Multiple Choice Questions

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. b. c. d.

The surviving company is one of the combining companies. The surviving company is neither of the two combining companies An investor-investee relationship is established. 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. b. c. d.

Tax-free reorganization Vertical combination Horizontal combination 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.

a. b. c. d.

Cost(1) No No Yes Yes

Cost(2) No Yes No Yes

PROB. 4-4 (AICPA)

Which of the following cost should be a capitalized and amortized over their estimated useful lives?

a. b. c. d.

Cost of good will from purchase business combination No Yes No Yes

Cost of developing good will internally No No 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 S’s carrying amount b. Fair value Fair value c. S’s carrying amount Fair value d. S’s carrying amount S’s 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:

a. b.

Direct Acquisition Added to price paid Added to price paid

Indirect Acquisition Added to price paid Expensed

c.

Expensed

Expensed

d.

Expensed

Expensed

Security Insurance Added to price paid Deducted from the value Of security issued Deducted from value Of security issued 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 Consultant’s 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 Wood’s 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 Pine’s 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)

a. b. c. d.

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

PROB. 4-14 (IFRS 3) In a business combination, an acquirer’s 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 Inventory Property and equipment (net of accumulated Depreciation of P220,000) Goodwill Liabilities Net assets

60,000 180,000 320,000 100,000 (120,000) 540,000

On April 1, 2009, Wall’s 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. b. c. d.

150,000 120,000 50,000 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)

a. b. c. d.

An entire acquired quantity is sold. The goodwill remaining from the acquisition should be Including the carrying amount of the net assets sold. Charge to retained earnings of the current period. Expensed in the periodic sold 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 Accounts receivable Inventories Plant, property and equipment Liabilities

36,000 457,000 120,000 696,400 350,800

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 was: a. b. c. d.

net assets (excluding goodwill, if any) recorded in the books of the acquiring company 1,400,000 1,175,200 1,309,000 958,200

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

Assets Liabilities Capital stock, no par Capital stock, 100 par Additional paid in capital Retained earnings

Com Co. P4,000,000 1,500,000 2,000,000 700,000 (200,000)

Pol Co. P2,500,000 800,000 1,000,000 300,000 400,000

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, nonconvertible 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 finder’s 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. Local’s 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 Local’s net assets. 2- Goodwill should be measured at P34,000,000 if the non-controlling interest is measured at fair value. Statement (1) a. False b. False c. True d. True

Statement (2) False True False 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 Ohau’s identifiable assets and liabilities was P700,000 and elected to measure the noncontrolling interest at its share of the identifiable net assets. Annual impairment reviews of goodwill have not resulted in any impairment losses being recognized. Ohau’s 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 Lamp’s 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 Swain’s 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 Hadji’s 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 Moon’s 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 Green’s 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.

a. b. c. d.

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

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 Natural’s 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 Koala’s 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 Germ’s 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

SOLUTIONS AND EXPLANATIONS 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 acquirer’s 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 acquirer’s 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 acquirer’s 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 Less market value of the net assets required: Cash Inventory at fair value Property and equipment (net) at fair value Liabilities Goodwill

620,000 60,000 150,000 380,000 (120,000)

470,000 150,000

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 purchaser’s 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 arm’s 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 Less fair value of the net assets acquired: Cash Accounts receivable Inventories Plant, property & equipment Liabilities Goodwill

1,400,000 36,000 457,000 133,000 900,000 (350,800)

1,175,200 224,800

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 owner’s equity Acquisition cost Less fair value of the net assets acquired: Cash Accounts receivable Inventories Plant, property & equipment Liabilities Excess of fair value over cost

1,000,000 36,000 457,000 133,000 900,000 (350,800)

1,175,200 (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) Less normal earnings Excess earnings Multiply by capitalization rate Goodwill

160,000 145,000 15,000 8% 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) Add increased in appraised value of Pol Co.’s assets Total assets/liabilities & stockholder’s equity

6,500,000 300,000 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 Capital stock issued by Com Co. in the combination [(2,500,00 + 300,000) – 800,000)] Com Co.’s capital stock reflecting the combination

2,000,000 2,000,000 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 finder’s 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 Non-controlling interest share in net asset: (85,000,000 x 20%) Total Less fair value of net assets of acquired company Goodwill (NCI measured at its proportionate share)

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

100,000,000 17,000,0000 117,000,000 85,000,000 32,000,000

100,000,000 19,000,000 119,000,000 85,000,000 34,000,000

Under PFRS 3 (Revised), the acquire shall, at the acquisition date, measure the acquiree’s 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 interest’s proportionate share of the acquiree’s 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 Less market value of net assets acquired (700,000 x 70% Goodwill

1,960,000 490,000 1,470,000

PROB. 4-25 Suggested answer (d)

Acquisition cost Less market value of net assets acquired (70% x 1,200,000) (65% x 640,000) Goodwill (Gain on bargain purchase)

Swain 1,420,000

Hadji 300,000

840,000 _______ 580,000

416,000 (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 FV of contingent consideration Less MV of net assets acquired Goodwill

200,000,000 10,000,000

210,000,000 116,000,000 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 postacquisition 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 Less increase in provisional fair value Goodwill

160,000,000 135,000,000 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 it’s 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 Less MV of the net assets acquired (100%) Gain on bargain purchase

112,000,000 120,000,000 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 noncontrolling 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 acquire’s net assets, the noncontrolling 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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