Chapter 3 124 125 Goodwill is 3. measured at the Chapter 3: Summary business combination is not excess earnings expected to be undisCOunted amount earned from the of total Goodwill arising from a How much is the goodwill? combination. tested for impairment at least annually. In areversebutacquisition, amortized the issuer of shares (thee legal acquirer) 4. Goodwill is measured by is the accounting acquiree. acquisition i. discounting the earnings at 9%. How much is the average excess The consideration transferred in a reverse goodwill? leonl measured based on the number of equity interests the Reverse acquisition to give th, subsidiary (accounting acquirer) would have had to issue 5. Entity A and Entity Bexchanged equity interests in a owners of the legal parent (accounting acquiree) the same combination. Relevant information follows: business percentage of equity interest in the combined entity that results from Entity A has 2,000 issued shares. To effect the business the reverse acquisition. combination, Entity A will issue 2 new shares for each of the 3,000 total outstanding shares of Entity B. PROBLEMS: Entity A's shares have fair value of P100 per share, while Entity B's shares have fair value of 300 per share. Entity A's net identifiable assets have a fair value of PROBLEM 1: FOR CLASSROOM DISCUSSION Methods of estimatinggoodwill P260,000 as at the acquisition date. Use the following information for the next four items: How much is the goodwill? Entity A is contemplating on acquiring Entity B. Relevant information follows: Entity B's average annual earnings in the past 5 years were PROBLEM 2: MULTIPLE CHOICE - THEORY P1,000,000. Entity B's net assets as at the current year-end have a tair 1. After initial recognition, goodwill arising from abusiness value of P8,000,000. combination is (use full PFRSS')its The industry average rate of return on equity is 12%. a. amortized over its useful life, not exceeding 10 years. The probable duration of Entity B's "excess earnings" is 5 b. not amortized but tested for impairment at least annually. years. C. amortized over its useful life, not exceeding 40 years. d. amortized and tested for impairment 1. Goodwill is equal to the average excess earnings 25%. How much is the goodwill? capitalized a . How is goodwill tested for impairment? CGUS are the ones a. Goodwill is allocated to CGUs. The charged first to 2. Goodwill is measured by capitalizing the average tested for impairment. Any impairment is excess is charged to the 12%. How much is the goodwil1? earnings a the allocated goodwill, and any other assets in the CGU. Business Combinations (Part 3) 127
PROBLEM 3: MULTIPLE CHOICE- COMPUTATIONAL
Use the following information for the next three questions: Gamer Co. and Player Co. are planring to combine their businesses and put up a new entity called App Corporation. App will issue 100,000 ordinary shares, which are to be subdivided between Gamer and Player based on their total contributions, including goodwill. Goodwill is computed by capitalizing excess earnings at 20%. The industry normal earnings are 5% of net assets. Gamer Co. Player Co. Fair value of net identifiable assets 500,000 380,000 Average annual earnings 40,000 39,000
1. How much is the total goodwill expected to arise from the
business combination? a. 175,000 c. 75,000 b. 100,000 d. 0
2. How many shares will be issued to Gamer and Player,
respectively? Gamer Co. Player Co. a. 45,500 54,500 b. 64,500 35,500 C. 25,500 74,500 d. 54,500 45,500
3. Which of the combining entities is most likely the acquirer?
Garner Co. c. App Corporation b. Player Co. d. Google Play
4. Cloudy Co. plans to acquire all the assets and liabilities of Day Co. Cloudy expects that it will need to pay a premium equal to the discounted amount of Day's excess average annual earnings in order to effect the transaction. The appropriate discount rate is 10%. 128 Chapter 3
Day's earnings in the past 5years:
Year Earnings 20x1 120,000 20x2 130,000 20x3 135,000 20x4 125,000 20x5 140,000 Total 650,000
The 20x4 earnings include an expropriation loss of
P40,000. Day's net assets have a current fair value of P590,000. The industry average rate of return on net assets is 12%. The probable duration of "excess earnings" is 5 years. How much is the estimated purchase price? a. 932,432 b. 844,741 c. 817,447 d. 798,324
5. Sunday Co., a publicly isted entity, and Monday Co., a
private company, exchange equity interests in a business combination. Sunday Co. issues 12 shares for all the outstanding shares of Monday. Sunday's shares are quoted at P60 per share, while Monday's shares have a fair value of P200 per share. The net assets of the entities immediately before the combination are shown below: (The amounts approximat® the acquisition-date fair values) EQUITY Sunday Co. Monday Co. Share capital: 12,000 ordinary shares, P10 par 120,000 9,000 ordinary shares, P100 par 900,000 Retained earnings 10,000 800,000 1,700,000 Total equity 130,000
