Accounting for Business Combination
1. On June 1, 20x9, Cline Co. paid P800,000 cash for the net assets of Renn Corp. The carrying
values for Renn’s assets and liabilities on June 1, are as follows:
Cash P150,000
Accounts receivable 80,000
Inventory 320,000
Goodwill 100,000
Liabilities (130,000)
Net assets P620,000
On June 1, 20x9, Renn’s accounts receivable had a fair value of P140,000. Additionally, Renn has
an unrecorded patent with an estimated fair value of P200,000. All other items were stated at
their fair values. On June 1, combined balance sheet, how much is reported for goodwill?
2. On January 1, 20x1, ABC Co. acquired all of the assets and assumed all liabilities of XYZ, Inc. As
of this date the carrying amounts and fair value of the assets and liabilities of XYZ acquired by
ABC are shown below:
Assets Carrying amounts Fair value
Petty cash fund 10,000 10,000
Receivables 200,000 120,000
Allowance for doubtful accounts (30,000) -
Inventory 520,000 350,000
Building – net 1,000,000 1,100,000
Goodwill 100,000 20,000
Total assets 1,800,000 1,600,000
Liabilities
Payables 400,000 400,000
On the negotiation for the business combination, ABC Co. incurred transaction cost amounting
to P100,000 for legal, accounting, and consultancy fee.
Required: Compute for goodwill (gain on bargain purchase) for the following cases:
a. ABC Co. paid P1,500,000 cash consideration for the assets and liabilities of XYZ, Inc.
b. ABC Co. paid P1,000,000 cash consideration for the assets and liabilities of XYZ, Inc.
3. On January 1, 20x1, ABC Co. acquired 80% of the voting shares of XYZ, Inc. On this date, XYZ’s
identifiable assets and liabilities of P1,200,000 and P400,000, respectively.
Required: Compute for goodwill (gain on bargain purchase) for the following cases:
a. ABC Co. elects the option to measure the NCI at the NCI’s proportionate share of XYZ,
Inc.’s identifiable net assets. ABC Co. paid P1,000,000 for the interest acquired in XYZ,
Inc.
b. ABC Co. elects the option to measure the NCI at fair value. The consideration transferred
is P1,000,000.
c. ABC Co. elects the option to measure the NCI at fair value. The fair value of the 20% is
determined to be P155,000. The consideration transferred is P1,000,000 for the interest
in XYZ, Inc.
4. The statement of financial position of SKY Corporation is presented below:
Current assets P195,000
Land 1,320,000
Building 660,000
Equipment 525,000
Total assets P2,700,000
Liabilities P525,000
Ordinary shares, P5 par value 900,000
Share premium 825,000
Retained earnings 450,000
Total Liabilities and Equity P2,700,000
All the assets and liabilities of SKY assumed to approximate their fair values except for land and
building. It is estimated that the land has a fair value of P2,100,000 and the fair value of the
building increased by P480,000. SNOW Corporation acquired 80% for P3,000,000.
Required: Compute for goodwill (gain on bargain purchase) for the following cases:
a. Assume that the non-controlling interest is measured at NCI’s proportionate of
identifiable net assets.
b. Assume that the non-controlling interest is measured at fair value. The fair value of NCI
is determined to be P736,500.
c. Assume that the non-controlling interest is measured at fair value.
5. On January 1, 20x1, ABC Co. acquired 15% ownership interest in XYZ, Inc. for P100,000. ABC Co.
classified the investment as 'held for trading securities' (i.e., FVPL) in accordance with PFRS 9.
On January 1, 20x4, ABC Co. acquired additional 60% ownership interest in XYZ, Inc. for
P800,000. Relevant information follows:
a. The previously held 15% interest has a carrying amount of P170,000 on December 31,
20x3 and fair value of P180,000 on January 1, 20x4.
b. XYZ's net identifiable assets have a fair value of P1,000,000.
c. ABC elected to measure the NCI at 'proportionate share'.
Requirement: Compute for the goodwill.
6. Par Company acquires 15 percent of Ser Company’s common stock for P500,000 cash and
carries the investment as a financial asset. A few months later, Par purchases another 60 percent
of Ser Company’s stock for P2,160,000. At that date, Ser Company reports identifiable assets
with a book value of P3,900,000 and a fair value of P5,100,000, and it has liabilities with a book
value and fair value of P1,900,000. The fair value of the 25% non-controlling interest in Ser
Company is P900,000.
Required: Compute for goodwill (gain on bargain purchase) for the following cases:
a. Goodwill arising on consolidation is to be valued on the proportionate basis.
b. Goodwill arising on consolidation is to be valued on the fair value basis.
Solution:
Problem 1: 100% Acquisition (Fully Owned)
I. Record and adjust the identifiable assets and liabilities of the acquiree to their fair value and
compute the net assets.
Cash P150,000
Accounts receivable 140,000
Inventory 320,000
Patent 200,000
Liabilities (130,000)
Net assets P680,000
The AR is adjusted to its FV, and the FV of the unrecorded patent is recorded.
Goodwill recorded in the book of acquiree is not recognized in business combination since It
is unidentifiable.
II. Compute for goodwill (gain on bargain purchase)
Consideration transferred 800,000
Non-controlling interest in the acquiree (NCI) -
Previously held equity interest in the acquiree -
Total 800,000
Less: Fair value of net identifiable assets acquired (680,000)
Goodwill 120,000
No NCI since it is 100% acquisition.
No indication of PHI.
Problem 2: 100% Acquisition (Fully Owned)
Assets Fair value
Petty cash fund 10,000
Receivables 120,000
Allowance for doubtful accounts -
Inventory 350,000
Building – net 1,100,000
Total identifiable assets 1,580,000
Liabilities
Payables 400,000
Net Asset 1,180,000
a. ABC Co. paid P1,500,000 cash consideration for the assets and liabilities of XYZ, Inc.
Consideration transferred 1,500,000
Non-controlling interest in the acquiree (NCI) -
Previously held equity interest in the acquiree -
Total 1,500,000
Less: Fair value of net identifiable assets acquired (1,180,000)
Goodwill 320,000
b. ABC Co. paid P1,000,000 cash consideration for the assets and liabilities of XYZ, Inc.
Consideration transferred 1,000,000
Non-controlling interest in the acquiree (NCI) -
Previously held equity interest in the acquiree -
Total 1,000,000
Less: Fair value of net identifiable assets acquired (1,180,000)
Gain on a bargain purchase (180,000)
Problem 3: With non-controlling interest (Partially Owned)
Controlling interest – 80%: Non-controlling interest – 20%
FV of identifiable assets 1,200,000
Less: FV of liabilities (400,000)
FV of identifiable net asset 800,000
a. ABC Co. elects the option to measure the NCI at the NCI’s proportionate share of XYZ, Inc.’s
identifiable net assets. ABC Co. paid P1,000,000 for the interest acquired in XYZ, Inc.
Consideration transferred 1,000,000
Non-controlling interest in the acquiree (NCI) 160,000 (800k*20%)
Previously held equity interest in the acquiree -
Total 1,160,000
Less: Fair value of net identifiable assets acquired (800,000)
Goodwill 360,000
b. ABC Co. elects the option to measure the NCI at fair value. The consideration transferred is
P1,000,000.
Consideration transferred 1,000,000
Non-controlling interest in the acquiree (NCI) 250,000 1𝑀
∗ 20%
80%
Previously held equity interest in the acquiree -
Total 1,250,000
Less: Fair value of net identifiable assets acquired (800,000)
Goodwill 450,000
FV is not given, therefore, Implied FV is computed and used to measure NCI.
c. ABC Co. elects the option to measure the NCI at fair value. The fair value of the 20% is determined
to be P155,000. The consideration transferred is P1,000,000 for the interest in XYZ, Inc.
Since the FV given, 155,000, is less than the value of NCI using proportionate basis, 160,000,
the NCI shall be measured using proportionate basis. Therefore, the answer is similar to
requirement letter A.
Problem 4: With non-controlling interest (Partially Owned)
Controlling interest – 80%: Non-controlling interest – 20%
Current assets P195,000
Land 2,100,000
Building 1,140,000
Equipment 525,000
FV of identifiable assets 3,960,000
FV of Liabilities (525,000)
FV of Identifiable Net assets P3,435,000
Adjust the FV of assets and compute for the FV of net identifiable assets.
a. Assume that the non-controlling interest is measured at NCI’s proportionate of identifiable net
assets.
Consideration transferred 3,000,000
Non-controlling interest in the acquiree (NCI) 687,000 3,435,000 ∗ 20%
Previously held equity interest in the acquiree -
Total 3,687,000
Less: Fair value of net identifiable assets acquired (3,435,000)
Goodwill 252,000
b. Assume that the non-controlling interest is measured at fair value. The fair value of NCI is
determined to be P736,500.
Consideration transferred 3,000,000
Non-controlling interest in the acquiree (NCI) 736,500
Previously held equity interest in the acquiree -
Total 3,736,500
Less: Fair value of net identifiable assets acquired (3,435,000)
Goodwill 301,500
c. Assume that the non-controlling interest is measured at fair value.
Consideration transferred 3,000,000
Non-controlling interest in the acquiree (NCI) 750,000 3𝑀
∗ 20%
80%
Previously held equity interest in the acquiree -
Total 3,750,000
Less: Fair value of net identifiable assets acquired (3,435,000)
Goodwill 315,000
For items b and c, NCI is valued using FV since it is greater than the value using proportionate
basis.
Problem 5: With previously held interest.
Controlling interest – 75% (15% + 60%): NCI – 25%
Consideration transferred 1,000,000
Non-controlling interest in the acquiree (NCI) 250,000 1𝑀 ∗ 25%
Previously held equity interest in the acquiree 180,000
Total 1,430,000
Less: Fair value of net identifiable assets acquired (1,000,000)
Goodwill 430,000
PHI is measure at FV.
Difference between the FV, 180,000, and CA, 170,000, is recognized as gain (loss).
Problem 6: With previously held interest.
Controlling interest – 75% (15% + 60%): NCI – 25%
FV of identifiable assets 5,100,000
Less: FV of liabilities (1,900,000)
FV of identifiable net asset 3,200,000
a. Goodwill arising on consolidation is to be valued on the proportionate basis.
Consideration transferred 2,160,000
Non-controlling interest in the acquiree (NCI) 800,000 3.2𝑀 ∗ 25%
Previously held equity interest in the acquiree 540,000 2.16𝑀
∗ 15%
60%
Total 3,500 ,000
Less: Fair value of net identifiable assets acquired (3,200,000)
Goodwill 300,000
b. Goodwill arising on consolidation is to be valued on the fair value basis.
Consideration transferred 2,160,000
Non-controlling interest in the acquiree (NCI) 900,000
Previously held equity interest in the acquiree 540,000 2.16𝑀
∗ 15%
60%
Total 3,600 ,000
Less: Fair value of net identifiable assets acquired (3,200,000)
Goodwill 400,000