PROBLEM 33-9 (IAA)

High Company purchased for cash at P50 per share all 150,000 ordinary shares
outstanding of another entity.The acquiree on the date of acquisition showed net assets
with a carrying amount of P6,000,000.

The fair value of the property, plant and equipment on same date was P800,000 in excess
of carrying amount.

What amount should be recorded as goodwill?

Acquisition cost (150,000 x P50) 7,500,000

Fair value of net assets acquired (6,800,000)
Goodwill 700,000

Carrying amount of net assets 6,000,000

Excess fair value of property, plant and equipment 800,000
Fair value of net assets acquired 6,800,000

PROBLEM 33-10 (IAA)

Flair Company purchased another entity for P8,000,000 at year-end. The carrying
amount of the acquiree’s net assets on the date of purchase is P6,200,000.

An analysis indicated that the fair value of the acquiree’s tangible assets exceeded the
carrying amount by P600,000, and the fair value of identifiable intangible assets
exceeded carrying amount by P450,000.

What amount of goodwill should be recognized?

Acquisition cost 8,000,000

Net assets at fair value (6,200,000 + 600,000 + 450,000) 7,250,000
Goodwill 750,000

PROBLEM 33-11 (IAA)

At the current year-end, Clever Company purchased for P4,000,000 cash all of the
outstanding ordinary shares of another entity when the acquiree showed net assets of
P3,200,000. The acquiree revealed the following fair value and carrying amount of assets
and liabilities:

Carrying amount Fair value

Property, plant and equipment, net 5,000,000 5,750,000
Other assets 500,000 0
Long-term debt 3,000,000 2,800,000

What amount should be reported as goodwill?

Carrying amount of net assets 3,200,000

Undervaluation of propety, plant and equipment 750,000
Overvaluation of other assets ( 500,000)
Overvaluation of long-term debt 200,000
Fair value of net assets acquired 3,650,000
Acquisition cost 4,000,000
Fair value of net assets acquired (3,650,000)
Goodwill 350,000

PROBLEM 33-12 (IAA)

Guenivere Company is planning to sell the business to new interests. The cumulative net
earnings for the past five years amounted to P16,500,000 including expropriation loss of
P1,500,000.

The normal rate of return is 20%. The fair value of net assets of the entity at current year-
end was P10,000,000.

What is the amount of goodwill if:

1. Excess earnings are purchased for 5 years?

Cumulative earnings 16,500,000

Add back expropriation loss 1,500,000
Adjusted cumulative earnings 18,000,000

Average annual earnings (18,000,000 / 5 years) 3,600,000

Normal earnings (20% x 10,000,000) (2,000,000)
Excess earnings 1,600,000

Goodwill (1,600,000 x 5 years) 8,000,000

2. Excess earning are capitalized at 25%?

Excess earnings 1,600,000

Divide by: Capitalization rate 25%
Goodwill 6,400,000

3. Annual average earnings are purchased for 3 years?

Goodwill (3,600,000 x 3 years) 10,800,000

4. Annual average earnings are capitalized at 25%

Average annual earnings 3,600,000

Divide by: Capitalization rate 25%
Net assets including goodwill 14,400,000
Net assets before goodwill 10,000,000
Goodwill 4,400,000

5. Excess earnings are discounted at 12% for 5 years?

The PV of an ordinary annuity of 1 for 5 years at 12% is 3.60.

Excess earnings 1,600,000

Multiply by PV factor 3.60
Goodwill 5,760,000
PROBLEM 33-13 (IAA)
Meek Company is considering the acquisition of another entity which provided the
following data:

Shareholder’s equity 5,000,000

Earnings for prior three years 1,500,000
Normal rate of return 8%

The acquiree has a valuable patent which is not recorded. If the entity is sold, the patent
would be transferred to the buyer for P500,000. Other assets are properly appraised. The
patent has a remaining life of 5 years.

The earnings of the entity are expected to increase 10% more than the average earnings
of the past three years before taking into consideration the amortization of the patent cost.

1. What amount should be reported as average future earnings for goodwill

computation?

Average historical earning (1,500,000 / 3) 500,000

Expected income (500,000 x 10%) 50,000
Total 550,000
Amortization (500,000 / 5) ( 100,000)
Average earnings for 5-year period 450,000

2. What amount should be reported as goodwill if average future earnings are

capitalized at 8%?

Average earnings 450,000

Divide by: Capitalization rate 8%
Net assets, including goodwill or purchase price 5,625,000
Net assets, excluding goodwill (5,000,000)
Goodwill 625,000

3. What amount should be reported as goodwill if average excess earnings are

capitalized at 10%?

Average excess earnings 450,000

Normal earnings (5,000,000 x 8%) (400,000)
Average excess earnings 50,000
Divide by: Capitalization rate 10%
Goodwill 500,000

4. What amount should be reported as goodwill if average excess earnings are

discounted at 10% for 4 years?

Average excess earnings 50,000

Multiply by the present value of ordinary an ordinary
annuity of 1 for 4 years at 10% 3.17
Goodwill 158,500
PROBLEM 33-14 (IAA)
Lowland Company assembled the following data relative to a certain entity in
determining the amount to be paid for net assets and goodwill:

Assets at fair value before goodwill 2,600,000

Liabilities 900,000
Shareholder’s equity 1,700,000

Net earnings after elimination of unusual or infrequent items:

2018 200,000
2019 230,000
2020 300,000
2021 250,000
2022 270,000

Goodwill is measured by capitalizing average earnings at 10% with normal rate of return
at 8%.

What amount should be reported as acquisition cost of the acquiree?

2023 200,000
2024 230,000
2025 300,000
2026 250,000
2027 270,000
Cumulative net earnings 1,250,000

Average earnings (1,250,000 / 5) 250,000

Divide by: Capitalization rate 10%
Net assets including goodwill 2,500,000
Shareholder’s equity 1,700,000
Goodwill 800,000

Net assets before goodwill 1,700,000

Goodwill 800,000
Acquisition cost 2,500,000

PROBLEM 33-15 (PHILCPA Adapted)

Sarah Company is interested in computing the goodwill to be recognized in the purchase
of ABC Company in January 2023. The following information was taken from the
records of ABC Company:
Net Income Net assets
2018 360,000 1,600,000
2019 388,000 1,800,000
2020 288,000 1,900,000
2021 380,000 2,000,000
2022 394,000 2,100,000
1,810,000 9,400,000
Goodwill is measured by capitalizing excess earnings at 40% with normal return on
average net assets at 10%.

What amount should be recorded as acquisition cost of ABC Company?

Average net assets (9,400,000 /5) 1,880,000

Average annual earnings (1,810,000 / 5) 362,000

Normal earnings (10% x 1,880,000) (188,000)
Excess earnings 174,000
Divide by: Capitalization rate 40%
Goodwill 435,000

Net assets at fair value - 2022 2,100,000

Goodwill 435,000
Total acquisition cost 2,535,000