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Chapter 14
Business Combinations (Part 1)
PROBLEM 14-1: TRUE OR FALSE

1. FALSE 6. TRUE
2. FALSE 7. FALSE
3. FALSE 8. TRUE
4. TRUE 9. TRUE
5. FALSE 10. TRUE
PROBLEM 14-2: THEORY

1. A 6. B 11. C 16. B
2. C 7. B 12. A 17. C
3. D 8. E 13. D 18. C
4. D 9. C 14. C 19. C
5. A 10. B 15. D 20. D

1. A 6. D
2. A 7. B
3. B 8. B
4. D 9. A
5. C 10. D
PROBLEM 14-4: THEORY & COMPUTATIONAL

1. A
2. D
3. D
4. Solution:
Consideration transferred 12,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 12,000,000
Fair value of net identifiable assets acquired (11.5M – 2K) (11,498,000)
Goodwill 502,000
1
5. Solutions:
Requirement (a):
Consideration transferred 800,000
NCI in the acquiree 202,000
Total 1,002,000
FV of net identifiable assets acquired (1.02M – 4K) (1,016,000)
Gain on bargain purchase (14,000)
Requirement (b):
NCI in the acquiree [(800K ÷ 80%) x 20%] 200,000
Total 1,000,000
Fair value of net identifiable assets acquired (1,016,000)
Requirement (c):
NCI in the acquiree (1,016,000 x 20%) 203,200
Total 1,003,200
6. Solution:
Finder’s fees 10,000
Professional fees of consultants 50,000
General administrative costs 30,000
Total amount to be expensed 90,000
7. Solution:
Publishing title 2,000
R&D costs 80,000
Patent 50,000
Net identifiable assets acquired 132,000
8. Solution: (1M – 800K) = 200,000
2
9. A
10. Solution: [1M – (800K – 100K)] = 300,000
11. Solutions:
Requirement (a): full PFRS
Total 1,200,000
Fair value of net identifiable assets acquired (800,000)
Goodwill 400,000
Requirement (b): PFRS for SMEs

Purchase cost 1,000,000
Direct costs 100,000
Total 1,100,000
Interest in net identifiable assets acquired (800K x 75%) (600,000)
Goodwill 500,000
PROBLEM 14-5: MULTIPLE CHOICE: COMPUTATIONAL

1. A [300,000 – (220,000 + 60,000)] = 20,000
2. B [860,000 – (840,000 – 140,000)] = 160,000
3. C [(15 x 250,000) – (3,000,000 + 400,000)] = 350,000
4. B (250,000 x 50) – (10,750,000 + 500,000 + 225,000 + 365,000) =

12,500,000 – 11,840,000 = 660,000
5. A
Solution:
NCI in the acquiree (200,000 x 25% x 18.50) 925,000
Total 3,775,000
Fair value of net identifiable assets acquired (3,650,000)*
Goodwill 125,000
*(3,000,000 + 200,000 + 150,000 + 300,000) = 3,650,000
6. D [275,000 – (550,000 – 200,000 + 60,000)] = (135,000)
7. A (2,000,000 – 1,600,000) = 400,000 goodwill
3
8. C ₱2,000,000 Net proceeds – ₱2,800,000 Carrying amount = 800,000
loss on disposal
9. A
10. D
PROBLEM 14-6: EXERCISES: COMPUTATIONAL

1. Solutions:
Requirement (a): Proportionate share
Consideration transferred [250K + (10,000 x 2)] 270,000
NCI in the acquiree (205,000 x 5%) 10,250
Total 280,250
Goodwill 75,250
Requirement (b): Fair value

Consideration transferred [250K + (10,000 x 2)] 270,000
Total 281,500
Goodwill 76,500
4
Chapter 15
PROBLEM 15-1: TRUE OR FALSE

1. FALSE 6. FALSE
2. TRUE 7. TRUE
3. TRUE 8. TRUE
4. FALSE 9. FALSE
5. TRUE 10. TRUE

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

1. Solutions:
Requirement (a): (2,000,000 ÷ 100) = 20,000 shares
Requirement (b):
Investment in subsidiary (20,000 sh. x 100) 2,000,000
Ordinary shares (20,000 sh. x 80) 1,600,000
Share premium 400,000
2. Solution:
Consideration transferred (squeeze) 800,000
NCI in the acquiree -
Total 800,000
Goodwill (start) -
No. of shares issued by Point (800,000 ÷ ₱40) 20,000

Outstanding shares of Finger (40,000 ÷ ₱4) 10,000
Ratio 2:1
3. C
1
4. Solutions:
Requirement (a):
Consideration transferred (50,000 sh. x ₱7) 350,000
Non-controlling interest in the acquiree (665,000 x 40%*) 266,000
Previously held equity interest in the acquiree** 70,000
Total 686,000
Goodwill 21,000
* (10,000 + 50,000) ÷ 100,000 = 60% controlling interest; (100% - 60%) =

40% NCI
** (10,000 sh. x ₱7) = 70,000
Requirement (b):
7/1/20x2
Investment in subsidiary (50,000 x 7) 350,000
Cash 350,000
to record the newly acquired shares
Held for trading securities [(7 – 5) x 10,000] 20,000

Unrealized gain – P/L 20,000
to remeasure the previously held equity interest
Investment in subsidiary 70,000

Held for trading securities (50,000 + 20,000) 70,000
to reclassify the previously held equity interest
5. Solution:
Consideration transferred -
Non-controlling interest in the acquiree (200K x 100%) 200,000
Total 200,000
Goodwill -
6. D
7. Solutions:
Requirement (a):
800,000 – (1,200,000 – 300,000) = (100,000) negative goodwill
Requirement (b):
800,000 – (1,200,000 – 200,000 + 20,000 – 300,000) = 80,000 goodwill
2
Requirement (c):
Feb. Goodwill 80,000
1,
Retained earnings* 100,000
20x2
Intangible asset 180,000
to record the adjustment to the provisional
amount assigned to the building
Feb. Accumulated amortization 7,500
1,
20x2
Retained earnings 7,500
to record the adjustment to the 20x1
amortization
*This represents the reversal of the negative goodwill recognized in

profit or loss in 20x1.
**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
8. Solution:
The consideration transferred on the business combination is computed as
follows:
Cash payment on business combination 800,000
Reimbursement for consultant fee (30,000)
Patent (50,000)
Consideration transferred on the business combination 720,000
720,000 – (1,200,000 – 700,000) = 220,000 goodwill
Notes:
 The reimbursement for the consultant fee is an acquisition-related
cost. It shall be accounted for as a separate transaction (i.e.,
expensed).
 The patent is not transferred to the previous owners of Star but
rather retained by the combined entity after the business
combination.

1. D
Solution:
Consideration transferred (squeeze) 2,000,000
Total 2,000,000
3
Goodwill (start) -
(2,000,000 ÷ 20,000 shares) = 100 per share
2. C
Solution:
Investment in subsidiary (consideration transferred) 2,000,000
Ordinary shares (squeeze) 1,600,000
(1,600,000 ÷ 20,000 shares) = 80 per share
3. B
Solution:
Consideration transferred (squeeze) 800,000
Total 800,000
Goodwill (start) -
Outstanding shares of Finger (40,000 ÷ ₱4) 10,000

Ratio 2:1
No. of shares issued by Point (10,000 sh. x 2) 20,000
(800,000 consideration transferred ÷ 20,000 sh. issued by Point) = 40
4. A
5. B
6. C
7. D
8. C
Solution:
The consideration transferred on the business combination is
computed as follows:
Cash payment on business combination 4,000,000
Additional payment to subsidiary’s 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
4
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:

Total 4,200,000
Goodwill 1,760,000
9. D
Solution:
The settlement loss to is computed as follows:
Settlement loss before adjustment (“off-market” value) 320,000
Carrying amount of deferred liability (240,000)
Adjusted settlement loss 80,000

Cash payment 4,000,000
Payment for the settlement of pre-existing relationship
(‘off-market’ value) (320,000)
The fair value of net identifiable assets acquired is computed as

follows:
Fair value of subsidiary’s identifiable assets 6,400,000
Intangible asset – reacquired right 160,000
Carrying amount of asset related to the reacquired rights –
(200,000)
prepayment
Adjusted fair value of identifiable assets acquired 6,360,000
Fair value of liabilities assumed (3,600,000)
Fair value of net identifiable assets acquired 2,760,000

Total 3,680,000
Goodwill 920,000
5
10. A
Solution:
(360,000)
(‘off-market’ value)

Total 3,640,000
Goodwill 840,000
11. B
Solution:
The settlement gain or loss is computed as follows:
400,000
(fair value)
Carrying amount of estimated liability on pending lawsuit (520,000)
Settlement gain 120,000

(400,000)
(fair value)

Total 3,600,000
Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)
Goodwill 800,000
12. C
Solution:
6
Fair value of contingent consideration 40,000

Total 4,040,000
Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)
Goodwill 1,240,000
13. 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) (20,000)
Dec. Unrealized loss on change in fair value – P/L 20,000

31, Liability for contingent consideration 20,000
20x1 to recognize loss on change in fair value of liability
assumed for contingent consideration
14. B
Solution:
Dec. Liability for contingent consideration 40,000
31, Gain on extinguishment of liability – P/L 40,000
20x1
15. C
Solution:
Fair value of shares issued (10,000 sh. x ₱400 per sh.) 4,000,000
Fair value of contingent consideration 360,000

Total 4,360,000
7
Fair value of net identifiable assets acquired (6.4M –3.6M) (2,800,000)
Goodwill 1,560,000
16. D
17. C
Solution:
Dec. Share premium – contingent consideration 360,000
31,
20x1
18. B
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired 6,400,000

Fair value of liabilities assumed 3,600,000 -
Fair value of contingent liability assumed 400,000 (4,000,000)
Fair value of net identifiable assets acquired 600,000

Non-controlling interest in the acquiree 320,000
Total 4,320,000
Goodwill 1,920,000
PROBLEM 14-5: EXERCISES: COMPUTATIONAL

1. Solution:
DR: Investment in sub (31,000 x 15) ₱465,000
CR: Common stock (par) (31,000 x 10) ₱310,000
CR: APIC ₱155,000
2. Solution:
Carrying amount of investment in associate = 400K + (100K x 30%) – (30K x
30%) = 421,000.
Fair value of existing investment on acquisition date = (1,012,000 ÷ 45%) x

30% = 674,667
(674,667 – 421,000) = 253,667
3. Solutions:
Requirement (a):
8
Consideration transferred (80,000 sh. x ₱8) 640,000
Non-controlling interest in the acquiree (665,000 x 10%*) 66,500
Previously held equity interest in the acquiree** 80,000
Total 786,500
Goodwill 121,500
* (10,000 + 80,000) ÷ 100,000 = 90% controlling interest;

(100% - 90%) = 10% NCI
** (10,000 sh. x ₱8) = 70,000
Requirement (b):
7/1/20x2
Investment in subsidiary (80,000 x 8) 640,000
Cash 640,000
to record the newly acquired shares
Investment in FVOCI securities [(8 – 5) x 10,000] 30,000

Unrealized gain – OCI 30,000
to remeasure the previously held equity interest
Unrealized gain – OCI (10,000 x 8) – 30,000 50,000

Retained earnings 50,000
to transfer the accumulated fair value change to retained earnings
Investment in subsidiary 80,000

Investment in FVOCI securities 80,000
to reclassify the previously held equity interest
9
Chapter 16

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

1. C
2. D
3. A
4. Solution:
Gamer Player
Co. Co. Total
Fair value of net identifiable assets 500,000 380,000
Average annual earnings 40,000 39,000
Industry normal earnings (5% of net
assets) 25,000 19,000
Excess earnings 15,000 20,000
Divide by: Capitalization rate 20% 20%
Estimated goodwill 75,000 100,000 175,000
5. Solution:
Gamer Player
Co. Co. Total
Estimated goodwill 75,000 100,000
Total contributions 575,000 480,000 1,055,000
1
Distribution ratio
(575/1,055); (480/1,055) 54.50% 45.50%
Total no. of shares to be distributed 100,000 100,000
Shares to be distributed 54,500 45,500 100,000
6. Answer: Gamer Co.
Since the new entity, App Corporation, will issue equity interests to both
Gamer and Player, the acquirer is most likely the entity that receives the
most voting rights after the business combination (i.e., Gamer Co. –
54,500 shares or 54.50% interest).
However, if the newly created entity will transfer cash and other
considerations and assume liabilities to acquire both Gamer and Player, the
acquirer would be the newly created entity.
7. Solution:
Accounting acquiree (CBA Co.) issues shares – Legal form:
Actual %
CBA's currently issued shares 10,000 20%
Shares to be issued to ZYX (5 sh. x 8,000 sh.) 40,000 80%
Total shares of CBA Co. after the combination 50,000
Accounting acquirer (ZYX, Inc.) issues shares – Substance:

Reverse %
ZYX's currently issued shares 8,000 80%
Shares to be issued to CBA's shareholders to enable
them to have the same interest in ZYX, Inc.
[(8,000 ÷ 80%) x 20%] 2,000 20%
Total 10,000
As a result, the fair value of the consideration effectively transferred

by ZYX and the group’s interest in CBA is ₱800,000 (2,000 shares of
ZYX, Inc. with a fair value per share of ₱400).

Consideration transferred (2,000 x ₱400) 800,000
Total 800,000
Goodwill 200,000
2
1. A
Solution:
King Kong
Co. Co. Total
Average annual earnings 100,000 160,000
Normal earnings (10% of net assets) 60,000 80,000
Excess earnings 40,000 80,000
Estimated goodwill 200,000 400,000 600,000
Total contributions 800,000 1,200,000 2,000,000
Distribution ratio 40.00% 60.00%
Total number of shares to be distributed 40,000 40,000
Shares to be distributed 16,000 24,000 40,000
2. A
Solution:
Da Co. De Co. Di Co. Total
Net identifiable assets 320,000 480,000 800,000
Average annual earnings 48,000 48,000 64,000
Normal earnings
(6% of Net assets) 19,200 28,800 48,000
Excess earnings 28,800 19,200 16,000
Divide by: Cap. rate 20% 20% 20%
Estimated goodwill 144,000 96,000 80,000 240,000
Net identifiable assets 320,000 480,000 800,000
Total contributions 464,000 576,000 880,000 1,920,000
Distribution ratio 24.17% 30.00% 45.83% 100%
3. C
Solution:
Gamer Co. Player Co.
Divide by: Par value per preference share 20 20
Number of preference shares to be issued 25,000 19,000
4. A
Solution:
Gamer Co. Player Co.
Average actual earnings 40,000 39,000
3
Total par value of shares to be issued 800,000 780,000
Excess 300,000 400,000
Divide by: Par value per ordinary share 10 10
Number of ordinary shares to be issued 30,000 40,000
5. A
Solution:
Gamer Co. Player Co. Total
Average actual earnings 40,000 39,000 79,000
Divide by: Capitalization rate 5% 5% 5%
Consideration transferred 800,000 780,000 1,580,000
Fair value of net identifiable assets 500,000 380,000 880,000
Goodwill 300,000 400,000 700,000
6. A
Solution:
Gamer Co. Player Co. Total
No. of ordinary shares to be issued 30,000 40,000 70,000
Interest in voting rights 42.86% 57.14% 100%
Since the new entity, App Corporation, will issue equity interests to both
Gamer and Player, the acquirer is most likely the entity that receives the
most voting rights after the business combination (i.e., Gamer Co.).
However, if the newly created entity will transfer cash and other
considerations and assume liabilities to acquire both Gamer and Player, the
acquirer would be the newly created entity.
7. B
Solution:
Analyses:
 ZYX, Inc. lets itself be acquired (legal form) for it to gain control
over the legal acquirer (substance).
Legal form of the agreement: (ZYX lets itself be acquired)

CBA Co. issues 40,000 ordinary shares to ZYX, Inc.’s shareholders in
exchange for all of ZYX, Inc.’s 8,000 shares outstanding.
Substance of the agreement: (ZYX gains control over legal acquirer)

After the combination, ZYX, Inc. gains control because it now owns
80% of CBA Co.
4
Accounting acquiree (CBA Co.) issues shares – Actual:
CBA's currently issued shares 10,000 20%
Shares to be issued to ZYX (5 sh. x 8,000 sh.) 40,000 80%
Total shares of CBA Co. after the combination 50,000
Accounting acquirer (ZYX, Inc.) issues shares – Reverse:

ZYX's currently issued shares 8,000 80%
Shares to be issued to CBA's shareholders to enable
them to have the same interest in ZYX, Inc.
[(8,000 ÷ 80%) x 20%] 2,000 20%
Total 10,000
The consideration transferred is computed as follows:

Shares of ZYX effectively transferred to CBA 2,000
Multiply by: Fair value per share of ZYX’s shares 800
Fair value of consideration effectively transferred 1,600,000

Total 1,600,000
Fair value of net identifiable assets acquired (6.4M –
5.2M) (1,200,000)
Goodwill 400,000

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Chapter 14

Business Combinations (Part 1)

PROBLEM 14-1: TRUE OR FALSE

PROBLEM 14-2: THEORY

PROBLEM 14-3: THEORY

PROBLEM 14-4: THEORY & COMPUTATIONAL

8. Solution: (1M – 800K) = 200,000

10. Solution: [1M – (800K – 100K)] = 300,000

Requirement (b): PFRS for SMEs

PROBLEM 14-5: MULTIPLE CHOICE: COMPUTATIONAL

2. B [860,000 – (840,000 – 140,000)] = 160,000

3. C [(15 x 250,000) – (3,000,000 + 400,000)] = 350,000

4. B (250,000 x 50) – (10,750,000 + 500,000 + 225,000 + 365,000) =

*(3,000,000 + 200,000 + 150,000 + 300,000) = 3,650,000

6. D [275,000 – (550,000 – 200,000 + 60,000)] = (135,000)

7. A (2,000,000 – 1,600,000) = 400,000 goodwill

PROBLEM 14-6: EXERCISES: COMPUTATIONAL

Requirement (b): Fair value

Business Combinations (Part 2)

PROBLEM 15-1: TRUE OR FALSE

PROBLEM 15-2: THEORY

PROBLEM 15-3: THEORY & COMPUTATIONAL

No. of shares issued by Point (800,000 ÷ ₱40) 20,000

* (10,000 + 50,000) ÷ 100,000 = 60% controlling interest; (100% - 60%) =

Held for trading securities [(7 – 5) x 10,000] 20,000

Investment in subsidiary 70,000

*This represents the reversal of the negative goodwill recognized in

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

Consideration transferred on the business combination 720,000

720,000 – (1,200,000 – 700,000) = 220,000 goodwill

PROBLEM 15-4: MULTIPLE CHOICE: COMPUTATIONAL

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

(1,600,000 ÷ 20,000 shares) = 80 per share

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

(800,000 consideration transferred ÷ 20,000 sh. issued by Point) = 40

The fair value of net identifiable assets acquired is computed as

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

The consideration transferred on the business combination is

The fair value of net identifiable assets acquired is computed as

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

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

The consideration transferred on the business combination is

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

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

Dec. Unrealized loss on change in fair value – P/L 20,000

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

Fair value of identifiable assets acquired 6,400,000

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

PROBLEM 14-5: EXERCISES: COMPUTATIONAL

Fair value of existing investment on acquisition date = (1,012,000 ÷ 45%) x

(674,667 – 421,000) = 253,667

* (10,000 + 80,000) ÷ 100,000 = 90% controlling interest;

** (10,000 sh. x ₱8) = 70,000

Investment in FVOCI securities [(8 – 5) x 10,000] 30,000

Unrealized gain – OCI (10,000 x 8) – 30,000 50,000

Investment in subsidiary 80,000

Business Combinations (Part 3)

PROBLEM 16-1: THEORY

PROBLEM 16-2: THEORY & COMPUTATIONAL

Estimated goodwill 75,000 100,000 175,000

6. Answer: Gamer Co.

Accounting acquirer (ZYX, Inc.) issues shares – Substance:

As a result, the fair value of the consideration effectively transferred