1.

Company A acquires 80% of Company B for P10,000,000, carrying value of Company B net assets at

the time of acquisition being P6,000,000 and fair value of these net identifiable assets being P8,000,000.

What will be Goodwill if NCI is to be valued on the proportionate basis or “Partial” Goodwill?

Using the standard formula which is Consideration transferred + Value of NCI + Fair value of

previously held interest – FV net assets of Subsidiary = Goodwill, it will be shown as = 10,000,000 +

1,600,000+ 0 ( no previously held interest) – 8,000,000(FV of net identifiable assets of Sub) = 3,600,000

The 1,600,000 came from 8,000,000 * 20%. Since we are valuing it in Partial Goodwill method then

that means NCI is valued on its share on the Fair value on net identifiable assets. So, NCI does not

have a goodwill.

For shortcut purposes. Since NCI does not have a goodwill, we can just subtract the Price paid by the

Parent/Acquirer then subtract it from the Percentage it will own (in this case 80%) in the subsidiary

valued during business combination (using the fair value of net assets). So, it will be like this

10,000,000 – (8,000,000 * 80%) --- 10,000,000 – 6,400,000 = 3,600,000.

What is the amount of Non-Controlling Interest arising on consolidation if this is to be valued on a

partial Goodwill?

8,000,000 * 20% = 1,600,000. Remember partial goodwill NCI is valued with no goodwill because you

value it only to the proportionate share or the percentage share of the Subsidiary Net assets during

the combination ( remember again subsidiary’s assets and liabilities are generally valued at fair value

). 8,000,000 is the fair value of the net assets ( fair value of assets of Sub minus the fair value of the

liabilities of subsidiary). It is the proportionate share or the percentage of the NCI to the Subsidiary

which is 20 Percent of the net assets of the subsidiary valued during business combination. (again

assets and liabilities of subsidiary during business combination is valued at fair value)

What is the amount of Goodwill arising on consolidation if NCI is to be valued on the full (fair value)

basis or “Full/Gross-up” Goodwill

* 20% = 2,500,000) + 0 (No previously held interest) – 8,000,000 (FV of net identifiable assets of Sub) =

4,500,000

What will be the amount of Non-Controlling interest arising on consolidation is to be valued on the full

(fair value) basis or “Full/Gross-up” Goodwill?

There is no fair value of NCI that is stated. So when the problem does not state a fair value and it is

finding the full goodwill method of valuing the, the fair value that we will find is the implied fair value.

Implied because we are using the Price being paid by the controlling interest as the basis of fair value

of the non controlling interest. We take the price paid as the fair value of the subsidiary. In this case,

80% amounted to P10,000,000 being paid by the parent. So we take the price paid as its fair value

because fair value, as defined by IFRS 13 Fair Value Measurement, is the The price that would be

received to sell an asset or paid to transfer a liability in an orderly transaction between market

participants at the measurement date. With this definition, we use the price as the assumed fair value

if the problem is silent. The fair value of 80 percent is 10,000,000. We divide it by the percentage,

10,000,000/80% = 12,500,000. We then get the 20% of this. 12,500,000 * 20% = 2,500,000. This would

be the value of NCI as I also used in the above problem. However if there is a fair value given, then we

will use that fair value. Also please remember, if the implied fair value is lower than the proportionate

share of NCI or the partial goodwill NCI, we won’t use the implied fair value as the NCI cannot be

valued lower than the proportionate share. Remember, the NCI is owned by the non controlling

owners, hence it would be unfair for them to be lowered than their proportionate share in the

subsidiary. In this problem, the full goodwill NCI is valued at 2,500,000 and the partial goodwill NCI is

valued at 1,600,000. So we can use that implied fair value. Also please take note that the difference of

the full goodwill and partial goodwill NCI is the goodwill that is 2,500,000 – 1,600,000 = 900,000. The

900,000 is the goodwill pertaining to the NCI. Remember partial goodwill NCI is valued with no
goodwill because you value it only to the proportionate share or the percentage share of the

Subsidiary Net assets during the combination ( remember again subsidiary’s assets and liabilities are

generally valued at fair value ) while full goodwill NCI is the NCI with goodwill. This shows that the

total goodwill using full goodwill method 4,500,000. 900,000 pertains to the goodwill of NCI. And

3,600,000 pertains to the controlling interest.

2. Entity Subsidiary has 40% of is share publicly traded on an exchange. Entity Parent purchases the 60%

non – publicly traded shares in one transaction, paying P6,300,000. Based on the trading price of the

shares of Entity Subsidiary at the date of gaining control a value of P4,000,000 assigned to the 40% non-

controlling interest (or fair value of non – controlling interest), indicating that Entity Parent has paid a

control premium of P300,000. The fair value of Entity Subsidiary’s identifiable net assets is P7,000,000

and a carrying value of P5,000,000.

What is the Goodwill if NCI is to be valued on a proportionate basis or Partial Goodwill?

Using the standard formula

6,300,000 + 2,800,000* - 7,000,000 = 2,100,000

* 7,000,000 * 40% = 2,800,000

Shortcut formula

6,300,000 – 4,200,000* = 2,100,000

* 7,000,000 * 60% = 4,200,000

What is the amount of Non-Controlling Interest if NCI is to be valued on a proportionate Basis or Partial

Goodwill?

7,000,000 * 40% = 2,800,000

What is the Goodwill if NCI is to be valued on the Full (Fair value) Basis or “Full/Gross-up” Goodwill?

6,300,000 + 4,000,000 + 0 – 7,000,000 = 3,300,000. Since there is a fair value given for the NCI. We will

use that in valuing NCI. The goodwil pertaining to NCI is 1,200,000 as it is 4,000,000 – 2,800,000.
What is the amount of Non-Controlling Interest if NCI is to be valued on a Full ( Fair Value) Basis or

“Full/Gross-up” Goodwill?

P4,000,000 as stated in the problem, this is the fair value. Please note of the term control premium.

Control premium of 300,000 is included in the consideration transferred at 6,300,000. Control

Premium is the extra consideration that a Parent/Acquirer gives the former owners of the Subsidiary

for the controlling interest that they will receive. Since the fair value of the Non controlling interest

was stated here, there was the non-controlling interest has no effect when solving the problem.

However if the fair value of the non controlling interest is not stated and we are forced to use the

implied fair value method of valuing NCI then there will be implications. First since the control

premium is an extra consideration for the controlling interest they will receive then it should not be

part of the implied fair value of NCI computation. Remember, the Fair value definition is The price

that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date. Now since the control premium is an extra

consideration and not necessarily what would be paid if this was done in an orderly transaction

between market participants ( think of it as the fair value is the price that will be paid if done normally

with buyers and seller without extra consideration ) then the consideration transferred cannot be

used fully in computing the implied fair value of NCI. We must first deduct the control premium that

was paid. In this case 6,300,000 – 300,000 = 6,000,000. 6 Million is the price that would’ve been

normally paid between market participants. So 6 million would be divided by the percentage which is

60% = 10,000,000 and then multiplied by the NCI percentage which is 40% then it would 4,000,000.

Take note this problem shows us that the implied fair value is the same as the fair value stated. But

that is not always the case ok. This is merely a practice problem that is why it is shown that way. Be

flexible in solving answers. What if instead of 6,300,000. The problem stated 7,300,000. The problems

can change so be flexible in answering problems.

3. Pares Company acquires 15 percent of Serap Company’s common stock for P500,000 cash and carries
the investment using the cost method. A few months later, Pares Purchases another 60 percent of Serap

Company’s stock for P2,160,000. At the date, Serap 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

P1,900,000. The fair value of the 25% non-controlling interest in Serap Company is P900,000.

What is the goodwill if this consolidation is to be valued on a Partial Goodwill Basis?

=Using the standard formula = 2,160,000 + (800,000*) + (540,000**) – (3,200,000***) = 300,000

* (5,100,000 – 1,900,000) *25% = 800,000

** (2,160,000/60%) * 15% = 540,000

*** 5,100,000 – 1,900,000 = 3,200,000

Debit investment in serap 500,000

Credit cash 500,000

Debit investment in seap 40,000

Credit gain on remeasurement 40,000

This is an example of a step acquisition. Step acquisition means that you had a prior interest before

gaining control. In this case you had 15% interest first. Per the standard formula in addition to the

consideration transferred and NCI (whether valued at fair value), we are to also consider the fair value

of the prior interest.

There are times that the prior interest’s fair value is given but there are times that you have to

compute its implied fair value as we had done. If for example, the problem has stated that the fair

value of the 15 percent is 560,000. Then we don’t have to compute for the implied fair value since the

fair value is already given. The formula will then look like this

2,160,000 + 800,000 (proportionate share) + 560,000 – 3,200,000 = 320,000 ----? Theoretical example

only

What is the NCI if it is to be valued on a Partial Goodwill Basis?

What is the goodwill if this consolidation is to be valued on a Full Goodwill Basis?

Using the standard formula = P2,160,000 + (900,000*) + (540,000) – 3,200,000 = 400,000

* fair value is 900,000 as stated in the problem

400,000 – 300,000 = 100,000 pertaining to goodwill of NCI

What is the NCI if it is to value on a Full Goodwill Basis?

900,000 as stated in the problem

What amount of Gain or loss should be recognized when the additional shares are acquired.

The amount of gain/ loss pertains to the recognition of the fair value of the 15 percent interest.

Remember the investment is carried at cost method. Meaning the cost is what is presented and

recorded when the 15 percent was bought which is 500,000. We then must recognize it at its fair value

which is 540,000. So in that case, the value of the 15 percent interest rose from 500,000 to 540,000.

We then should recognize a gain of 40,000. This is the entry below

Debit Investment 40,000

Credit Gain 40,000

What if the prior equity interest is not under cost method.

The treatment will be the same, the investment account will still be remeasured to the fair value at

the date of acquisition. Let’s say it is under the fair value method, and before acquisition it has a fair

value of 520,000. So at acquisition, when the fair value is 540,000, we will still remeasure it. But the

gain we will recognize is only 20,000 since we came from 520,000 rather than 500,000

What if the prior equity interest is using equity method?

The treatment is still the same. We will still remeasure it in its fair value. But the amount before

remeasurement will most likely be different. 500,000 is the cost of investment. Remember in equity

method, we recognize income from the associate as an increase in investment and dividends as
deduction. If let’s say we bought the 15 percent interest in January 1, 2016 and the acquisition date

for the 60% equity interest is June 30, 2016. Then Serap Company has a 100,000 income for the whole

year and is earned evenly and declared dividends 10,000 on March 30, 2016. How do we account this

in the equity method?

First we must account for the share in net income and then we deduct the dividends received

Please be careful in asnwering this, remember when we use equity method, we must consider also

the date and the equity interest we have. The net income is 100,000 then we have to multiply the 15%

since that is the equity interest. 100,000 * 15% = 15,000. But that is not the answer yet. Remember we

only held the 15% in six months and the income is earned evenly. So we must prorate this to the

number of months we held it. 15,000 * 6/12 = 7,500. That is the share in net income

We prepare the following entry

Investment in Serap 7,500

Share in net income 7,500

Then we account for the dividends received. Remember, the associate is giving back cash, it is like

returning the cost to us. So since the dividends were declared March 30, 2016 and is still within the

time that we held the 15% we must consider it in determining the amount of equity interest prior to

acquisition. 10,000 dividends * 15% = 1,500. We don’t prorate this cause unlike net income, this is not

given out evenly and only on a one date basis. We prepare the following entries

Cash (dividend received) 1,500

Investment in Serap 1,500

So by the time June 30, 2016, the dat eof acquisition, the investment in serap account will be, 500,000

+ 7,500 – 1,500 =506,000. Then we remeasure it to its fair value. We had already computed the fair

value above as 540,000, so 506,000 to 540,000, we will have a gain of 34,000. We prepare the

following entries
Investment in Serap 34,000

Gain on remeasurement 34,000

4. On September 1, 2016, Company P Acquires 75% (750,000 ordinary shares) of Company S for

P7,500,000 (P10 per share). In the period around the acquisition date, Company S’s shares are trading at

about P8 per share. Company P pays a premium over market because of the synergies it believes it will

get. It is therefore reasonable to conclude that the fair value of Company S’s as a whole may not be

P10,000,000. In fact, an independent valuation shows that the value of Company S is P9,700,000 (fair

value of Company S). Assuming that the fair value of the net identifiable assets is P8,000,000 (Carrying

value is P6,000,000)

What is the Goodwill if the NCI is to be valued at a proportionate share basis?

7,500,000 – (8,000,000 * 75%) = 1,500,000

What is the amount of NCI if it is to be valued on a proportionate share basis?

8,000,000 * 25% =2,000,000

What is the Goodwill if the NCI is to be valued at a full (Fair value) Basis?

9,700,000 – 8,000,000 = 1,700,000. The 9,700,000 is the whole fair value of S Company. Since

7,500,000 is the consideration transferred by the acquirer then the fair value of NCI would be the

residual of the fair value of the subsidiary and the consideration transferred by the acquirer which

would be 9,700,000 – 7,500,000 = 2,200,000. We cannot use implied fair value method of computing

the NCI because there is a control premium. Remember to be able to know the value of NCI when

there is control premium in the acquirer’s consideration then we must first remove the control

premium in the acquirer’s consideration because again control premium is not indicative of fair value,

it is only extra consideration by the acquirer because of the control that it will gain. Normally we will

deduct the control premium in the acquirer’s consideration and then divide it to the acquirer’s

percentage of ownership and then multiply it by the percentage of NCI. However since there is no
control premium amount stated, we cannot do that. The problem only stated the whole value of the

subsidiary which is 9,700,000 so when we deduct it to the fair value of the net assets of the Subsidiary

we will get the 1,700,000. If we then subtract the 1,700,000 full goodwill from the partial goodwill

1,500,000 then we will get 200,000 as the goodwill pertaining to NCI.

What is the amount of NCI if it is to be valued on a full (Fair value) Basis?

We can solve it by using the whole fair value of the Subsidiary and deducting it from the consideration

transferred by the acquirer which would show 9,700,000 – 7,500,000 =2,200,000. OR we can solve it

by getting the proprotionate share of non controlling interest first then add the goodwill pertaining to

the NCI. So in this case get the fair value of net assets of subsidiary which is 8,000,000 then multiply to

the percentage of NCI to get the proportionate share in net assets. 8,000,000 * 25% = 2,000,000. Then

we add the Goodwill pertaining to NCI to get the value of NCI using full goodwill method. 2,000,000 +

200,000. Remember the NCI at full goodwill simply means that NCI has a share in goodwill resulting

from the business acquisition.

5. All the issued and outstanding common stock of Manila Company were bought by Makati Company

on October 1, 2016 for P700,000. The assets and liabilities of Manila Company were:

Cash…………………………………………………………………………………………………..P50,000

AR (net of 25,000 allowance of doubtful accounts)………………………..….P250,000

Inventory………………………………………………………………………..…………………P150,000

Property and Equip (net of accumulated Dep)…………………………………...P300,000

Accounts/Notes Payable…………………………………………………………………….P130,000

On October 1, 2016 the fair value of the following assets were as follows:

Accounts Receivable(net)…………………………………………………………………. P235,000

Inventory…………………………………………………………………………………………...P130,000

Property and Equipment (net)……………………………………………………………P400,000

There is an unrecorded warranty liability on prior product sales estimated P20,000 discounted cash flow
based on estimated future cash flows

What is the amount of goodwill as a result of the business combination?

700,000 – (50,000 + 235,000 _ 130,000 + 400,000 – 130,000 – 20,000) = 35,000. We will also recognize

the warranty liability. Remember we will recognize contingent liabilities as long as they are present

obligation regardless if there is only possible outflow of economic benefits

What is the amount of goodwill recorded in the books of Makati Co. as a result of the business

combination?

0. Goodwill will only show on the consolidated financial statement of Makati and Manila Company.

6. On January 1, 2016, Gold Rush Company acquires 80 percent ownership in California Corporation for

P200,000. The fair value of the non-controlling interest at that time is determined to be P50,000. It

reports net assets with a book value of P200,000 and fair value of P230,000. Gold Rush Company reports

Net assets with a book value of P600,000 and a fair value of P650,000 at that time, excluding its

investment in California.

What will be the amount of Goodwill that would be reported immediately after the combination under

current accounting practice if the option of full goodwill method is used?

200,000 + 50,000 -230,000 = 20,000

What will be the amount of NCI that would be reported immediately after the combination under

current accounting practice if the option of full goodwill method is used?

50,000

7. The Lampara Company acquired a 70% interest in The Oak Company for P1,960,000 when the fair

value of Oak’s identifiable assets and liabilities was P700,000 and elected to measure the non-

controlling interest at its share of the identifiable net assets. Annual impairment of goodwill has not

resulted in any impairment losses being recognized. Oak’s current statement of financial position shows

share capital of P100,000, a revaluation reserve of P300,000 and retained earnings of P1,400,000.
Under PFRS 3 Business combinations, what figure should be shown as goodwill.

1,960,000 – (700,000*70%) = 1,470,000

8. The Moon Company acquired a 70% interest in The Swan Company for P1,420,000 when the fair value

of Swan’s identifiable assets and liabilities was P1,200,000. Moon acquired a 65% interest in The Homer

Company for P300,000 when the fair value of Homer’s identifiable assets and liabilities was P640,000.

Moon measures non-controlling interests at the relevant share of the identifiable net assets at the

acquisition date Neither Swan nor Homer had any contingent liabilities at the acquisition date and the

above fair values were the same as the carrying amounts in their financial statements.

What is the Goodwill and gain on bargain purchase?

1,420,000 – ( 1,200,000 * 70% ) =580,000 partial goodwill

300,000 – (640,000 * 65%) = (116,000) Gain on bargain purchase

300,000 + 224,000 – 640,000 = (116,000)

9. On October 1, 2016 The Ting Company acquired 100 percent of the Green Company when the fair

value of Green’s net assets was P116 million and their carrying amount was P120,000,000. The

consideration transferred comprised P200 million in cash transferred at the acquisition date, plus

another P60 million in cash to be transferred 11 months after the acquisition date if a specified profit

target was met by Green. At the acquisition date there was only a low probability of the profit target

being met, so the fair value of the additional consideration liability was P10 million. In the event, the

profit target was met and the P60 million cash was transferred.

What is the Goodwill?

210,000,000 – 116,000,000 = 94,000,000. Remember, we recognize contingent consideration in its fair

value on the date of acquisition. We don’t adjust the Goodwill when the contingent consideration is

met because they are not indicative of information known at the acquisition date.

11. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2015 for P400,000
cash. A contingent payment of P16,500 will be paid on April 15, 2016 if Rhine generates cash flows from

operations of P27,000 or more in the next year. Harrison estimates that there is a 20% probability that

Rhine will generate at least P27,000 next year and uses an interest rate of 5% to incorporate the time

value of money. The fair value of P16,500 at 5% using a probability weighted approach is P3,142.

What will Harrison record as acquisition price on January 1, 2015?

400,000 + 3,142 = 403,142

What is the entry if the result from operations is P27,200?

Debit Loss 13,358

Debit Liability 3,142

Credit Cash 16,500

12. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its

bitter rival, by issuing bonds with a par value and fair value of P150,000. Immediately prior to the

acquisition, Beta reported total assets of P500,000, liabilities of P280,000 and stockholders’ equity of

P220,000. At that date, Standard Video reported total assets of P400,000, liabilities of P250,000 and

stockholders’ equity of P150,000. Included in Standard’s liabilities was an accounts payable to Beta in

the amount of P20,000, which Beta included in its accounts receivable.

Based on the preceding information: (1) what amount of total assets did Beta report in its balance sheet

immediately after the acquisition?

500,000 + 150,000 = 650,000

(2) what amount of assets was reported in the consolidated balance sheet immediately after the

acquisition?

500,000 + 150,000 + 400,000 – 20,000 – 150,000 = 880,000. We add both their assets. We would

normally add a goodwill however there is no goodwill that resulted from the business acquisition.

150,000 – 150,000 = 0. We don’t recognize the 150,000 in the consolidated financial statement

because it is an intercompany account. Also, we eliminate the 20,000 because they are intercompany
payable for Standard and intercompany receivable for Beta. We eliminate intercompany accounts

because we need to see the assets and liabilities of both the company’s as one. So, in consolidated

statement Beta and Standard are seen as one economic entity. So, the liability of one is the asset of

another. We must eliminate them because in a consolidated FS they basically don’t exist. The same

with Investment account. The 150,000 is the investment account that will be recognized in the

acquirer’s books. However there is no investment account in the Consolidated FS because they will

need to be seen as one entity only, that’s why we eliminate them.