Chapter 13 Business Combinations (Part 1)

Multiple Choice Theory

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

11.
12.
13.
14.
15.

C
A
D
C
D

16.
17.
18.
19.
20.

B
C
C
C
D

B
D
B
C
A

16.
17.
18.

B
B
D

21.
22.

B
D

Multiple Choice Computational

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

11.
12.
13.
14.
15.

Solutions:
1. C
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

6,000,000
6,000,000
(4,720,000)
1,280,000

2. B
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Gain on a bargain purchase

4,000,000
4,000,000
(4,720,000)
(720,000)

3. D
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total

4,000,000
620,000
4,620,000

Fair value of net identifiable assets acquired

Goodwill

(3,200,000)
1,420,000

4. A
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (4.8M 1.6M)
Gain on a bargain purchase

2,400,000
620,000
3,020,000
(3,200,000)
(180,000)

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

4,000,000
1,000,000
5,000,000
(3,200,000)
1,800,000

6. A
Solution:
Fair value of identifiable assets acquired
Fair value of liabilities assumed
Fair value of net identifiable assets acquired
Multiply by: Non-controlling interest
NCIs proportionate share in net identifiable assets

4,800,000
(1,600,000)
3,200,000
20%
640,000

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

4,000,000
640,000
4,640,000
(3,200,000)
1,440,000

7. D
Solution:
Consideration transferred (8,000 sh. x 500)
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

8. D
Solution:
Consideration transferred (fair value of bonds)
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

9. D
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

The 800,000 restructuring provisions are ignored because these are

post-acquisition expenses.
10. C
Solution:
Fair value of identifiable assets acquired, including
intangible asset on the operating lease with favorable
terms (6.4M + 80K)

Fair value of liabilities assumed

Fair value of net identifiable assets acquired

6,480,000
(3,600,000)
2,880,000

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

Consideration transferred
4,000,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
4,000,000
Fair value of net identifiable assets acquired
(2,880,000)
Goodwill
1,120,000
11. B
Solution:
A liability shall be recognized because the terms of the operating
lease where the acquiree is the lessee is unfavorable.
The fair value of net identifiable assets acquired is computed as
follows:
3

Fair value of identifiable assets acquired

Fair value of liabilities assumed, including liability on the
operating lease with unfavorable terms (3.6M + 80K)

Fair value of net identifiable assets acquired

6,400,000
(3,680,000)

2,720,000

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

Consideration transferred
4,000,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
4,000,000
Fair value of net identifiable assets acquired
(2,720,000)
Goodwill
1,280,000
12. D
Solution:
No intangible asset or liability is recognized, regardless of terms of
the operating lease, because the acquiree is the lessor.
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
4,000,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
4,000,000
(2,800,000)
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill
1,200,000
13. B
Solution:
The fair value of net identifiable assets acquired is computed as
follows:
Fair value of identifiable assets before recognition of
unrecorded assets, excluding recorded goodwill (6.2M 80K)
Fair value of unrecorded identifiable intangible assets (all of
the items listed)

Total fair value of identifiable assets acquired

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

6,120,000
1,080,000
7,200,000
(1,800,000)
5,400,000

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

Consideration transferred
6,000,000
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
6,000,000
Fair value of net identifiable assets acquired
(5,400,000)
Goodwill
600,000
4

14. C
Solution:
Fair value of identifiable assets
Costs to sell of the held for sale asset
Fair value of unrecognized research and development
Adjusted value of identifiable assets
Fair value of liabilities assumed
Fair value of net identifiable assets acquired

6,400,000
(80,000)
200,000
6,520,000
(3,600,000)
2,920,000

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

4,000,000
4,000,000
(2,920,000)
1,080,000

15. A
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Fair value of identifiable assets acquired
Total fair value of liabilities assumed:
Fair value of liabilities assumed
Fair value of contingent liabilities assumed:
Contractual contingent liability assumed
Contractual contingent liability assumed
Non-contractual contingent liability assumed
Fair value of net identifiable assets acquired

6,400,000
3,600,000
40,000
120,000
200,000

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

(3,960,000)
2,440,000

4,000,000
320,000
4,320,000
(2,440,000)
1,880,000

Consideration transferred and indemnification asset

16. B
Solution:
The fair value of the consideration transferred is determined as follows:

Cash payment (4M x 50%)

Present value of future cash payment (Note payable)
(4M x 50% x PV of 1 @10%, n=5)

Land transferred to former owners of XYZ at fair value

2,000,000
1,241,843
1,200,000

4,441,843

Fair value of consideration transferred

The fair value of the net identifiable assets acquired is computed as

follows:
Fair value of assets
6,400,000
80,000
Indemnification asset (480,000 400,000)
6,480,000
Total
Fair value of liabilities
(3,600,000)
2,880,000
Fair value of net identifiable assets acquired
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
4,441,843
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
4,441,844
(2,880,000)
Fair value of net identifiable assets acquired
Goodwill / (Gain on a bargain purchase)
1,561,843
17. B
Solution:
The deferred tax liability and asset are computed as follows:
Carrying
amounts

Cash in bank
Receivables net
Inventory
Building net
Patent
Payables
Contingent liability

40,000
680,000
2,080,000
4,000,000
1,600,000
-

Fair
values

Taxable/ (Deductible)
Temporary difference

40,000
480,000
1,400,000
4,400,000
120,000
1,600,000
80,000

200,000
680,000
(400,000)
(120,000)
80,000

Total taxable temporary difference (400K + 120K)

Multiply by: Tax rate
Deferred tax liability

520,000
30%
156,000

Total deductible temporary difference (200K + 680K + 80K)

Multiply by: Tax rate
Deferred tax asset

960,000
30%
288,000

The fair value of the net identifiable assets of the acquiree is

computed as follows:
Fair value of identifiable assets acquired excluding
6,728,000
recorded goodwill (6.4M 80K goodwill + 120K unrecorded
patent + 288K deferred tax asset)

Fair value of liabilities assumed (1.6M + 80K contingent

6

(1,836,000)

liability + 156K deferred tax liability)

Fair value of net identifiable assets acquired

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

4,892,000

6,000,000
6,000,000
(4,892,000)
1,108,000

18. D
Solution:
The consideration transferred is adjusted for the dividends purchased
as follows:
Fair value of consideration transferred
6,400,000
Dividends-on (Dividends purchased)
(400,000)
Adjusted consideration transferred
6,000,000
Goodwill is computed as follows:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
FV of net identifiable assets acquired (6.4M 80K - 2M)
Goodwill

6,000,000
6,000,000
(4,320,000)
1,680,000

Exercises
1. Solutions:
Case #1
(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

3,000,000
3,000,000
(2,360,000)
640,000

* Fair value of identifiable assets acquired excluding goodwill

(3.2M 40K)
3,160,000
Fair value of liabilities assumed
( 800,000)
Fair value of net identifiable assets acquired
2,360,000
Case #2:

Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Gain on a bargain purchase

2,000,000
2,000,000
(2,360,000)
(360,000)

2. Solutions:
Case #1:
(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

2,000,000
310,000
2,310,000
(1,600,000)
710,000

Case #2:
(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
Gain on a bargain purchase

1,200,000
310,000
1,510,000
(1,600,000)
(90,000)

Case #3:
(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

2,000,000
500,000
2,500,000
(1,600,000)
900,000

Case #4:
(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

2,000,000
320,000
2,320,000
(1,600,000)
720,000

(1)
(2)
(3)

*The non-controlling interests proportionate share of acquirees

identifiable net assets is computed as follows:
Fair value of identifiable assets acquired
2,400,000
Fair value of liabilities assumed
( 800,000)
Fair value of net identifiable assets acquired
1,600,000
Multiply by: Non-controlling interest
20%
Non-controlling interests proportionate share
in net identifiable assets
320,000
3. Solutions:
Case #1:
(1) Consideration transferred (8,000 sh. x P250)
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

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

Case #2:
(1) Consideration transferred (fair value of bonds)
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill

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

4. Solution:
(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

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

5. Solutions:
Case #1:
(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

2,000,000
2,000,000
(1,440,000)
560,000

*The fair value of net identifiable assets acquired is computed as

follows:
Fair value of identifiable assets acquired , including
intangible asset on the operating lease with
3,240,000
favorable terms (P3.2M + P40K)
Fair value of liabilities assumed
(1,800,000)
Fair value of net identifiable assets acquired
1,440,000
Case #2:
Goodwill (gain on bargain purchase) is computed as follows:
2,000,000
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,000,000
Total
(1,360,000)
Fair value of net identifiable assets acquired*
640,000
Goodwill
* The fair value of net identifiable assets acquired is computed as

follows:
Fair value of identifiable assets acquired
Fair value of liabilities assumed, including liability
on the operating lease with unfavorable terms
(P1.8M + P40K)

Fair value of net identifiable assets acquired

3,200,000
(1,840,000)
1,360,000

Case #3:
Goodwill (gain on bargain purchase) is computed as follows:
2,000,000
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,000,000
Total
(1,400,000)
Fair value of net identifiable assets acquired
600,000
Goodwill
6. Solution:
The fair value of net identifiable assets acquired is computed as
follows:
Fair value of identifiable assets before recognition of unrecorded
assets, excluding recorded goodwill (3.1M 40K)
3,060,000
Fair value of unrecorded identifiable intangible assets
(all of the items listed above)
540,000
Total fair value of identifiable assets acquired
3,600,000

10

Fair value of liabilities assumed

Fair value of net identifiable assets acquired

( 900,000)
2,700,000

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

3,000,000
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
3,000,000
Total
(2,700,000)
Fair value of net identifiable assets acquired
300,000
Goodwill
7. Solution:
The fair value of net identifiable assets is computed as follows:
3,200,000
Fair value of identifiable assets
(40,000)
Costs to sell of the held for sale asset
100,000
Fair value of unrecognized research and development
3,260,000
Adjusted value of identifiable assets
(1,800,000)
Fair value of liabilities assumed
1,460,000
Fair value of net identifiable assets acquired
Goodwill (gain on bargain purchase) is computed as follows:
2,000,000
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,000,000
Total
(1,460,000)
Fair value of net identifiable assets acquired
540,000
Goodwill
8. Solution:
Cash payment (P2M x 50%)
Present value of future cash payment
(2M x 50% x PV of P1 @10%, n=5)

Piece of land transferred to former owners at

fair value
Fair value of consideration transferred

1,000,000
620,922
600,000
2,220,922

The fair value of the net identifiable assets acquired is computed as

follows:
Fair value of assets
3,200,000
40,000
Indemnification asset (240,000 200,000)
Total

3,240,000

11

Fair value of liabilities

(1,800,000)

Fair value of net identifiable assets acquired

1,440,000

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

2,220,922
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
2,220,922
Total
(1,440,000)
Fair value of net identifiable assets acquired
780,922
Goodwill / (Gain on a bargain purchase)
9. Solutions:
Requirement (a): Fair value of consideration transferred
Increase
COLLOQUY Co. Combined entity
1,200,000
1,400,000
200,000
Share capital
600,000
2,400,000
1,800,000
Share premium
1,800,000
3,800,000
2,000,000
Totals
The fair value of the shares transferred as consideration for the
business combination is P2,000,000 (i.e., total increase in
COLLOQUYs share capital and share premium accounts).
The number of shares issued in the business combination is
computed as follows:
Increase in COLLOQUYs share capital account
(see table above)
200,000
Divide by: COLLUQUYs par value per share
10
Number of shares issued
20,000
The acquisition-date fair value per share of the shares issued is
computed as follows:
Fair value of consideration transferred
2,000,000
Divide by: Number of shares issued
20,000
Acquisition-date fair value per share
200
Requirement (b): Goodwill
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred
2,000,000
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
2,000,000
Fair value of net identifiable assets acquired
(1,400,000)

12

Goodwill

600,000

Requirement (c): Retained earnings of the combined entity

Because CONVERSATIONs retained earnings will be eliminated
after the business combination, the retained earnings of the combined
entity immediately after the business combination is equal to
COLLOQUYs acquisition date retained earnings (i.e., P1,600,000)
10. Solution:
The consideration transferred is adjusted for the dividends purchased
as follows:
Fair value of consideration transferred
3,200,000
Dividends-on (Dividends purchases)
( 200,000)
Adjusted consideration transferred
3,000,000
Goodwill is computed as follows:
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
FV of net identifiable assets acquired
Goodwill

3,000,000
3,000,000
(2,160,000)
840,000

11. Solution:
The deferred tax liability (asset) is determined as follows:
Carrying
amounts

Cash in bank
Receivables net
Inventory
Building net
Patent
Payables
Contingent liability

Fair values

20,000
340,000
1,040,000
2,000,000
800,000
-

20,000
240,000
700,000
2,200,000
60,000
800,000
40,000

Temporary
taxable/
(deductible)
difference
(100,000)
(340,000)
200,000
60,000
(40,000)

Total taxable temporary difference (200K + 60K)

Multiply by: Tax rate
Deferred tax liability

260,000
30%
78,000

Total deductible temporary difference (100K + 340K + 40K)

Multiply by: Tax rate

480,000
30%

13

Deferred tax asset

144,000

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

3,000,000
3,000,000
(2,446,000)
554,000

*The fair value of the net identifiable assets of the acquiree is

computed as follows:
Fair value of identifiable assets acquired excluding goodwill
(3.2M 40K recorded goodwill + 60K unrecorded patent
+ 144K deferred tax asset)

3,364,000

Fair value of liabilities assumed

(800K + 40K contingent liability + 78K deferred tax liability)

Fair value of net identifiable assets acquired

14

( 918,000)
2,446,000