Practice Set No.

2 BUSINESS COMBINATION – PART 1 AIROCT2019

Measuring goodwill/ gain on bargain purchase

On January 1, 20x1, ABC acquired all of the assets and assumed all of the liabilities of XYZ. As
of this date, the carrying amounts and fair values of the assets and liabilities of XYZ acquired
by ABC are shown below:

Carrying AmountsFair Values

Cash 10,000 10,000
Receivables 200,000 120,000
AFDA (30,000)
Inventory 520,000 350,000
Building-net 1,000,000 1,100,000
Goowill 100,000 20,000
Total Assets 1,800,000 1,600,000

Liabiliites
Payables 400,000 400,000

On the negotiation for the business combination ABC incurred transaction costs amounting to
P100,000 for legal, accounting and consultancy fees.

1. If ABC paid P1,500,000 cash as consideration for the assets and liabilities of XYZ. How
much is the goodwill (gain on bargain purchase) on the business combination?
2. How much is the gain on disposal on business should XYZ recognize?
3. If ABC paid P1,000,000 cash as consideration for the assets and liabilities of XYZ. How
much is the goodwill (gain on bargain purchase) on the business combination?

Non-controlling interest measured at FV

On January 1, 20x1, ABC acquired 80% of XYZ in exchange for cash. Because the former
owners of XYZ needed to dispose of their investments in XYZ by a specified date, they did not
have sufficient time to market XYZ to multiple potential buyers.

On January 1, 20x1, XYZ’s identifiable assets and liabilities have fair values of P1,200,000 and
P400,000, respectively.

Case 1:
4. ABC elects the option to measure non-controlling interest at fair value. The independent
consultant engaged by ABC determined that the fair value of the 20% non-controlling
interest in XYZ is P155,000.

ABC paid P1,000,000 for the 80% interest in XYZ. How much is the goodwill (gain on
bargain purchase) on the business combination?

Case 2:
5. ABC elects the option to measure non-controlling interest at fair value. A value of
P250,000 is assigned to the non-controlling interest in XYZ.

The consideration transferred is P1,000,000. How much is the goodwill (gain on bargain
purchase) on the business combination?

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 Practice Set No. 2 BUSINESS COMBINATION – PART 1 AIROCT2019

Case 3:
6. ABC elects the option to measure non-controlling interest at the non-controlling interest’s
proportionate share of XYZ’s net identifiable assets.

ABC paid P1,000,000 for the interest acquired in XYZ. How much is the goodwill (gain on
bargain purchase) on the business combination?

Transaction Cost
On January 1, 20x1, ABC acquired all of the identifiable assets and assumed all of the
liabilities of XYZ. On this date, the identifiable assets acquired and liabilities assumed have
fair values of P1,600,000 and P900,000, respectively.
ABC inquired the following acquisition-related costs: legal fees P10,000, due diligence costs,
P100,000 and general administrative costs of maintaining an internal acquisition department,
P20,000.

Case 1:
7. As consideration for the business combination. ABC transferred 8,000 of its own equity
instruments with par value per share of P100 and fair value per share of P125 to XYZ
former owners. Costs of registering the shares amounted to P40,000. How much is the
goodwill (gain on bargain purchase) on the business combination?
8. Prepare pertinent journal entries.

Case 2:
9. As consideration for the business combination. ABC issued bonds with face amount and
fair value of P1,000,000. Transaction costs incurred in issuing the bonds amounted to
P50,000. How much is the goodwill (gain on bargain purchase) on the business
combination?
10. Prepare pertinent journal entries.

Restructuring Provisions
11. On January 1, 20x1, ABC acquired all of the identifiable assets and assumed all of the
liabilities of XYZ by paying cash of P1,000,000. On this date, the identifiable assets
acquired and liabilities assumed have fair values of P1,600,000 and P900,000,
respectively.

ABC has estimated restructuring provisions of P200,000 representing costs of exiting the
activity of XYZ, costs of terminating employees of XYZ and cost of relocating the
terminated employees. Compute for the goodwill (gain on bargain purchase)?

Specific recognition principles – Operating lease

On January 1, 20x1, ABC acquired all of the identifiable assets and assumed all of the
liabilities of XYZ by paying cash of P1,000,000. On this date, the identifiable assets acquired
and liabilities assumed have fair values of P1,600,000 and P900,000, respectively.

12. As of January 1, 20x1, ABC holds a building and patent which are being rented out to XYZ
under operating lease. ABC has determined that the terms of the operating lease on the

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 Practice Set No. 2 BUSINESS COMBINATION – PART 1 AIROCT2019

building compared with market terms are favorable. The fair value of the differential is
estimated at P20,000.
Compute for the goodwill (gain on bargain purchase)?

13. As of January 1, 20x1, ABC holds a building and patent which are being rented out to XYZ
under operating lease. ABC has determined that the terms of the operating lease on the
building compared with market terms are unfavorable. The fair value of the differential is
estimated at P20,000. Compute for the goodwill (gain on bargain purchase)?

14. As of January 1, 20x1, ABC renting a building and patent from XYZ under operating lease.
ABC has determined that the terms of the operating lease on the building compared with
market terms are favorable. The fair value of the differential is estimated at P20,000.
Compute for the goodwill (gain on bargain purchase)?

Contingent Liabilities
15. On January 1, 20x1, ABC acquired 90% of the identifiable assets and assumed all the
liabilities of XYZ by paying cash of P1,000,000. On this date, XYZ’s identifiable assets and
liabilities have fair values of P1,600,000 and P900,000, respectively. Non-controlling
interest has a fair value of P80,000.

The following are not included in the fair value measurement of liabilities:

 XYZ has an existing contract with a customer to deliver products at a specified future
date. In accordance with the agreement, XYZ shall pay a penalty for failure to deliver
the said goods. ABC determined that the fair value of the penalty is P10,000.
However, because ABC expects to comply with the agreement, it was assessed that
payment of penalty is improbable
 XYZ has agreed the bank loan of a third party. ABC shall replace XYZ as the guarantor.
If the third party defaults on the loan, ABC will be held liable for the guarantee. ABC
determined that the fair value of the guarantee is P30,000. However, both XYZ and
ABC believe that the third party will not default on its loan from the bank
 There is a pending unresolved litigation filed by a third party against XYZ. ABC
determined that the fair value of settling the litigation is P50,000. However, because
the legal counsels of ABC and XYZ strongly believe that they will win the case, it was
assessed that payment for the settlement of the litigation is improbable.

Compute for the goodwill (gain on bargain purchase)?

Fair value of acquirer’s shares is more reliably determinable

On January 1, 20x1, ABC and XYZ entered into business combination effected through
exchange of equity instruments. The combination resulted to ABC obtaining 100% interest in
XYZ. Both of the combining entities are publicly listed. As of this date, ABC’s shares have a
quoted price of P100 per share. ABC recognized goodwill of P300,000 on the business
combination. No acquisition-related costs were incurred. Additional selected information at
acquisition dare is shown below:

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 Practice Set No. 2 BUSINESS COMBINATION – PART 1 AIROCT2019

ABC Combined Enitity

(Before Acquisition) (After Acquisition)
Share Capital 600,000.00 700,000.00
Share Premium 300,000.00 1,200,000.00
Total 900,000.00 1,900,000.00

Required:
16. Number of shares issued by ABC in the business combination
17. Par value of the shares issued
18. Acquisition-date fair value of the net identifiable assets of XYZ
Fair value of acquirer’s shares is reliably determinable
On January 1, 20x1, ABC acquired all of the identifiable assets and assumed all of the
liabilities of XYZ by issuing its own ordinary shares. Information at acquisition date is shown
below:

ABC XYZ
Combined Enitity
(Carrying Amounts) (Fair Values)
Identifiable Assets 2,400,000 1,600,000 4,000,000
Goodwill 0 0 ?
Total 2,400,000 1,600,000 ?

Liabilities 700,000 900,000 1,600,000

Share Capital 600,000 300,000 900,000
Share Premium 300,000 250,000 550,000
Retained Earnings 800,000 150,000 ?
Total Liabiliites and Equity 2,400,000 1,600,000 ?

Additional Information:
 ABC’s share capital consists of 60,000 ordinary shares with par value of P10 per share
 XYZ’s share capital consists of 3,000 ordinary shares with par value of P100 per share

Required:
19. Fair value of consideration transferred on the business combination, including the number
of shares issued and their acquisition fair value per share
20. Goodwill recognized on acquisition date
21. Retained earnings of the combined entity immediately after the business combination

Business Combination Achieved in Stages

On January 1, 20x1, ABC acquired 15% ownership interest in XYZ for P100,000. The investment
was accounted for under PFRS 9. From 20x1 to the end of 20x3, ABC recognized net fair value
gains of P50,000.

On January 1, 20x4, ABC acquired additional 60% ownership interest in XYZ for P800,000. As
of this date, ABC has identified the following:
a. The previously held 15% interest has a fair value of P180,000
b. XYZ’s net identifiable assets have fair value of P1,000,000
c. ABC elected to measure non-controlling interests at the non-controlling interests
proportionate share of XYZ’s identifiable net assets.
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 Practice Set No. 2 BUSINESS COMBINATION – PART 1 AIROCT2019

Required: Compute for the goodwill under each of the following scenarios:
22. The previously held interest was classified as FVPL
23. The previously held interest was classified as FVOCI

Business combination achieved in stages

24. On January 1, 20x1, ABC Co. acquired 30% ownership interest in XYZ for P100,000.
Because the investment gave ABC significant influence over XYZ, the investment was
accounted for under the equity method in accordance with PAS 28 Investment in Associate
and Joint Ventures.

From 20x1 to the end of 20x3, ABC recognized P50,000 net share in the profits of the
associate and P10,000 share in dividends. Therefore, the carrying amount of the
investment in associate account on January 1, 20x3 is P140,000

On January 1, 20x4, ABC acquired additional 60% ownership interest in XYZ for P800,000.
As of this date, ABC has identified the following:

a. The previously held 30% interest has a fair value of P180,000

b. XYZ’s net identifiable assets have a fair value of P1,000,000
c. ABC elected to measure non-controlling interest at the non-controlling interests
proportionate share of XYZ’s identifiable net assets.

Compute for the Goodwill?

5 of 5 Albert I. Rivera, CPA, MBA, CRA