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Chapter 14 Business Combinations (Part 2)

Multiple Choice Theory


1. C
6. B
2. C
7. D
3. D
8. A
4. A
9. A
5. A
Multiple Choice Computational
Answers at a glance:
1. A
6. D
2. D
7. B
3. A
8. A
4. B
9. C
5. D
10. C

11.
12.
13.
14.
15.

A
B
D
A
B

16.
17.
18.
19.
20.

C
D
C
D
A

21.
22.
23.
24.
25.

B
C
A
B
C

26.
27.
28.

D
C
B

Solution:
1. A
Solution:
Share capital
Share premium
Totals

COLLOQUY Co.
2,400,000
1,200,000
3,600,000

Combined entity
2,800,000
4,800,000
7,600,000

Increase
400,000
3,600,000
4,000,000

The fair value of the shares transferred as consideration for the


business combination is 4,000,000 (i.e., total increase in share
capital and share premium accounts).
2. D
Solution:
Increase in COLLOQUYs share capital account
(see table above)

Divide by: ABCs par value per share


Number of shares issued
3. A
Solution:
Fair value of consideration transferred
Divide by: Number of shares issued
Acquisition-date fair value per share
4. B

15

400,000
40
10,000

4,000,000
10,000
400

Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill

4,000,000
4,000,000
(2,800,000)
1,200,000

5. D 3,200,000 COLLOQUYs retained earnings


6. D
Solution:
Share capital
Share premium
Totals

COLLOQUY Co.
2,400,000
1,200,000
3,600,000

Combined entity
2,800,000
4,800,000
7,600,000

Fair value of shares transferred


Divide by: ABCs fair value per share
Number of shares issued
7. B
Solution:
Increase in share capital account (see table above)
Divide by: Number of shares issued
Par value per share
8. A
Solution:
Consideration transferred (see previous computation)
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total

Increase
400,000
3,600,000
4,000,000
4,000,000
400
10,000

400,000
10,000
40

Goodwill (given information)

4,000,000
4,000,000
(3,700,000)
300,000

9. C
Solution:
Consideration transferred
Non-controlling interest in the acquiree (1M x 25%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

3,200,000
1,000,000
720,000
4,920,000
(4,400,000)
920,000

Fair value of net identifiable assets acquired (squeeze)

16

10. C
Solution:
Consideration transferred
Non-controlling interest in the acquiree (1M x 25%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

3,200,000
1,000,000
720,000
4,920,000
(4,400,000)
920,000

11. A
Solution:
Consideration transferred
Non-controlling interest in the acquiree (1M x 10%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

3,200,000
400,000
720,000
4,320,000
(4,000,000)
320,000

12. B
Solution:
Consideration transferred
Non-controlling interest in the acquiree (4M x 100%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

4,000,000
4,000,000
(4,000,000)
-

13. D
Solution:
Consideration transferred (4M x 60%*)
Non-controlling interest in the acquiree (4M x 40%*)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

2,400,000
1,600,000
4,000,000
(4,000,000)
-

*After the business combination, the parents ownership interest is


increased to 60% (i.e., 36,000 60,000). Consequently, the noncontrolling interest is 40%.
14. A
15. B

17

16. C
17. D
18. C
Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment on business combination
4,000,000
Additional payment to subsidiarys former owner
200,000
Consideration transferred on the business combination
4,200,000
The fair value of net identifiable assets acquired is computed as
follows:
Fair value of identifiable assets
6,400,000
Fair value of inventory not transferred to DIAPHANOUS
(360,000)
Adjusted fair value of identifiable assets acquired
6,040,000
Fair value of liabilities assumed
(3,600,000)
Adjusted fair value of net identifiable assets acquired
2,440,000
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
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
(2,440,000)
Goodwill
1,760,000
19. D
Solution:
The settlement loss to is computed as follows:
Settlement loss before adjustment (off-market value)
Carrying amount of deferred liability
Adjusted settlement loss

320,000
(240,000)
80,000

The consideration transferred on the business combination is


computed as follows:
Cash payment
4,000,000
Payment for the settlement of pre-existing relationship
(off-market value)
(320,000)
Consideration transferred on the business combination
3,680,000
The fair value of net identifiable assets acquired is computed as
follows:

18

Fair value of subsidiarys identifiable assets


Intangible asset reacquired right

6,400,000
160,000

Carrying amount of asset related to the reacquired rights


prepayment

(200,000)

Adjusted fair value of identifiable assets acquired


Fair value of liabilities assumed
Fair value of net identifiable assets acquired

6,360,000
(3,600,000)
2,760,000

Goodwill (gain on bargain purchase) is computed as follows:


Consideration transferred
3,680,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
3,680,000
Fair value of net identifiable assets acquired
(2,760,000)
Goodwill
920,000
20. A
Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment
4,000,000
Payment for the settlement of pre-existing relationship
(360,000)
(off-market value)
Consideration transferred on the business combination
3,640,000
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
3,640,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
3,640,000
Fair value of net identifiable assets acquired
(2,800,000)
Goodwill
840,000
21. B
Solution:
The settlement gain or loss is computed as follows:
Payment for the settlement of pre-existing relationship
(fair value)
Carrying amount of estimated liability on pending lawsuit

Settlement gain

400,000
(520,000)
120,000

The consideration transferred on the business combination is


computed as follows:
4,000,000
Cash payment
(400,000)
Payment for the settlement of pre-existing relationship
19

(fair value)
Consideration transferred on the business combination

3,600,000

Goodwill (gain on bargain purchase) is computed as follows:


Consideration transferred
3,600,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
3,600,000
Fair value of net identifiable assets acquired (1.6M - .9M)
(2,800,000)
Goodwill
800,000
22. C
Solution:
The consideration transferred on the business combination is
computed as follows:
4,000,000
Cash payment
40,000
Fair value of contingent consideration
Consideration transferred on the business combination

4,040,000

Goodwill (gain on bargain purchase) is computed as follows:


Consideration transferred
4,040,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
4,040,000
Fair value of net identifiable assets acquired (1.6M - .9M)
(2,800,000)
Goodwill
1,240,000
23. A
Solution:
*The unrealized loss on change in fair value is computed as follows:
Fair value of liability on January 1, 20x1
40,000
Fair value of liability on December 31, 20x1
60,000
[(2.2M 1.6M) x 10%]

Increase in fair value of liability (loss)


Dec.
31,
20x1

Unrealized loss on change in fair value P/L

Liability for contingent consideration

20,000
20,000

to recognize loss on change in fair value of liability


assumed for contingent consideration

24. B
Solution:
Dec. Liability for contingent consideration
31,
20x1

(20,000)

Gain on extinguishment of liability P/L

20

40,000
40,000

25. C
Solution:
The consideration transferred on the business combination is
computed as follows:
4,000,000
Fair value of shares issued (10,000 sh. x 400 per sh.)
360,000
Fair value of contingent consideration
Consideration transferred on the business combination

4,360,000

Goodwill (gain on bargain purchase) is computed as follows:


Consideration transferred
4,360,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
4,360,000
Fair value of net identifiable assets acquired (6.4M 3.6M) (2,800,000)
Goodwill
1,560,000
26. D
27. C
Solution:
Dec.
Share premium contingent consideration
31,
Share premium

360,000

20x1

360,000

28. B
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired
3,600,000
Fair value of liabilities assumed
400,000
Fair value of contingent liability assumed
Fair value of net identifiable assets acquired

6,400,000
(4,000,000)
600,000

Goodwill (gain on bargain purchase) is computed as follows:


Consideration transferred
4,000,000
Non-controlling interest in the acquiree
320,000
Previously held equity interest in the acquiree
Total
4,320,000
Fair value of net identifiable assets acquired
(2,400,000)
Goodwill
1,920,000

21

Exercises
1. Solutions:
Requirement (a): Number of shares issued
CONJUNCTION Co. Combined entity
1,200,000
1,400,000
Share capital
600,000
2,400,000
Share premium
1,800,000
3,800,000
Totals

Increase
200,000
1,800,000
2,000,000

The fair value of the shares transferred as consideration for the


business combination is P2,000,000.
The number of shares issued in the business combination is
computed as follows:
Fair value of shares transferred
2,000,000
Divide by: CONJUNCTIONs fair value per share
200
Number of shares issued
10,000
Requirement (b): Par value per share
The par value per share of the shares issued is computed as follows:
Increase in share capital account (see table above)
200,000
Divide by: Number of shares issued
10,000
Par value per share
20
Requirement (c): Acquisition-date fair value of the net
identifiable assets acquired
(1) Consideration transferred (see previous computation)
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
(squeeze)

Goodwill (given information)

2,000,000
2,000,000
(1,400,000)
600,000

2. Solutions:
Scenario #1: Goodwill (gain on bargain purchase) is computed as
follows:
1,600,000
(1) Consideration transferred
500,000
(2) Non-controlling interest in the acquiree (2M x 25%)
360,000
(3) Previously held equity interest in the acquiree
2,460,000
Total
(2,200,000)
Fair value of net identifiable assets acquired
460,000
Goodwill
*100% minus 75%

22

Scenario #2: The previously held interest was initially classified


as FVOCI
Goodwill (gain on bargain purchase) is computed as follows:
1,600,000
(1) Consideration transferred
500,000
(2) Non-controlling interest in the acquiree (2M x 25%)
360,000
(3) Previously held equity interest in the acquiree
2,460,000
Total
(2,200,000)
Fair value of net identifiable assets acquired
460,000
Goodwill
3. Solution:
(1) Consideration transferred
(2) Non-controlling interest in the acquiree (2M x 10%*)
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
*100% minus 90%

1,600,000
200,000
360,000
2,160,000
(2,000,000)
160,000

4. Solution:
(1) Consideration transferred
(2) Non-controlling interest in the acquiree (2M x 100%)
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

2,000,000
2,000,000
(2,000,000)
-

5. Solution:
(1) Consideration transferred (2M x 60%)
(2) Non-controlling interest in the acquiree (2M x 40%)
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

1,200,000
800,000
2,000,000
(2,000,000)
-

6. Solutions:
Case #1:
The unadjusted goodwill is computed as follows:
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
23

2,000,000
-

Total
Fair value of net identifiable assets acquired
Goodwill (recognized on Sept. 30, 20x1)

2,000,000
(1,400,000)
600,000

The adjusted fair value of net identifiable assets acquired is computed


as follows:
Fair value of identifiable assets acquired
3,200,000
Provisional amount assigned to building
(1,400,000)
Fair value of building per appraisal
1,000,000
Adjusted fair value of identifiable assets acquired
2,800,000
Fair value of liabilities assumed
( 1,800,000)
Adjusted fair value of net identifiable assets acquired 1,000,000
The adjusted goodwill is computed as follows:
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
The adjustment to goodwill is computed as follows:
Goodwill recognized on September 30, 20x1
Adjusted goodwill
Increase in goodwill

2,000,000
2,000,000
(1,000,000)
1,000,000

600,000
1,000,000
400,000

The adjustment to depreciation expense recognized in 20x1 is


computed as follows:
Depreciation recognized (P1,400,000 10 years x 3/12)
35,000
Adjusted depreciation (P1,000,000 5 years x 3/12)
50,000
Additional depreciation expense for 20x1
15,000
The measurement period adjusting entries are as follows:
July
Goodwill
400,000
1,
Building
20x2
July
1,
20x2

400,000

to record adjustment to
provisional amount assigned to building

Retained earnings
Accumulated depreciation

15,000
15,000

Of course if monthly depreciation expenses were recognized during


January to June 30, 20x2, the monthly depreciation expenses
recognized shall also be adjusted accordingly.

24

Case #2:
INNOCUOUS shall recognize the fair value of the patent as a
retrospective adjustment to the goodwill recognized on September
30, 20x1. Further, the amortization expense that would have been
recognized had the patent been recorded on September 30, 20x1
shall also be recognized as retrospective adjustment.
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired
3,200,000
Fair value of unrecorded patent
200,000
Adjusted fair value of identifiable assets acquired
3,400,000
Fair value of liabilities assumed
( 1,800,000)
Adjusted fair value of net identifiable assets acquired 1,600,000
The adjusted goodwill is computed as follows:
(1)
(2)
(3)

Consideration transferred
Non-controlling interest in the
acquiree
Previously held equity interest in the
acquiree
Total
Fair value of net identifiable assets
acquired
Goodwill

Unadjusted
2,000,000

Adjusted
2,000,000

2,000,000

2,000,000

(1,400,000)

(1,600,000)

600,000

400,000

The measurement period adjusting entries are as follows:


July 1,
Patent
200,000
20x2
Goodwill
July 1,
Retained earnings (200K 4 x 3/12)
12,500
20x2
Accumulated amortization

200,000
12,500

Case #3:
Because the new information is obtained after the measurement
period (i.e., beyond one year from September 30, 20x1),
INNOCUOUS should account for the new information in accordance
with PAS 8 as correction of error. PAS 8 requires the correction of
an error to be accounted for retrospectively and for the financial
statements to be presented as if the error had never occurred by
correcting the prior periods information.
Adjustments shall be made similar to those in Case #2; however, the
disclosures provided in the notes will vary because of the application
of PAS 8 instead of PFRS 3.

25

The correcting entries on the 20x1 financial statements are as


follows:
Nov. 1,
Patent
200,000
20x2
Goodwill
200,000
Nov. 1,
Retained earnings (200K 4 x 3/12)
12,500
20x2
Accumulated amortization
12,500
7. The new information obtained on April 1, 20x2 shall be
accounted for as measurement period adjustment because it
provides evidence of facts and circumstances that, if known,
would have affected the measurement of the amounts recognized
as of September 30, 20x1.
The new information obtained on July 1, 20x2 shall not be accounted
for as a measurement period adjustment because it relates to facts
and circumstances that have not existed as of acquisition date.
However, this information may necessitate impairment testing on the
goodwill recognized. Any impairment shall be recognized in profit or
loss (see discussion later in this chapter).
.
The adjusted goodwill is computed as follows:
(1)
(2)
(3)

Consideration transferred
Non-controlling interest in the
acquiree
Previously held equity interest in
the acquiree
Total
Fair value of net identifiable assets
acquired
Goodwill

Unadjusted
2,000,000

Adjusted
2,000,000

2,000,000

2,000,000

(1,400,000)

(1,600,000)

600,000

400,000

The measurement period adjusting entry on April 1, 20x2 is as


follows:
Apr. 1,
Net identifiable assets
200,000
20x2
Goodwill
200,000
8. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment on business combination
2,000,000
Additional payment to TRANSPARENTs
former owner
100,000
Consideration transferred on the business

26

combination

3,100,000

The fair value of net identifiable assets acquired is computed as


follows:
Fair value of identifiable assets
2,200,000
Acquisition-date fair value of inventory not
transferred to DIAPHANOUS
( 180,000)
Adjusted fair value of identifiable assets acquired
3,020,000
Fair value of liabilities assumed
(1,800,000)
Adjusted fair value of net identifiable assets acquired 1,220,000
Goodwill (gain on bargain purchase) is computed as follows:
2,100,000
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,100,000
Total
(1,220,000)
Fair value of net identifiable assets acquired
880,000
Goodwill
9. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment
2,000,000
Payment for the settlement of pre-existing relationship
(off-market value)

Consideration transferred on the business


combination

( 160,000)
1,840,000

The fair value of net identifiable assets acquired is computed as


follows:
Fair value of SLAVEs identifiable assets
3,200,000
Identifiable intangible asset on reacquired rights
80,000
Carrying amount of asset related to the reacquired
rights prepayment

Adjusted fair value of identifiable assets acquired


Fair value of liabilities assumed
Fair value of net identifiable assets acquired

( 100,000)
3,180,000
( 1,800,000)
1,380,000

Goodwill (gain on bargain purchase) is computed as follows:


(1) Consideration transferred
1,840,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
1,840,000
Fair value of net identifiable assets acquired
(1,380,000)

27

Goodwill

460,000

10. Solution:
Because the settlement of the pre-existing relationship is treated as a
separate transaction, the amount attributed to the settlement loss
(i.e., P180,000) shall be accounted for as payment for the
settlement of the pre-existing relationship. Therefore, the adjusted
consideration transferred on the business combination is
P1,820,000 (P2M P180,000).
The at-market value of P140,000 shall be subsumed in goodwill
because there is no reacquired right.
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred
1,820,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
1,820,000
Fair value of net identifiable assets acquired
(1,400,000)
Goodwill
420,000
11. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment
2,000,000
Payment for the settlement of pre-existing
relationship (fair value)
( 200,000)
Consideration transferred on the business combination
1,800,000
The settlement gain or loss is computed as follows:
Payment for the settlement of pre-existing
relationship (fair value)
200,000
Carrying amount of estimated liability on pending lawsuit ( 260,000)
Settlement gain
60,000
There is gain because the liability is settled for a lower amount.
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred
1,800,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
1,800,000
Fair value of net identifiable assets acquired
(1,400,000)

28

Goodwill

400,000

12. Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment
2,000,000
Fair value of contingent consideration
20,000
Consideration transferred on the business
2,020,000
combination
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred
2,020,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
2,020,000
Fair value of net identifiable assets acquired
(1,400,000)
Goodwill
620,000
13. Solution:
The consideration transferred on the business combination is
computed as follows:
Fair value of shares issued
2,000,000
Fair value of contingent consideration
180,000
Consideration transferred on the business
2,180,000
combination
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred
2,180,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
2,180,000
Fair value of net identifiable assets acquired
(1,400,000)
Goodwill
780,000
14. Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired
3,200,000
Fair value of liabilities assumed
Fair value of contractual contingent liability assumed
Fair value of contractual contingent liability assumed

29

1,800,000
20,000
60,000

Fair value of noncontractual contingent liability assumed

100,000

Total fair value of liabilities assumed

1,980,000

Fair value of net identifiable assets acquired

1,220,000

Goodwill (gain on bargain purchase) is computed as follows:


2,000,000
(1) Consideration transferred
160,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,160,000
Total
(1,220,000)
Fair value of net identifiable assets acquired
940,000
Goodwill
15. Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired
Fair value of liabilities assumed

3,200,000
1,800,000

Fair value of contractual contingent liability

assumed
Fair value of net identifiable assets
acquired

200,000

(2,000,000)
1,200,000

Goodwill (gain on bargain purchase) is computed as follows:


2,000,000
(1) Consideration transferred
160,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,160,000
Total
(1,200,000)
Fair value of net identifiable assets acquired
960,000
Goodwill

30

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