

Requirement a:
ABC Co. Combined entity Increase

Share capital 800,000 976,000 176,000

Divide by: ₱ 20
Number of shares issued 8,800

Requirement b:
Consideration transferred (a) 968,000
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 168,000
(a)
ABC Co. Combined entity Increase

Share capital 800,000 976,000 176,000

Share premium 300,000 1,092,000 792,000
Totals 1,100,000 2,068,000 968,000

(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 acquired 800,000

Requirement c:
Retained earnings = 400,000

2. Solution:

Requirement a: Compute for the goodwill

Consideration transferred (80,000sh. x ₱8) 640,000
Non-controlling interest in the acquiree
(665,000 x 10% (a)) 66,500
Previously held equity interest in the acquiree (b) 80,000
Total 786,500
Fair value of net identifiable assets acquired - 665,000
Goodwill 121,500

(a) NCI
(10,000 +80,000) ÷ 100,000 = 90% controlling interest
(100% - 90%) = 10% NCI

(b)Previously held equity interest

(10,000 shares x ₱8) = 80,000
 Requirement b: Provide all the journal entries
July 1, 20x1

Investment in subsidiary (80,000 x 8) 640,000

Cash 640,000
to record the newly acquired shares

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

Unrealized gain -P/L 30,000
to remeasure the previously held equity interest

Investment in subsidiary 80,000

FVPL financial assets 80,000
to reclassify the previously held equity interest

3. Solution:

Requirement a:
Provisional Adjusted
Consideration transferred 1,800,000 1,800,000
Non-controlling interest - -
Previously held equity interest - -
Total 1,800,000 1,800,000
Fair value of net identifiable assets - 1,700,000 - 1,600,000 (a)
Goodwill 100,000 200,000

(a) (2.6M - 300K provisional amount + 200K fair value - .9M) = 1,600,000

Requirement b:
Aug-31 Goodwill 100,000
20x2 Trademark 100,000

4. Solution:

Requirement a:
Settlement loss (360K-170K 'at market") 190,000
Carrying amount of related asset or liability recognized -
Adjusted settlement loss 190,000

Jan. 1 Settlement loss 190,000

20x1 Cash 190,000
Requirement b:
Consideration transferred (2.2M-190K of f-market value) 2,010,000
Non-controlling interest in the acquiree -
Previously held equity nterest in the acquiree -
Total 2,010,000
Fair value of net identifiable assets acquired (3.6M - 1.8M) - 1,800,000
Goodwill 210,000

5. Solution:

Requirement a:
Consideration transferred
(10,000sh. x ₱200) +280K contingent considerations 2,280,000
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 360,000

Requirement b:
Dec. 31 Unrealized loss - P/L (a) 120,000
20x1 Liability for contingent consideration 120,000

Jan. 14 Liability for contingent consideration 400,000

20x2 Cash 400,000

(a) Carrying amount of contingent consideration - Dec.31, 20x1 280,000

Fair value - Dec.31, 20x1 400,000
Increase in fair value of liability (loss) - 120,000

Requirement c:
Dec. 31 Liability for contingent consideration 280,000
20x1 Gain on extinguishment of liability - P/L 280,000

PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. D
2. C
3. B
4. C
5. C
Problem 6: Solutions
1. Acquisition-date fair value per share of the ordinary shares issued by Burns

Consideration transferred (squeeze) 2,000,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired - 2,000,000
Goodwill (start) -

(2,000,000 ÷ 20,000 shares) = 100 per share

2. Par value per share of Burn’s ordinary shares

Consideration transferred 2,000,000

Less: Increase in share premium 400,000
Increase in share capital 1,600,000

(1,600,000 ÷ 20,000 shares) = 80

3. Acquisition-date fair value per share of Point’s share

Outstanding shares of Finger (40,000/₱4 par) 10,000

Ratio
No. of shares issued by Point (10,000sh x 2) 20,000

Consideration transferred (squeeze) 800,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 800,000
Fair value of net identifiable assets acquired - 800,000
Goodwill (start) -

Consideration transferred 800,000

Divide by: Shares issued by Point 20,000
Acquisition-date fair value 40
4. Goodwill
Consideration transferred (50,000 sh x ₱7) 350,000
Non-controlling interest (665,000 x 40%) 266,000
Previously held equity interest in the acquiree 70,000
Total 686,000
Fair value of net identifiable assets acquired - 665,000
Goodwill 21,000

Non-controlling interest
(10,000 + 50,000) / 100,000=60% controlling interest
(100% - 60%) = 40%

Previously held equity interest in the acquiree

(10,000 shares x ₱7) = 70,000

5. Entry to restate the goodwill

Provisional Adjusted
Consideration transferred 800,000 800,000
Non-controlling interest - -
Previously held equity interest - -
Total 800,000 800,000
Fair value of net identifiable assets acquired - 900,000 - 720,000
Goodwill - 100,000 80,000

**1.2M - 200K provisional amount + 20K fair value -.3M) = 720,000

Feb-01 Goodwill 80,000

20x2 Retained earnings 100,000
Intangible asset 180,000

Feb-01 Accumulated amortization 7,500

20x2 Retained earnings 7,500

Amortization recognized in 20x1: (200,000/10) x 6/12 =10,000

Correct amortization in 20x1: (20,000/4) x 6/12 = 2,500
Excess amortization expense in 20x1 = (10,000-2,500) = 7,500
TOPIC 1.3 SPECIAL ACCOUNTING TOPICS
LEARNING ACTIVITY 1.3.2
Concept-review

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B
2. A
3. B
4. D
5. D

PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. A
2. D
3. A
4. B
5. C
Solutions for Problem 3:
1. Total goodwill expected to arise from the business combination:

Gamer Co. Player Co. Total

Average annual earnings 40,000 39,000
Less: Normal earnings 25,000 19,000
Excess earnings 15,000 20,000
Divide: Capitalization rate 20.00% 20.00%
Goodwill 75,000 100,000 175,000

2. Shares issued to Gamer Co. and Player Co.

Gamer Co. Player Co.

Average annual earnings 40,000 39,000
Less: Normal earnings 25,000 19,000
Excess earnings 15,000 20,000
Divide: Capitalization rate 20.00% 20.00%
Goodwill 75,000 100,000

Contributions 575,000 480,000

Divide: Total Contributions (575K+480K) 1,055,000 1,055,000
 Contributions 575,000 480,000
Divide: Total Contributions (575K+480K) 1,055,000 1,055,000
Percentage 54.50% 45.50%
Multiply: Total number of shares to be issued 100,000 100,000
Shares to be issued 54,500 45,500

(500K x 5%) = 25,000

(500K + 75K) = 575,000
(380K x 5%) = 19,000
(380K + 100K) = 480,000

3. The acquirer is the Gamer Co.

4. Estimated purchase price
Average earnings (650K+40K)/5 138,000
Less: Normal earnings (590K x 12%) 70,800
Excess earnings 67,200
Multiply: PV of ordinary annuity@10%, n=5 3.79079
Goodwill 254,741

Estimated purchase price (squeeze) 844,741

Less: FV of net assets 590,000
Goodwill 254,741

5. Goodwill
Legal form: Sunday Co. issues shares to Monday Co.
Sunday Co'c currently issued shares 12,000
Shares issued to Monday Co. (9,000 x 12%) 108,000
Total shares after combination 120,000

Substance form: Monday Co. issues shares to Sunday Co

Monday Co's currently issued shares 9,000
Shares issued to Sunday Co. (9,000/90%) x 10 1,000
Total shares after combination 10,000

Consideration transferred (1,000 x 200) 200,000

Less: Total equity of Sunday Co. 130,000
Goodwill 70,000