2nd Term, Academic Year 2022-2023

ACCOUNTING ON BUSINESS COMBINATION

Illustrative Problem (with solutions) focusing on the recognition and

measurement of NCI resulting to either full or partial GW and the
related working paper entries as well as the effect of Control
Premium
PROBLEM I. The Statement of Financial Position of GERBY Corporation on June 30, 2021 is
presented below:

Current assets P 195,000

Land 1,320,000
Building 660,000
Equipment 525,000
Total assets P2,700,000

Liabilities 525,000
Ordinary shares, P5 par 900,000
Share premium 825,000
Retained earnings 450,000
Total equities P2,700,000

All the assets and liabilities of Gerby assumed to approximate their fair values except for land
and building. It is estimated that the land has a fair value of P2,100,000 and the fair value of the
building increased by P480,000. Neggy acquired 80% of Gerby’s outstanding shares for
P3,000,000. The non-controlling interest is measured at fair value.
Case A: Assuming the consideration paid (P3,000,000) includes a control premium of
P852,000, how much is the goodwill/(gain on acquisition) on the consolidated financial
statement?

Answer: P252,000 GOODWILL - Partial

Solution: 537,000

CI NCI
100% 80% 20%

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 Aggregate Amount 3,687,000.00 3,000,000.00* 687,000.00**
LESS: Fair Value of Net Assets 3,435,000.00 2,748,000.00 687,000.00
Goodwill/(Gain) 252,000.00 252,000.00 -***

537,000
Computation of FV of NET ASSETS of Subsidiary
Ordinary shares, P5 par 900,000.00
Share premium 825,000.00
Retained earnings 450,000.00
Book Value of Net Assets of Subsidiary 2,175,000.00
Over/Undervaluation of Assets & Liabilities
Land (2,100,000-1,320,000) 780,000.00
Building ( increased by 480,000) 480,000.00
Total Over/Undervaluation of Assets & Liabilities 1,260,000.00
3,435,000.00
x
Fair Value of Net Assets of Subsidiary
20%= 687,00
0
Notes

*P 3,000,000- Represents the cost of investment given by Neggy

** P687,000 represents the value of NCI which is based on the Fair Value of Net Assets of Subsidiary
(3,435,000 x 20%). Hence, it will result in partial goodwill with the parent (controlling interest) only
getting the share in goodwill.

***Even if the problem stated that NCI is measured at FAIR VALUE when that fair value will result to a
share on negative goodwill of NCI that FAIR VALUE will be ignored, thus the proportionate share in FV of
Subsidiary’s NA will prevail (3,435,000 x 20%) that makes the NCI no Share in Goodwill. This concept is
also applied if the implied FV of NCI from the prorated cost of investment given by Parent ((P 3,000,000-
852,000) x 20/80= P537,000****) is less than the proportionate share in FV of Subsidiary’s NA will
prevail (3,435,000 x 20% = P687,000)

****The P537,000 is computed as ((P 3,000,000- 852,000) x 20/80) which is the implied FV of NCI on the
date of acquisition. The P852,000 is deducted from 3,000,000 because it is a control premium that
exclusively belongs to the former shareholders of subsidiaries to encourage them to sell their share to
the parent so that the latter will gain control over the subsidiary. Furthermore, If the value of NCI is
based on the proportionate share in FV of Subsidiary’s Net Assets, any goodwill will be called as Partial
Goodwill hence only the parent has the share in goodwill. When the fair value of NCI whether given or
implied will be the measurement basis, then any goodwill will be called as Full/Total Goodwill hence the
parent and non-controlling interest have the share in Goodwill.

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NEGGY'S BOOK

INVESTMENT IN SUBSIDIARY 3,000,000.00

CASH 3,000,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of Gerby

Ordinary shares, P5 par 900,000.00

Share premium 825,000.00
Retained earnings 450,000.00

INVESTMENT IN SUBSIDIARY 1,740,000.00

NCI 435,000.00

To recognize excess of FV over BV of assets and Liabilities

Land 780,000.00
Building 480,000.00

INVESTMENT IN SUBSIDIARY 1,008,000.00

NCI 252,000.00

To recognize goodwill

Goodwill 252,000.00
INVESTMENT IN SUBSIDIARY 252,000.00

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Case B. Assuming the consideration paid (P3M) excludes control premium of P138,000
and the fair value of the non-controlling interest is P736,500, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?

Answer: 439,500 GOODWILL

Solution:

100% 80% 20%

Cost of Investment 3,874,500.00 3,138,000.00 * 736,500.00 **
Fair Value of Net Assets 3,435,000.00 2,748,000.00 687,000.00
Goodwill/(Gain) 439,500.00 390,000.00 49,500.00 ***
Notes
*P 3,138,000- Represents the cost of investment given by Neggy plus the control premium since it’s
excluded.
** P736,500 represents the value of NCI which is based on the GIVEN fair value.
*** Since the value of NCI (given fair value) is not lower than the value of NCI based on the
proportionate share in FV of Subsidiary’s Net Assets, it will result in a goodwill with parent (CI) getting
the share in goodwill as well as the NCI.

NEGGY'S BOOK
INVESTMENT IN SUBSIDIARY 3,138,000.00
CASH 3,138,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of Gerby

Ordinary shares, P5 par 900,000.00

Share premium 825,000.00
Retained earnings 450,000.00
INVESTMENT IN SUBSIDIARY 1,740,000.00
NCI 435,000.00

To recognize excess of FV over BV of Assets and Liabilities

Land 780,000.00
Building 480,000.00
INVESTMENT IN SUBSIDIARY 1,008,000.00
NCI 252,000.00

To recognize goodwill

Goodwill 439,500.00
INVESTMENT IN SUBSIDIARY 390,000.00
NCI 49,500.00

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Case C: Assuming the consideration paid (P3M) includes a control premium of P222,000,
how much is the goodwill/ (gain on acquisition) on the consolidated financial statement?

Answer: 259,500 GOODWILL-Full

Solution:
100% 80% 20%
694,500.00
Aggregate amount 3,694,500.00 3,000,000.00 * **
Fair Value of Net Assets 3,435,000.00 2,748,000.00 687,000.00
7,500.00
Goodwill/(Gain) 259,500.00 252,000.00 ***

*P 3,000,000- Represents the cost of investment given by Neggy

** P694,500 represents the value of NCI which is based on the implied fair value on basis of prorated
share of cost of investment exclusive of any premium ((3,000,000-222,000) x 20/80)

*** Since the value of NCI (implied fair value) is not lower than the value of NCI based on the
proportionate share in FV of Subsidiary’s Net Assets, it will result in a goodwill with parent (CI) getting
the share in goodwill as well as the NCI.

NEGGY'S BOOK

INVESTMENT IN SUBSIDIARY 3,000,000.00

CASH 3,000,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of Gerby

Ordinary shares, P5 par 900,000.00

Share premium 825,000.00
Retained earnings 450,000.00
INVESTMENT IN SUBSIDIARY 1,740,000.00
NCI 435,000.00

To recognize excess of FV over BV of assets and Liabilities

Land 780,000.00
Building 480,000.00
INVESTMENT IN SUBSIDIARY 1,008,000.00
NCI 252,000.00

To recognize goodwill

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Goodwill 259,500.00
INVESTMENT IN SUBSIDIARY 252,000.00
NCI 7,500.00

PROBLEM II. RUSSIA Corporation acquired 65 percent of VACCINE Corporation’s common

stock on December 31, 2021. VACCINE’s statement of financial position immediately before the
combination reflected the following balances:

Cash and receivables P 120,000

Inventory 210,000
Land 270,000
Building and equipment 750,000
Total Assets P 1,350,000

Accounts payable P 90,000

Income tax payable 120,000
Bonds payable 300,000
Ordinary shares 300,000
Retained earnings 540,000
Total equities P 1,350,000

A review of the fair value of State’s assets and liabilities indicated that inventory, land, and
buildings and equipment had fair values of P 195,000, P300,000, and P900,000 respectively. All
other assets and liabilities have book value equal to their fair value. Non-controlling interest is
measured at fair value.

1. Assuming RUSSIA paid P800,000 for 65% of the outstanding shares of VACCINE and
the fair value of the non-controlling interest at the date of acquisition was determined to
be P400,000, how much is the goodwill/(income for acquisition) to be reported in the
consolidated statement of financial position of RUSSIA Corporation?

2. Assuming RUSSIA paid P600,000 for 65% of the outstanding shares of VACCINE and
the fair value of the non-controlling interest at the date of acquisition was determined to
be P320,000, how much is the goodwill/(income for acquisition) to be reported in the
consolidated statement of financial position of RUSSIA Corporation?

3. Assuming RUSSIA paid P715,000 for 65% of the outstanding shares of VACCINE, how
much is the goodwill/(income for acquisition) to be reported in the consolidated
statement of financial position of RUSSIA Corporation?

4. Assuming RUSSIA paid P650,000 for 65% of the outstanding shares of VACCINE, how
much is the goodwill/(income for acquisition) to be reported in the consolidated
statement of financial position of RUSSIA Corporation?

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SOLUTIONS

ASSUMPTION 1
100% 65% 35%
CONSIDERATION TRANSFERRED 1,200,000.00 800,000.00 400,000.00
LESS:FAIR VALUE OF NET ASSETS 1,005,000.00 653,250.00 351,750.00
GOODWILL/(GAIN ON ACQUISITION) 195,000.00 146,750.00 48,250.00

RUSSIA'S BOOKS

INVESTMENT IN SUBSIDIARY 800,000.00

CASH 800,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of VACCINE

Ordinary shares 300,000.00

Retained earnings 540,000.00

INVESTMENT IN SUBSIDIARY 546,000.00

NCI 294,000.00

To recognize excess of FV over BV of assets and Liabilities

Land 30,000.00
Building 150,000.00

Inventory 15,000.00

INVESTMENT IN SUBSIDIARY 107,250.00

NCI 57,750.00

To recognize goodwill

Goodwill 195,000.00

INVESTMENT IN SUBSIDIARY 146,750.00

NCI 48,250.00

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 ASSUMPTION 2
100% 65% 35%

CONSIDERATION TRANSFERRED 951,750.00 600,000.00 351,750.00

LESS:FAIR VALUE OF NET ASSETS 1,005,000.00 653,250.00 351,750.00

GOODWILL/(GAIN ON
ACQUISITION) (53,250.00) (53,250.00) -

RUSSIA'S BOOKS

INVESTMENT IN SUBSIDIARY 600,000.00

CASH 600,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of VACCINE

Ordinary shares 300,000.00

Retained earnings 540,000.00
INVESTMENT IN SUBSIDIARY 546,000.00
NCI 294,000.00

To recognize excess of FV over BV of Assets and Liabilities

Land 30,000.00
Building 150,000.00
Inventory 15,000.00
INVESTMENT IN SUBSIDIARY 107,250.00
NCI 57,750.00

To recognize GAIN

INVESTMENT IN SUBSIDIARY 53,250.00

GAIN ON BARGAIN PURCHASE 53,250.00

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 ASSUMPTION 3
100% 65% 35%

CONSIDERATION TRANSFERRED 1,100,000.00 715,000.00 385,000.00

LESS:FAIR VALUE OF NET ASSETS 1,005,000.00 653,250.00 351,750.00

GOODWILL/(GAIN ON
ACQUISITION) 95,000.00 61,750.00 33,250.00

RUSSIA'S BOOK

INVESTMENT IN SUBSIDIARY 715,000.00

CASH 715,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of VACCINE

Ordinary shares 300,000.00

Retained earnings 540,000.00
INVESTMENT IN SUBSIDIARY 546,000.00
NCI 294,000.00

To recognize excess of FV over BV of assets and Liabilities

Land 30,000.00
Building 150,000.00
Inventory 15,000.00
INVESTMENT IN SUBSIDIARY 107,250.00
NCI 57,750.00

To recognize GOODWILL

Goodwill 95,000.00
INVESTMENT IN SUBSIDIARY 61,750.00
NCI 33,250.00

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 ASSUMPTION 4
100% 65% 35%

CONSIDERATION TRANSFERRED 1,001,750.00 650,000.00 351,750.00

LESS:FAIR VALUE OF NET ASSETS 1,005,000.00 653,250.00 351,750.00

GOODWILL/(GAIN ON
ACQUISITION) (3,250.00) (3,250.00) -

RUSSIA'S BOOK

INVESTMENT IN SUBSIDIARY 650,000.00

CASH 650,000.00

WORKING PAPER ENTRIES

To eliminate BV of Net Assets/SHE of VACCINE

Ordinary shares
300,000.00

Retained earnings 540,000.00

INVESTMENT IN SUBSIDIARY 546,000.00
NCI 294,000.00

To recognize excess of FV over BV of assets and Liabilities

Land
30,000.00
Building
150,000.00
Inventory 15,000.00
INVESTMENT IN SUBSIDIARY 107,250.00
NCI 57,750.00

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To recognize GAIN

INVESTMENT IN SUBSIDIARY 3,250.00

GAIN ON BARGAIN PURCHASE 3,250.00

-end of materials-

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