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SOL. MAN. Chapter 2 BUS. COM. PART 2

Business Combinations (Manila Central University)

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Chapter 2
Business Combinations (Part 2)
PROBLEM 1: TRUE OR FALSE
1. FALSE – The transaction is a business combination
effected through exchanges of equity interests.
2. TRUE
3. FALSE - ₱100, the total increase in share capital and
share premium
4. FALSE – (₱100 consideration transferred, equal to total
increase in share capital and share premium, minus
₱80 fair value of net assets) = ₱20 goodwill
5. TRUE
6. FALSE
7. TRUE – The 20% interest is most likely to have been
classified as Investment in associate. Accordingly, the
remeasurement gain of ₱10 (₱40 fair value - ₱30
carrying amount) is recognized in profit or loss.
8. TRUE – (100 CT + 60 NCI + 40 PHEI) – 180 = 20
goodwill
9. FALSE
10. TRUE

PROBLEM 2: TRUE OR FALSE

1. FALSE – maximum of 12 months from acquisition date
2. TRUE
3. FALSE [100 – (170 – 70 provisional amt. + 60 fair value –
80)] = 20
4. TRUE
5. TRUE
6. TRUE
7. TRUE
8. TRUE
9. TRUE (100 + 20 fair value of contingent consideration) – (170 –
80) = 30
10. TRUE – Goodwill is not affected by fair value changes
that are not measurement period adjustments.

PROBLEM 3: FOR CLASSROOM DISCUSSION

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1. Solution:

Step 1
4,200,0
Consideration transferred (squeeze) 00
Non-controlling interest in the acquiree -
Previously held equity interest in the
acquiree -
4,200,0
Total 00
Fair value of net identifiable assets acquired (4,000,0
(given) 00)
Goodwill (start) 200,000

Step 2
₱4.2M consideration transferred ÷ ₱100 fair value per
share = 42,000 shares issued

2. Solution:
Consideration transferred 300,000
Non-controlling interest in the acquiree (690K x
40%*) 276,000
Previously held equity interest in the acquiree 138,000
Total 714,000
Fair value of net identifiable assets acquired (690,000)
Goodwill 24,000
*100% - (20% + 40%) = 40%

3. Solution:
Consideration transferred -
Non-controlling interest in the acquiree (1.8M x
100%) 1,800,000
Previously held equity interest in the acquiree -
Total 1,800,000
(1,800,00
Fair value of net identifiable assets acquired 0)
Goodwill -

4. Solution:

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Provisiona
l Adjusted
Consideration transferred 2,000,000 2,000,000
NCI - -
Previously held equity
- -
interest
Total 2,000,000 2,000,000
Fair value of net identifiable (1,900,00
(1,980,000)
assets 0)(a)
Goodwill 20,000 100,000

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

The new information obtained on July 1, 20x2 is

not a measurement period adjustment because it does
not relate to facts and circumstances that have existed
as at the acquisition date. This is accounted for as a post-
combination event under PFRS 9.

Apr. Goodwill 80,000

1,
Machine 80,000
20x2
Apr. (b)
Accumulated depreciation 278
1,
Retained earnings 278
20x2

(b)
Depreciation based on:
 provisional amount: (220K ÷ 6) x 2/12 = 6,111
 fair value: (140K ÷ 4) x 2/12 = 5,833
 Decrease in accumulated depreciation: (6,111 –
5,833) = 278

5. Solution:
720,00
Consideration transferred (800K – 30K – 50K) 0
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 720,000
Fair value of net identifiable assets acquired (600,000)
120,
Goodwill 000

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 The reimbursement for the appraisal fees is an

acquisition-related cost. This is expensed.
 The trade secret does not qualify as ‘consideration
transferred’ because it is retained in the combined
entity after the business combination.

6. Solution:

Consideration transferred (2M – 200K ‘off-market’ 1,800,00

value) 0
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
1,800,0
Total 00
Fair value of net identifiable assets acquired
(4M + 100K intangible asset on reacquired rt. – 150K (1,750,0
franchise - 2.2M) 00)
Goodwill 50,000

Journal entries
Jan. Identifiable assets acquired (4M + 100K 3,950,0
1, – 150K)
00
20x Goodwill
1 50,000 2,200,
Liabilities assumed 000
Cash (2M – 200K) 1,800,
to record the business
000
combination
Jan. Contract liability 230,00
1,
Cash 0 200,00
20x
1 Settlement gain 0
to record the effective 30,000
settlement of pre-existing relationship as
a separate transaction from business
combination transaction

7. Solutions:

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Requirement (a):
Consideration transferred 2,280,00
(10,000 sh. x ₱200) + 280K contingent consideration 0
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
2,280,00
Total 0
(1,900,0
Fair value of net identifiable assets acquired 00)
Goodwill 380,000

Requirement (b):
Dec.
31, No entry
20x1
Jan. Share premium – contingent 280,00
14, consideration 0 40,000
20x2
Share capital (2,000 x ₱20 par) 240,00
Share premium (squeeze) 0
to record the issuance of 2,000
additional shares

Requirement (c):
Dec. Share premium – contingent 280,0
31, consideration 00 280,00
20x1
Share premium 0

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PROBLEM 4: EXERCISES

1. Solutions:
Requirement (a):
ABC Combined Increa
Co. entity se
176,00
Share capital (₱20 par) 800,000 976,000
0

176,000 ÷ 20 par = 8,800 shares

Requirement (b):

Consideration transferred (a) 968,000

Non-controlling interest in the acquiree -
Previously held equity interest in the
acquiree -
Total 968,000
Fair value of net identifiable assets acquired (800,000
(b)
)
168,00
Goodwill 0

(a)
Combined Increase
ABC Co. entity
Share capital 800,000 976,000
Share
premium 300,000 1,092,000
Totals 1,100,000 2,068,000 968,000

(b)
ABC Co. Combined Increase
entity
Identifiable 1,400,000
assets 2,200,000 3,600,000
Liabilities 700,000 1,300,000 600,000
Fair value of net identifiable assets 800,000
acquired

Requirement (c):
Retained earnings = 400,000

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2. Solutions:

Requirement (a):
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
(665,000
Fair value of net identifiable assets acquired )
Goodwill 121,500

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

(100% - 90%) = 10% NCI

** (10,000 sh. x ₱8) = 80,000

Requirement (b):

7/1/20x2
Investment in subsidiary (80,000 x 8) 640,000
Cash 640,000
to record the newly acquired shares

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

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

Investment in subsidiary 80,000

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

3. Solution:

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Requirement (a):
Provisiona
l Adjusted
Consideration transferred 1,800,000 1,800,000
NCI - -
Previously held equity
- -
interest
Total 1,800,000 1,800,000
Fair value of net identifiable (1,600,00
(1,700,000)
assets 0)(a)
Goodwill 100,000 200,000

(a)
(2.6M – 300K provisional amount + 200K fair value - .9M)

Requirement (b):
Aug. Goodwill 100,000
31,
Trademark 100,000
20x2

4. Solution:

Requirement (a):

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Settlement loss (360K – 170K ‘at-market’ = 190 ‘off- 190,0

market’) 00
Carrying amount of related asset or liability
-
recognized
190,0
Adjusted settlement loss 00

Jan. Settlement loss 190,00

1,
Cash 0 190,00
20x
1 0

Requirement (b):
Consideration transferred (2.2M – 190K ‘off- 2,010,00
market’ value) 0
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
2,010,0
Total 00
Fair value of net identifiable assets acquired (1,800,0
(3.6M – 1.8M) 00)
210,00
Goodwill 0

The ₱170,000 “at-market” value is subsumed in goodwill

and not recognized as intangible asset because there is
no reacquired right.

5. Solution:

Requirement (a):
Consideration transferred
(10,000 sh. x ₱200) + ₱280K contingent 2,280,00
consideration 0
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
2,280,0
Total 00
(1,920,0
Fair value of net identifiable assets acquired 00)
360,00
Goodwill 0

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Requirement (b):
De Unrealized loss – P/L (a) 120,0
c.
Liability for contingent 00 120,0
31,
20x consideration 00
1
Jan. Liability for contingent 400,0
14,
consideration 00 400,0
20x
2 Cash 00

(a)
Carrying amount of contingent consideration - 280,00
12/31/20x1 0
400,00
Fair value – 12/31/20x1
0
(120,0
Increase in fair value of liability (loss)
00)

Requirement (c):
De Liability for contingent 280,0
c.
consideration 00 280,0
31,
20x Gain on extinguishment of 00
1 liability – P/L

PROBLEM 5: MULTIPLE CHOICE - THEORY

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

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PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. D
Solution:
Consideration transferred (squeeze) 2,000,000
NCI in the acquiree -
Previously held equity interest in the
acquiree -
Total 2,000,000
Fair value of net identifiable assets
(2,000,000)
acquired
Goodwill (start) -

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

2. C
Solution:
 2M consideration transferred – 400K increase in share
premium = 1.6M increase in share capital;
 1.6M ÷ 20,000 shares = 80

3. B
Solution:
Outstanding shares of Finger (₱40,000 ÷ ₱4 par)
10,000
Ratio 2:1
No. of shares issued by Point (10,000 sh. x 2)
20,000

Consideration transferred (squeeze) 800,000

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

(800,000 consideration transferred ÷ 20,000 sh. issued by

Point) = 40

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4. C
Solutions:
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
Fair value of net identifiable assets acquired (665,000)
Goodwill 21,000

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

60%) = 40% NCI
** (10,000 sh. x ₱7) = 70,000

5. C
Solution:

Provisiona
l Adjusted
Consideration transferred 800,000 800,000
NCI - -
Previously held equity
- -
interest
Total 800,000 800,000
Fair value of net identifiable (720,000
(900,000)
assets )(a)
Goodwill (Negative
(100,000) 80,000
goodwill)
(a)
(1.2M – 200K provisional amt. + 20K fair value - .3M)

Feb. Goodwill 80,000

1,
Retained earnings* 100,000
20x
2 Intangible asset 180,000
Feb. Accumulated amortization 7,500 7,
1,
Retained earnings 500
20x
2

*This represents the reversal of the negative goodwill

recognized in profit or loss in 20x1.

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**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

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