ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

AFAR-08
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ

PFRS 3 - BUSINESS COMBINATIONS:

STATUTORY MERGER & STATUTORY CONSOLIDATION
BUSINESS COMBINATION- Creating a Single Economic Entity
The term business combination refers in general to any set of conditions in which two or more organizations
are joined together through common ownership.
PFRS 3 Revised
Business combination is a transaction or event in which an acquirer obtains control of one or more
businesses. A business is defined as an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return directly to investors or other owners,
members or participants.
Scope of PFRS 3 Revised
Formation of all type of joint arrangements (joint venture and joint operations)* x
Acquisition of an asset (a group of assets) that is not a business x
Entities under common control x
Combinations involving mutual entities √
By contract alone (dual listing, stapling) √
x = not within the scope
√ = within the scope
*the scope exception only applies to the financial statements of the joint venture or joint
operation itself and not the accounting for the interest in a joint arrangement in the
financial statements of a party to the joint arrangement.

Classification of BUSINESS COMBINATIONS

Business Combinations may be classified into three schemes:

1. Based on the structure of the combination.
2. Based on the method used to accomplish the combination.
3. Based on the accounting method used.
Structure of the Combination (Business Point of View)

Combinations are classified into four types:

1. Horizontal Integration – this type of combination is one that involves companies within the same
industry that have been previously competitors. A horizontal integration would occur if Shell
Company and Petron Company, both integrated oil companies, were to combine.
2. Vertical Integration – this type of combination take place between two companies involved in the
same industry but at different levels. It normally involves a combination of a company and its
suppliers or customers. For example – a tire manufacturer and a tire distributor; Bally Shoe Company
(a manufacturer of shoes and Rustans Department Store)
3. Conglomerate Combination – is one involving companies in unrelated industries having little, if any,
production or market similarities for the purpose of entering into new markets or industries - such as
a tire manufacturer and an insurance company.
3

4. Circular Combination - entails some diversification, but does not have a drastic change in operation
as a conglomerate. For example – San Miguel Corporation accomplished when they diversify their
activities by putting up Magnolia Products.

Method of Combination (Legal Point of View)

Business combinations are also classified by method of combination into three types – statutory mergers,
statutory consolidations, and stock acquisition.

A Statutory Merger results when one company acquires all the net assets (assets and liabilities) of one or
more other companies through an exchange of stock, payment of cash or other property, or the issue of
debt instruments (or a combination of these methods). The acquiring company survives (remains in
existence), whereas the acquired company (or companies) ceases to exist as a separate legal entity,
although it may be continued as a separate division of the acquiring company.

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BUSINESS COMBINATIONS: STATUTORY MERGER & STATUTORY CONSOLIDATION
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Thus, if A Company acquires B Company in a statutory merger, the combination is often expressed as:
A Company + B Company = A Company
Or, if B Company acquires A Company:
A Company + B Company = B Company
The Board of Directors of the companies involved, normally negotiate the terms of a plan of merger, which
must be approved by the stockholders of each company involved.
A Statutory Consolidation results when a new corporation is formed to acquire the net assets (assets and
liabilities) two or more other corporations. The acquired company, then cease to exist as separate legal
entities. For example, if C Company is formed to consolidate A Company and B Company, then the
combination is generally expressed as follows:
A Company + B Company = C Company
Stockholders of the acquired companies (A and B) become stockholders in the new entity (C). The
acquired companies may be operated as separate divisions of the new corporation, just as they may
under a statutory merger. Statutory consolidation requires the same type of stockholders approval as in
statutory mergers.
The use of the term consolidation should not be confused with the accounting usage of the same word.
In accounting, consolidation refers to the mechanical process of bringing together the financial records of
two or more organizations to form a single set of statements. Statutory consolidation is a legal term used to
denote a specific type of business combination in which two or more existing companies are united under
the ownership of a newly created company.
A Stock Acquisition occurs when one corporation pays cash or issues stock or debt for all part of the voting
stock of another company, and the acquired companies remained intact as a separate legal entity. If the
acquiring company acquires more than 50% of the voting stock of the acquired company, for example, if
A Company acquires 75% of the voting stock of B Company, a parent-subsidiary relationship results.
Consolidated financial statements (explained in later topics) are prepared and the business combination
is often expressed as:
Financial Statements of A Co. + Financial Statements of B. Co.
=
Consolidated Financial Statements of A Co. and B Co.
The stock may be acquired through market purchases or through direct purchase from, or exchange with,
individual stockholders of the subsidiary company. Sometimes stock is acquired through a tender offer,
which is an open offer to purchase up to a stated number of shares of a given corporation at a stipulated
price per share. The offering price is generally set somewhat above the current market price of the shares
in order to provide an additional incentive to prospective sellers. The investee or subsidiary company
continues its legal existence and the investor or parent company records its acquisition in its records as a
long-term investment.
Although business combination is a broad term encompassing all forms of combination and the terms
merger and consolidation and stock acquisition have technical, legal definitions, the three terms are often
used interchangeably in practice. Thus, one cannot always rely on the accuracy of the term used to
identify the type of combination, but, must look to the facts of the situation to determine its accounting
treatment.
Method of Accounting for Business Combinations
The acquisition method is used for all business combinations. The pooling of interests method is prohibited.
Acquirer must be identified. Under PFRS No. 3, an acquirer must be identified for all business combinations.
Identification of an Acquirer
Control. The acquirer is the combining entity that obtains control of the other combining entities or
businesses. PFRS No. 3 provides considerable guidance for identifying the acquirer.
Other indicators of which party was the acquirer in any given business combinations are as follows (these
are suggestive only, not conclusive):
1. The fair value of one entity is significantly greater than that of the other combining enterprises; in
such a case, the larger entity would be deemed the acquirer.
2. The combination is effected by an exchange of voting stock for cash; the entity paying the cash
would be deemed to be the acquirer.
3. Management of one enterprise is able to dominate selection of management of the combined
entity; the dominant entity would be deemed to be the acquirer.

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BUSINESS COMBINATIONS: STATUTORY MERGER & STATUTORY CONSOLIDATION
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Recognizing and Measuring Goodwill and Gain from a Bargain Purchase
As a result of the PFRS 3 Revised, the way in which goodwill or a gain on a bargain purchase is calculated
has changed, being the difference between:
I. The sum of:
 the fair value of the consideration transferred
 the recognized amount of any non-controlling interest in the acquire
 for a business combination achieved in stages, the fair value of any previously held equity
interest in the acquiree; and
II. The acquisition-date recognized fair value amount of the identifiable assets acquired and liabilities
assumed.
Goodwill arises when I exceed II, under:
➢ Option 1: “Full” Goodwill Method – there is a non-controlling interest share in the goodwill.
➢ Option 2: “Partial/Proportionate Basis” Goodwill Method – there is no non-controlling interest
share in the goodwill.
Bargain purchase arises when II exceeds I. When a bargain purchase (as previously defined) occurs,
a gain on acquisition is recognized in the profit or loss. While this is consistent with the
pronouncement of PFRS 3 (old) under Option 2, the amount recognized may differ, due to the other
changes in the PFRS 3 Revised (new) which may also allow Option 1. It is under Option (1) where
there is an inconsistency of recognition of gain, wherein any excess that remains is recognized as a
gain, which is attributable only to the acquirer (or parent company).
Before concluding that bargain purchase (or discount on acquisition) has arisen, however, PFRS No.
3 requires that the acquirer shall:
1. reassess the identification and measurement of the acquiree's identifiable assets, liabilities,
and contingent liabilities and the measurement of the cost of the combination; and
2. recognize immediately in profit or loss any excess remaining after that reassessment.

Consideration transferred
For the purposes of applying the acquisition method, the fair value of the consideration transferred in
exchange for the acquirer’s interest in the acquiree is calculated as the sum of:
a. the acquisition-date fair values of the assets transferred by the acquirer, liabilities assumed or
incurred by the acquirer, and equity interests issued by the acquirer. Examples include cash, other
assets, contingent consideration, a business or a subsidiary of the acquirer, common or preferred
equity instruments, options, warrants, and member interests of mutual entities; and
b. the acquisition-date fair value of any non-controlling equity investment in the acquiree that the
acquirer owned immediately before the acquisition date.
The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts
that differ from their fair values at the acquisition date (for example, non-monetary assets or a business of
the acquirer). In that case, the acquirer shall remeasure those transferred assets or liabilities to their fair
values as of the acquisition date and recognize any gains or losses in profit or loss. However, if those assets
or liabilities are transferred to the acquiree and, therefore, remain within the combined entity after the
business combination, the acquirer shall eliminate any gains or losses on those transferred assets or liabilities
in the consolidated financial statements.
The acquisition-date fair value of the consideration transferred, including the fair value of each major class
of consideration, such as:

1. Cash or other monetary assets. The fair value is the amount of cash or cash equivalent dispersed.
The amount is usually readily available.

2. For deferred payment, the fair value to the acquirer is the amount the entity would have to borrow
to settle their debt immediately. Hence, the discount rate used is the entity’s incremental borrowing
rate.

3. Non-monetary assets. These consist of assets such as property, plant and equipment, investments,
licenses and patents. If active second-hand market price exists, fair values can be obtained by
reference to those markets. Where active markets do not exist, other means of valuation, including
the use of expert valuers, may be used.
4. Equity Instruments. If an acquirer issues its own shares as consideration, it will need to determine the
fair value of those shares at the date of exchange.

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5. Debt instruments/Liabilities undertaken. The fair values of liabilities undertaken are best measured
by the present value of future cash outflows. As noted in PFRS 3, future losses or other costs expected
to be incurred as a result of the business combination are not liabilities of the acquirer and are
therefore not included in the calculation of the fair value of consideration paid. These must be
treated as post-combination expenses.

6. Contingent consideration. The acquirer shall recognize the acquisition-date fair value of contingent
consideration. PFRS 3 Revised has formally defined contingent consideration as additional
consideration by the acquirer to the former owners (or return of consideration from the former
owners).

Changes that are the result of the acquirer obtaining additional information about facts and
circumstances that existed at the acquisition date, and that occur within the measurement period
(which may be a maximum of one year from the acquisition date), are recognized as adjustments
against the original accounting for the acquisition (and so may impact goodwill). Changes resulting
from events after the acquisition date are not measurement period adjustments. Such changes are
therefore accounted for separately from the business combination.

Costs and Expenses of Business Combination

The PFRS 3 Revised states that acquisition-related costs are costs incurred by the acquirer to effect a
business combination, including reimbursements to the acquiree for bearing some of the acquisition costs,
except costs of issuing debt instruments are accounted for under PFRS 9, and costs of issuing equity
instruments are accounted for under PAS 32, shall be accounted for as expenses in the periods in which
they are incurred. They are summarize as follows:

Acquisition-related costs Examples Treatment

1. Directly attributable costs professional fees paid to Expenses
accountants, legal advisers, valuers,
and other consultants (finders and
brokerage fees) to effect the
combination.
2. Indirect acquisition costs general and administrative costs, Expenses
including the costs of maintaining an
internal acquisitions department
(management salaries, depreciation,
rent, and costs incurred to duplicate
facilities) and other costs of which
cannot be directly attributed to the
particular acquisition
3. Costs of issuing securities transaction costs such as stamp Debit to APIC/Share
(issue and register stocks)* duties, professional adviser’s fees, Premium Account
underwriting costs and brokerage
fees may be incurred
*Similarly, the cost of arranging (registering) and issuing debt securities or financial liabilities are an
integral part of the liability issue transaction (Bond Issue Costs).

Allocating the cost of the business combination

Par. 36 of PFRS 3 includes the following statements:
“The acquirer shall measure and recognize as of the acquisition date the assets acquired and
liabilities assumed as part of the business combination. The identifiable assets acquired and
liabilities assumed shall be measured at fair value and recognized separately from goodwill.”

Recognition of Acquired Assets and Liabilities

The allocation of acquired assets and liabilities measurement which is at fair value occurs at acquisition
date. The allocation requires the recognition of:

1. Identifiable Tangible Assets. An asset other than an intangible asset is recognized if it is probable
(probability test) that any associated future economic benefits will flow to the acquirer, and its
fair value can be measured reliably (reliability test).

2. Identifiable Intangible Assets. PFRS 3 Revised requires the acquirer to recognize identifiable
assets acquired regardless of the degree of probability of an inflow of economic benefits. This
change emphasizes the expectation that all intangible assets that satisfy the definition criteria
in PAS 38, if acquired as part of a business combination, must be recognized.

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An intangible asset is identifiable if it:
➢ can be separated; or
➢ meets the contractual-legal criterion e.g. license to operate a nuclear power plant is an
intangible asset, even though the acquirer cannot sell or transfer the license separately from
the acquired power plant.

The acquirer shall recognize, separately from goodwill, the acquisition-date fair value of intangible
assets acquired in a business combination that meet the definition of an intangible asset in PAS 38.
Examples that would meet the definition of Intangible Assets:
a. Marketing-related intangible assets:
- trademarks, trade names, service marks, collective marks and certification marks
- internet domain names
- trade dress – unique color, share or package design
- newspaper mastheads
- non-competition assets

b. Customer-related intangible assets:

- customer lists
- order or production backlog
- customer contracts and the related customer relationships
- non-contractual customer relationships

c. Artistic-related intangible assets:

- plays, operas and ballets
- books, magazines, newspapers and other literary works
- musical works such as compositions, song lyrics, and advertising jingles
- pictures and photographs
- video and audiovisual material, including films, music videos, and television programs

d. Contract-based intangible assets

- licensing, royalty, and standstill agreements
- advertising, construction, management, service or supply contracts
- lease agreements
- construction permits
- franchise agreements
- operating and broadcasting rights
- use rights such as drilling, water, timber-getting and route authorities
- servicing contracts such as mortgage servicing contracts
- employment contracts priced below their market value
e. Technology-based intangible contracts
- patented technology
- computer software and mask works
- unpatented technology
- databases
- trade secrets such as secret formulas, processes or recipes
3. Liabilities. A liability other than a contingent liability is recognized if it is probable that an outflow
of resources will be required to settle the obligation, and its fair value can be measured reliably.
4. Contingent Liabilities. PFRS No. 3 Revised requires recognition of a contingent liability (of the
acquiree) assumed in a business combination will be recognize at their fair values if it is a present
obligation that arises from past events and its fair value can be measured reliably, regardless of
the probability of a cash flow arising.
******
Every great success was at the beginning impossible.
Opportunities are usually disguised as hard work, so most people don’t recognize them.
A goal is nothing more than a dream with a time limit.
***Wisdom is the quality that keeps you from getting into situations where you need it.***
***Every man is the architect of his own character.***
***Patience is bitter but its fruit is sweet.***
***Great passions, can elevate us to the things that we want to deliver.***
***Nothing great was ever achieved without determination.***
***Don’t be discouraged; everyone who got where he is, started where he was.***
***Impossibilities vanish when a man and his GOD confront a mountain.***

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I
Tree Corporation is a company involved in manufacturing cars. On January 1, 2023, the board of directors of the
said company has decided to acquire the net assets of Knee Corporation and Dudd Corporation, suppliers of
materials they use in production. The merger is expected to result in producing higher quality cars with lower total
cost. The following information was gathered from the books of the entities on January 1, 2023:

Tree Knee Dudd

Current Assets................................................................. P 1,375,000 P 390,000 P 260,000
Noncurrent Assets.......................................................... 3,125,000 2,550,000 1,700,000
Liabilities.......................................................................... 325,000 210,000 140,000
Ordinary Share Capital, P100 par................................ 2,748,500 1,780,200 1,186,800
Share Premium – Ordinary Share.................................. 176,500 169,800 113,200
Accumulated Profits (Losses)......................................... 1,250,000 780,000 520,000

Tree will issue 22,500 of its ordinary shares in exchange for the net assets of Knee and 11,200 of its ordinary shares
in exchange for the net assets of Dudd. The fair value of Tree’s shares is P150. In addition, the following fair values
were available:
Knee Dudd
Current Assets........................................................ P 450,000 P 230,000
Noncurrent Assets................................................. 2,150,000 1,975,000

The following out of pocket costs of the combination were as follows:

Legal fees for the contract of business combination........................ P 8,000
Audit fee for SEC registration of share issue........................................ 9,000
Printing costs of share certificates........................................................ 5,000
Broker’s fee ............................................................................................ 4,000
Accountant’s fee for pre-acquisition audit........................................ 10,000
Other direct cost of acquisition............................................................ 7,000
Internal secretarial, general and allocated expenses...................... 9,000
Documentary stamp tax on the new shares...................................... 2,000
Required:
1. Record the acquisition of the net assets of Knee and Dudd and related transactions on the books of
Tree.

2. Determine the following amounts that will appear in the balance sheet of Tree on January 1, 2023:
a. Goodwill arising from acquisition of Knee
b. Gain on acquisition of Dudd (to be added to accumulated P&L)
c. Current assets
d. Noncurrent assets
e. Total assets
f. Total liabilities
g. Ordinary share capital
h. Share premium
i. Accumulated profits (losses)/retained earnings
j. Shareholders’equity

3. (Cash Contingency) Determine the amount of goodwill arising from business combination of assuming
that Tree agreed to pay an additional P500,000 on January 1, 2025 to Knee Company, if the average
income of Knee Company during the 2-year period of 2023 - 2024 exceeds P5,000,000 per year. The
expected value is P200,000 calculated based on the 40% probability of achieving the target average
income. The amount of goodwill arising from acquisition amounted to:

4. Assuming the same facts as in (3) above. Before the contingency period is over, the probability present
value of the earnings contingency declines to P180,000, determine the amount of goodwill if the
changes in:
a. the value is within the measurement period (due to facts and circumstances existing as of the
date of acquisition).
b. the value is due to events occurring subsequent to acquisition.

5. (Stock Contingency with Market Value Given). In addition to the stock issue, Tree Company also agreed
to issue additional shares of common stock to the former stockholders of Knee Company if the average
post-combination earnings over the next two years equaled or exceeded P5,000,000 per year. The
additional 2,000 shares expected to be issued are valued at P320,000.

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On January 1, 2025, the earnings for 2023 and 2024 amounted to P5,000,000 and P5,350,000,
respectively.

Required:
a. Determine the amount of goodwill on January 1, 2023
b. The entry on January 1, 2025.
6. (Stock Contingency). In addition to the stock issue, Tree Company also agreed to issue additional 2,000
shares of common stock to the former stockholders of Knee Company two years later if the fair value of
acquirer (Tree’s common stock) fell below P150 per share.
On January 1, 2025, the contingent event happens and the common stock of Tree had a fair value
below P150.

Required:
a. Determine the amount of goodwill on January 1, 2023
b. The entry on January 1, 2025.
c. The entry on January 1, 2025, if the fair value of stock increase to P155:

7. (Stock Contingency). In addition to the stock issue, Tree Company also agreed to issue additional shares
of common stock to the former stockholders of Knee Company on January 1, 2025, to compensate for
any fall in the market value of Tree common stock below P150 per share. The settlement would be to
cure the deficiency by issuing added shares based on their fair value on January 1, 2025.

On January 1, 2025, the contingent event happens and the stock had a fair value of P135.
Required:
a. Determine the amount of goodwill on January 1, 2019
b. The entry on January 1, 2021.

II – with Answer
Pam Company is acquiring the net assets of Jam Company for an agreed-upon price of P900,000 on July
1, 20x4. The value was tentatively assigned as follows:
Current assets…………………………………………………………..................... P 100,000
Land…………………………………………………………………………………… 50,000
Equipment………………………………………………………………………......... 200,000 (5-year life)
Building…………………………………………………………………………........... 500,000 (20-year life)
Current liabilities…………………………………………….................................... ( 150,000)
Goodwill…………………………………………………………………………........ 200,000

Values were subject to change during the measurement period. Depreciation is taken to the nearest
month. The measurement period expired on July 1, 20x5, at which time the fair values of the equipment
and building as of the acquisition data was revised to P180,000 and P550,000, respectively.

At the end of 20x5, what adjustments are needed for the financial statements for the period ending
December 31, 20x4 and 20x5?

Answers:
The 20x4 financial statements would be revised as they are included in the 20x4 – 20x5 comparative
statements. The 20x4 statements would be based on the new values. The adjustments would be:

(a) The equipment and building will be restated at P180,000 and P550,000 on the comparative 20x4 and
20x5 balance sheets.

(b) Originally, depreciation on the equipment was P40,000 (P200,000/5) per year. It will be recalculated
as P36,000 (P180,000/5) per year. The adjustment for 20x4 is for a half year 20x4 depreciation expense
and accumulated depreciation will be restated at P18,000 instead of P20,000 for the half year.
Depreciation expense for 20x5 will be P36,000.
(c) Originally, depreciation on the building was P25,000 (P500,000/20) per year. It will be recalculated as
P27,500 (P550,000/20) per year. The adjustment for 20x4 is for a half year 20x4 depreciation expense
and accumulated depreciation will be restated at P13,750 instead of P12,500 for the half year.
Depreciation expense for 20x5 will be P27,500.
(d) Goodwill is reduced P30,000 on the comparative 20x4 and 20x5 balance sheets.
*The remarkable thing we have is a choice every day regarding the attitude we will embrace for that day. We cannot change our past... We
cannot change the fact that people will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one
string we have, and that is our attitude.*

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III – Consideration Transferred: Using Bonds with Gain on Acquisition
On January 1, 2022, Perez Company acquired all the assets and assumed all the liabilities of Stalton
Company and merged Stalton into Perez. In exchange for the net assets of Stalton, Perez gave its bonds
payable with maturity value of P600,000, a stated rate of 10%, interest payable semiannually on June 30
and December 31, a maturity of January 1,2032, and yield rate of 12%. Balance sheets for Perez and Stalton
(as well as fair value data) on January 1, 2022, were as follows:
Perez Stalton
Book Value Book Value Fair Value
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 P 114,000 P 114,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 352,700 150,000 135,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 848,300 232,000 310,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 700,000 100,000 315,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . 950,000 410,000 54,900
Accumulated depreciation- buildings .. . . . . . . . . . . . . . . . . . . . . . (325,000) (170,500)
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . ............................. . . . . . . 262,750 136,450 39,450
Accumulated depreciation- equipment . ........................... . . . . . . (70,050) __(90,450) ________
Total assets . . . . . . . . . . . . . .................................................... . . . . . . . P2,968,700 P 881,500 P 968,350
Current liabilities . . . . . . . . . .................................................... . . . . . . P 292,700 P 95,300 P 95,300
Bond payable, 8% due 1/1/27, Interest payable 6/30 and 12/31 300,000 260,000
Common stock, P15 par value . . . . . .................................. . . . . . . . 1,200,000
Common stock, P5 par value . . . . . . .................................. . . . . . . . 236,500
Other contributed capital . . . . . . ....................................... . . . . . . . 950,000 170,000
Retained earnings . . . . . . . . . . .............................................. . . . . . . . ___526,000 ___79,700
Total equities . . . . . . . . . . . . .................................................. . . . . . . . P 2,968,700 P 881,500
The amount of goodwill or gain on acquisition:
a. P 81,872 gain c. P 16,950 goodwill
b. P268,952 gain d. P 56,950 goodwill

IV
Geri acquired the net assets of Mark Corp. on July 1, 20x5. In exchange for net assets at fair market value
of Mark Co. amounting to P835,740, Geri issued 81,600 shares at a market price of P12 per share (P9 par
value). Out of pocket costs of the combination were as follows:
Legal fees for the contract of business combination................................. P 10,000
Audit fee for SEC registration of share issue ................................................ 13,000
Costs of shares of stock certificates ............................................................. 7,000
Broker’s fee ..................................................................................................... 8,000
Other direct cost of acquisition ................................................................... 22,000
General and allocated expenses ............................................................... 25,000

Geri will pay an additional cash consideration of P546,000 in the event that Mark’s net income will be equal
or greater than P1,140,000 for the period ended December 31, 20x5. At acquisition, there is a high
probability of reaching the target net income and the fair value of the additional consideration was
determined to be P234,000. Actual net income for the period ended December 31, 20x5 amounted to
P1,500,000. The additional consideration was paid.

1. What is the amount of goodwill to be recognized in the statement of financial position as of December
31, 20x5?
a. P -0- c. P377,460
b. P257,040 d. P425,640

2. What amount chargeable to operations (loss/expense) to be recognized for the year ended December
31, 20x5?
a. P -0- c. P377,000
b. P337,000 d. P397,000

V
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……………………………………………………………………………………… P 150,000
Accounts receivable…………………………………………………………………. 180,000
Capitalized software costs………………………………………………………….. 320,000
Goodwill………………………………………………………………………………… 100,000
Liabilities………………………………………………………………………………… ( 130,00)
Net assets……………………………………………………………………………… P 620,000

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AFAR-08
On June 1, 20x9, Renn’s accounts receivable had a fair value of P140,000. Additionally, Renn’s in-process
research and development was estimated to have a 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?
a. P320,000 c. P80,000
b. P120,000 d. P20,000
VI
Presented below are the financial balances for the Atwood Company and the Franz Company as of
December 31, 20x9, immediately before Atwood acquired Franz. Also included are the fair values for Franz
Company's net assets at that date.
Atwood Franz Co. Franz Co.
Book Values Book Values Fair Values
Dec. 31, 20x9 Dec. 31, 20x9 Dec. 31, 20x9
Cash P 870,000 P 240,000 P 240,000
Receivables 600,000 600,000 600,000
Inventory 1,230,000 420,000 580,000
Land 1,800,000 260,000 250,000
Buildings (net) 1,800,000 540,000 650,000
Equipment (net) 660,000 380,000 400,000
Accounts payable ( 570,000) ( 240,000) ( 240,000)
Accrued expenses ( 270,000) ( 60,000) ( 60,000)
Long-term liabilities (2,700,000) (1,020,000) (1,120,000)
Common stock, P20 par (1,980,000)
Common stock, P 5 par ( 420,000)
Additional paid-in capital ( 210,000) ( 180,000)
Retained earnings (1,290,000) ( 520,000)
Assume a business combination took place at December 31, 20x9. Atwood issued 50,000 shares of its
common stock with a fair value of P35 per share for all of the assets and liabilities of Franz. Stock issuance
costs of P15,000 and direct costs of P10,000 were paid. Atwood is applying the acquisition method in
accounting for Franz. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay
an additional P5,200 to the former owners if Franz's earnings exceed a certain sum during the next year.
Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected
present value of the contingency is P5,000. Compute the amount of goodwill at date of acquisition.
a. P455,000 c. P450,000
b. P460,000 d. P440,000
VII
Pyn Corporation acquires all of Sys Company at an acquisition cost of P90,000,000 in cash. Assets and
liabilities of the acquired company are as follows:
Book value Fair value
Current assets............................................................................. P 500,000 P 700,000
Land, buildings and equipment (net)..................................... 6,000,000 8,000,000
Brand names.............................................................................. 0 2,000,000
Technically skilled workforce.................................................... 0 15,000,000
Potentially profitable future contracts..................................... 0 10,000,000
Liabilities..................................................................................... 2,000,000 1,750,000
Pyn records goodwill of:
a. P71,050,000 c. P56,050,000
b. P66,050,000 d. P81,050,000
VIII
Pawan Corporation acquires all of Sesa Company at an acquisition cost of P100,000,000 in cash. Sesa’s
reported assets and liabilities are as follows:
Book value Dr(Cr) Fair value Dr(Cr)
Current assets..................................................................... P 5,000,000 P 7,000,000
Land, buildings and equipment (net)............................. 60,000,000 80,000,000
Liabilities.............................................................................. (40,000,000) (41,000,000)
Pawan determines that Sesa has the following intangible assets, not reported on its balance sheet:
Fair value
Favorable leaseholds........................................................................... P 4,000,000
In-process research & development.................................................. 10,000,000
Skilled workforce.................................................................................... 25,000,000
Advertising contracts............................................................................. 6,000,000
Advertising jingles................................................................................... 2,000,000
Pawan also discovers that Sesa has not properly recorded the expected liability from a pending lawsuit,
currently estimated at P6,000,000. Pawan records goodwill of:
a. P13,000,000 c. P28,000,000
b. P26,000,000 d. P38,000,000

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IX
The balance sheet of Salt Company, along with market values of its assets and liabilities, is as follows:
Salt Company
Book value Market value
dr (cr) dr (cr)
Current assets P 2,000,000 P 1,500,000
Plant & equipment (net) 30,000,000 35,000,000
Patents 100,000 2,000,000
Completed technology 0 10,000,000
Broader customer base 0 16,000,000
Technically skilled workforce 3,000,000
Potentially profitable future contracts 2,000,000
Licensing agreements 0 4,000,000
Potential contracts with new customers 1,500,000
Potential advertising jingles 1,000,000
Future cost savings 1,800,000
Goodwill 200,000 700,000
Liabilities (28,000,000) (30,000,000)
Common stock, P10 par (1,000,000)
Additional paid-in capital (5,000,000)
Retained earnings 1,700,000
1. Pail Company pays P100,000,000 in cash for Salt Company’s assets and liabilities. Pail records goodwill
of:
a. P50,800,000 c. P72,500,000
b. P66,800,000 d. P77,500,000
2. Now assume Pail Company pays P10,000,000 in cash to acquire the assets and liabilities of Salt
Company. Pail records a bargain purchase gain on acquisition of:
a. Zero c. P17,500,000
b. P12,500,000 d. P28,500,000
3. Pail paid P100,000,000 in cash for Salt. Three months later, Salt’s patents are determined to have been
worthless as of the date of acquisition. The entry to record this information includes
a. a debit to loss of P2,000,000.
b. a debit to patents of P2,000,000.
c. A debit to goodwill of P2,000,000.
d. A debit to retained earnings of P2,000,000.
4. Pail paid P10,000,000 in cash for Salt. Three months later, it is determined that Salt’s acquisition-date
liabilities omitted a pending lawsuit valued at P2,000,000. The entry to record this information includes
a. a debit to bargain purchase gain on acquisition of P2,000,000.
b. a debit to liabilities of P2,000,000.
c. A debit to goodwill of P2,000,000.
d. A debit to retained earnings of P2,000,000.
X
On July 1, 2022, the Magic Company acquired 100% of the Nato Company for a consideration transferred
of P160 million. At the acquisition date, the carrying amount of Nato’s net assets was P100 million. At the
acquisition date, a provisional fair value of P120 million was attributed to the net assets. An additional
valuation was received on May 31, 2023 increased this provisional value to P135 million and on July 30,
2023, this fair value was finalized at P140 million. What amount should Magi present for goodwill on its
statement of financial position on December 31, 2023, according to PFRS 3 Business Combinations?
a. P20 million c. P30 million
b. P25 million d. P60 million
XI
Ping Company acquires all of Sun Corp. in an asset acquisition. Ping paid P1,000,000 more than Sun's book
value, and this excess was attributed entirely to goodwill, as all of Sun's assets and liabilities were carried at
amounts equivalent to fair value. At the time of the combination, a lawsuit was pending against Sun, which
Sun had not recorded on its books. It was felt at the time that Sun would win the lawsuit, so no provision for
it was made when Ping recorded the asset acquisition.
1. Six months after the acquisition, new information reveals that the expected value of the lawsuit at the
date of acquisition was P400,000. The appropriate entry on Ping's books to record this new information:
a. Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
b. Loss on lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
c. Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
d. No entry required.

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2. Assume the same information as above, except that the value change is a result of events occurring
subsequent to acquisition. The appropriate entry on Ping's books to record the new information:
a. Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
b. Loss on lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
c. Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
d. No entry required.
XII
Dosmann, Inc., acquired net assets of Lizzi Corporation on January 1, 2022, for P700,000 in cash. This portion
of the consideration transferred results in a fair-value allocation of P35,000 to equipment and goodwill of
P88,000. At the acquisition date, Dosmann also agrees to pay Lizzi’s previous owners an additional P110,000
on January 1, 2024, if Lizzi earns a 10 percent return on the fair value of its assets in 2022 and 2023. Lizzi’s
profits exceed this threshold in both years. Which of the following is true?
a. The additional P110,000 payment is a reduction in retained earnings.
b. The fair value of the expected contingent payment increases goodwill at the acquisition date.
c. Goodwill as of January 1, 2024, increases by P110,000.
d. The P110,000 is recorded as an expense in 2024.

XIII
P Company assigned provisionally a fair value of P1,000,000 to land it acquired when it purchased S
Company. Ten months later, P obtained information that the land was worth P700,000 at the date of
acquisition. Two years after the acquisition, the land is worth P1,100,000. How does P account for these
value changes?
a. Loss of P300,000, reported on the income statement; no recognition of increase in value to P1,100,000.
b. Increase goodwill by P300,000; no recognition of increase in value to P1,100,000.
c. Decrease goodwill by a net amount of P100,000.
d. Loss of P300,000 and gain of P400,000, reported on the income statement.
XIV
Acquirer Corporation reports a bargain gain of P2 million on acquisition of Target Company. Subsequently,
Acquirer learns that one of Target’s patents, valued at P1 million, is worthless. How is this reported? Assume
the information is discovered (1) within the measurement period, and (2) after the measurement period is
over.
(1) Within the measurement period (2) After the measurement period
a. Increase in goodwill Loss on the income statement
b. Decrease in bargain gain Loss on the income statement
c. Loss on the income statement Decrease in bargain gain
d. Increase in goodwill Decrease in bargain gain

XV
An acquirer made the following entry to report an acquisition:
Tangible assets............................................................................. 4,000
Customer lists............................................................................... 600
Goodwill....................................................................................... 1,000
Liabilities................................................................................... 2,000
Cash......................................................................................... 3,600

Six months after the acquisition, the customer lists are determined to be worthless. How is this information
reported if (1) the new information relates to the value of the customer lists as of the date of acquisition,
and (2) the new information relates to changes in value since acquisition? Customer lists are written off,
and
(1) (2)
a. A gain on acquisition of P600 is recorded. Goodwill decreases P600.
b. Goodwill increases P600. A loss of P600 is recorded.
c. A loss of P600 is recorded. Goodwill increases P600.
d. Cash is reduced by P600. A loss of P600 is recorded.
XVI
Polk issues common stock to acquire all the assets of the Sam Company on January 1, 2022. There is a
contingent share agreement, which states that if the income of the Sam Division exceeds a certain level
during 2022 and 2023, additional shares will be issued on January 1, 2024. The impact of issuing the
additional shares is to
a. increase the price assigned to fixed assets
b. have no effect on asset values, but to reassign the amounts assigned to equity accounts
c. reduce retained earnings
d. record additional goodwill
*Faith is a higher faculty than reason.*

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XVII
Orbit Inc. purchased Planet Co. in 2022. At that time an existing patent was not recorded as a separately identified
intangible asset. At the end of fiscal year 2020, the patent is valued at P15,000, and goodwill has a book value of
P100,000. How should assets be reported at the beginning of fiscal year 2024?
a. Goodwill P100,000; Patent P0 c. Goodwill P100,000; Patent P15,000
b. Goodwill P115,000; Patent P0 d. Goodwill P85,000; Patent P15,000
XVIII
ACME Co. paid P110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was
available related to Comb's balance sheet:
Book Value Fair Value
Current Assets P50,000 P 50,000
Building 80,000 100,000
Equipment 40,000 50,000
Liabilities 30,000 30,000
1. What is the amount recorded by ACME for the Building?
a. P 20,000 c. P100,000
b. P 80,000 d. P110,000
2. What amount of gain (loss) on disposal of a business should Comb Corp. recognize?
a. Gain of P30,000 c. Loss of P30,000
b. Gain of P60,000 d. Loss of P60,000
XIX
Envigo Corporation acquired all the assets and liabilities of CFC Corporation by issuing shares of its common stock On
January 1, 2022. Partial balance sheet data for the companies prior to the business combination and immediately
following the combination is provided:
Envigo CFC
Book Value Book Value Combination
Cash P 65,000 P 25,000 P 90,000
Accounts receivable 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
Buildings and equipment (net) 400,000 150,000 650,000
Goodwill ________ ________ _______?
Total Assets P 570,000 P 240,000 P ?
Accounts payable P 50,000 P 25,000 P 75,000
Bonds payable 250,000 100,000 350,000
Common stock, P2 par 100,000 25,000 160,000
Additional paid-in capital 65,000 20,000 245,000
Retained earnings 105,000 70,000 _______?
Total Liabilities and Equities P 570,000 P 240,000 P ?
1. What number of shares did Envigo issue for this acquisition?
a. P80,000 c. P30,000
b. P50,000 d. P17,500
2. At what price was Envigo stock trading when stock was issued for this acquisition?
a. P2.00 c. P6.00
b. P5.63 d. P8.00
3. What was the fair value of the net assets held by CFC at the date of combination?
a. P115,000 c. P270,000
b. P227,000 d. P497,000
4. What amount of goodwill will be reported by the combined entity immediately following the combination?
a. P 13,000 c. P173,000
b. P125,000 d. P413,000
5. What balance in retained earnings will the combined entity report immediately following the combination?
a. P35,000 c. P105,000
b. P70,000 d. P175,000

-Once in a Long While-

Once in a long while, someone special walks into your life and really makes a difference.
They take the time to show you so many little ways that you matter,
They see and hear the worst in you and ugliest in you, but they don’t walk away in fact, they may care about you.
Their heart break with yours, their tears fall with yours, their laughter is shared with yours.
Once in a long while, somebody special walks into your life and then has to go and separate ways.
Every time you see a certain gesture, hear a certain laugh or phrase or return to a certain place, it reminds you of them.
Your eyes filled with tears, and a big smile comes across your face, and then you thank GOD that someone can still touch your
heart so deeply.
You remember their words, their looks, their expressions, you remember how much of themselves they gave – not just to you,
but to all.
You remember the strength that amazed you, the courage that impressed you, and the love that touched you…

GOD’s LOVE is like a river that keeps on flowing…

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Solution Guide – Problem I
I
The computations of goodwill/bargain purchase gain are as follows: (Date of Acquisition, 1/1/2023)
Knee Company: Dudd Company:
Consideration transferred: Consideration transferred:
Shares: 22,500 x P150 P Shares:11,200 x P150 P
Less: MV of A & L of Knee: Less: MV of A & L of Dudd:
Current assets P Current assets P
Non-current assets Non-current assets
Liabilities (_________) _________ Liabilities (________) _________
+ Excess: Goodwill P_985,000 - Excess: Gain on acquisition P (385,000}
Books of Tree:
Debit Credit Debit Credit
Current assets Current assets
Noncurrent assets Noncurrent assets
Goodwill Gain on acq./Accum. P/L
Liabilities Liabilities
Ord. Share capital, P100 par Ord. Share capital, P100 par
Share premium Share premium
Accumulated Profits (losses) / Acquisition-related expenses . . . . 29,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .
Acquisition related costs – direct costs.
Accumulated Profits (losses) / Acquisition-related expenses . . . . 9,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition related costs – indirect costs.
Share premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
Acquisition related costs – costs to issue and register stocks.
Tree Knee Dudd Balance
Separate - BV BV FV BV FV Sheet-Tree
Current assets P 1,375,000 – 54,000 P 390,000 P450,000 P 260,000 P 230,000
Noncurrent assets 3,125,000 2,550,000 2,150,000 1,700,000 1,975,000
Goodwill + 985,000
Total assets
Liabilities 325,000 + 210,000 140,000
Ordinary Share 2,748,500 + (22,500 sh. x P100) (11,200 sh. x P100)
Share premium 176,500 + (22,500 sh. x P50) (11,200 sh. X P50)
- 16,000 cost to issue and register)
Acc. profits/losses 1,250,000 - 29,000 DC - 9,000 IC + 385,000 gain
Total Equities __________
3. Goodwill – P1,185,000 (January 1, 2023)
Consideration transferred:
Shares: 22,500 shares x P150 P
Add: Expected Value of CC ____________
Consideration transferred P
Less: MV of A & L of Knee:
Current assets P
Non-current assets
Liabilities (____________) ___________
+ Excess: Goodwill P_________
The journal entry on January 1, 2023:
Current assets
Noncurrent assets
Goodwill
Liabilities
Ord. Share capital, P100 par x 22,500 shares
Share premium
Estimated liability for contingent consideration
4. a. Goodwill – P1,165,000 (within measurement period)
Estimated liability for contingent consideration
Goodwill
Within the measurement period.
b. Goodwill – P1,185,000 (subsequent change)
Estimated liability for contingent consideration
Gain due to subsequent events
Due to events subsequent to acquisition (which means not
existing on the date of acquisition) should be charged to
operations
Note: It should be noted that, there could be several adjustments (allocations) made during the first year post-acquisition, BUT
ALL of those would be based on information that existed at the date of acquisition (but could only becoming revealed in
a piece-meal or installment fashion whether it is material or immaterial has no relevance at all). BUT, anything resulting from
actual events or changes in circumstances AFTER the acquisition, whether within the first year or later must be recognized in
current P&L, and not as purchase price adjustment.

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5. a. Goodwill – P1,305,000 (January 1, 2023)
Consideration transferred:
Shares: 22,500 shares x P150 P
Add: Stock contingency ____________
Consideration transferred P
Less: MV of A & L of Knee:
Current assets P
Non-current assets
Liabilities (____________) ___________
+ Excess: Goodwill P ________
The journal entry on January 1, 2023:
Current assets
Noncurrent assets
Goodwill
Liabilities
Ord. Share capital, P100 par 22,500 shares
Share premium
Share Premium/ PIC for stock contingent consideration
b. January 1, 2025: Note: contingent consideration as equity is not remeasured and any settlement is accounted for within the
equity
Share Premium / PIC for stock contingent consideration
Ordinary Share Capital , P100 par x 2,000 shares
Share Premium/PIC in excess of par
Contingent event happens.
*If the share premium or additional paid-in capital from the related issuance is not enough to absorb such costs, the Philippine Interpretations
Committee (PIC) concluded that the excess shall be debited to “Share Issuance Costs” will be treated as a contra shareholders’ equity account
as a deduction to the following, in the order of priority:
1. Share Premium from previous share issuance; or**
2. Retained Earnings (Accumulated Profit/Loss) with appropriate disclosure.
** on a personal note, the word “or” indicated on the PIC Q&A as published should be removed since it is quite misleading because the
statement “order of priority” was already in used.
6. a. Goodwill – P985,000 (January 1, 2023)
Consideration transferred:
Shares: 22,500 shares x P150 P
Less: MV of A & L of Knee:
Current assets P
Non-current assets
Liabilities (____________) ___________
+ Excess: Goodwill P ________
The journal entry on January 1, 2023:
Current assets 450,000
Noncurrent assets 2,150,000
Goodwill 985,000
Liabilities 210,000
Ord. Share capital, P100 par 2,250,000
Share premium/PIC in excess of par 1.125,000
b. January 1, 2025:
Share premium/PIC in excess of par
Ord. Share capital, P100 par x 2,000 shares
Contingent event happens.
c. January 1, 2025:
No entry required.
Contingent event failed.
7.a. Goodwill – P985,000 (January 1, 2023)
Consideration transferred:
Shares: 22,500 shares x P150 P 3,375,000
Less: MV of A & L of Knee:
Current assets P 450,000
Non-current assets 2,150,000
Liabilities ( 210,000) ___2,390,000
+ Excess: Goodwill P 985,000
The journal entry on January 1, 2023:
Current assets 450,000
Noncurrent assets 2,150,000
Goodwill 985,000
Liabilities 210,000
Ord. Share capital, P100 par 2,250,000
Share premium/PIC in excess of par 1.125,000
b. January 1, 2025: (P150- P135) x 22,500 = P337,500 / P135 = 2,500 additional shares
Share premium/PIC in excess of par 250,000
Ordinary Share Capital, P100 x 2,500 shares 250,000
Contingent event happens.
*No one knows what he can do until he tries*
*Not knowing when the dawn will come, I open every door*
*The great thing in the world is not so much where you are but in what direction you are going*
*There are only two things in the world to worry over; the things you can control, and the things you can’t control. Fix the first forget the second.*
No act of kindness, no matter how small is ever wasted.
One individual plus courage is a majority.
There are storms to be considered, problems to be reckoned with, crisis to be encountered, high seas to contend with, unfateful events that should be
hurdled and they are phenomenon to be shunned with great faith and courage.
Every great success was at the beginning impossible.

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