Chapter 13 - Bus. Combination Part 1

Chapter 13 Business Combinations (Part 1)
Multiple Choice Theory

1. A
6. B
2. C
7. B
3. D
8. E
4. D
9. C
5. A
10. B
11.
12.
13.
14.
15.
C
A
D
C
D
16.
17.
18.
19.
20.
B
C
C
C
D
B
D
B
C
A
16.
17.
18.
B
B
D
21.
22.
B
D
Multiple Choice Computational

Answers at a glance:
1. C
6. A
2. B
7. D
3. D
8. D
4. A
9. D
5. B
10. C
11.
12.
13.
14.
15.
Solutions:
1. C
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
6,000,000
6,000,000
(4,720,000)
1,280,000
2. B
Solution:
Total
Gain on a bargain purchase
4,000,000
4,000,000
(4,720,000)
(720,000)
3. D
Solution:
Total
4,000,000
620,000
4,620,000

Goodwill
(3,200,000)
1,420,000
4. A
Solution:
Total
Fair value of net identifiable assets acquired (4.8M 1.6M)
2,400,000
620,000
3,020,000
(3,200,000)
(180,000)
5. B
Solution:
Total
Goodwill
4,000,000
1,000,000
5,000,000
(3,200,000)
1,800,000
6. A
Solution:
Fair value of identifiable assets acquired
Fair value of liabilities assumed
Multiply by: Non-controlling interest
NCIs proportionate share in net identifiable assets
4,800,000
(1,600,000)
3,200,000
20%
640,000
Total
Goodwill
4,000,000
640,000
4,640,000
(3,200,000)
1,440,000
7. D
Solution:
Consideration transferred (8,000 sh. x 500)
Total
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill
4,000,000
4,000,000
(2,800,000)
1,200,000
8. D
Solution:
Consideration transferred (fair value of bonds)
Total
Goodwill
4,000,000
4,000,000
(2,800,000)
1,200,000
9. D
Solution:
Total
Goodwill
4,000,000
4,000,000
(2,800,000)
1,200,000
The 800,000 restructuring provisions are ignored because these are

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

6,480,000
(3,600,000)
2,880,000
Goodwill (gain on bargain purchase) is computed as follows:

4,000,000
Total
4,000,000
(2,880,000)
Goodwill
1,120,000
11. B
Solution:
A liability shall be recognized because the terms of the operating
lease where the acquiree is the lessee is unfavorable.
The fair value of net identifiable assets acquired is computed as
follows:
3

Fair value of liabilities assumed, including liability on the
operating lease with unfavorable terms (3.6M + 80K)
6,400,000
(3,680,000)
2,720,000

4,000,000
Total
4,000,000
(2,720,000)
Goodwill
1,280,000
12. D
Solution:
No intangible asset or liability is recognized, regardless of terms of
the operating lease, because the acquiree is the lessor.
4,000,000
Total
4,000,000
(2,800,000)
Goodwill
1,200,000
13. B
Solution:
follows:
Fair value of identifiable assets before recognition of
unrecorded assets, excluding recorded goodwill (6.2M 80K)
Fair value of unrecorded identifiable intangible assets (all of
the items listed)
Total fair value of identifiable assets acquired

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

6,000,000
Total
6,000,000
(5,400,000)
Goodwill
600,000
4
14. C
Solution:
Fair value of identifiable assets
Costs to sell of the held for sale asset
Fair value of unrecognized research and development
Adjusted value of identifiable assets
6,400,000
(80,000)
200,000
6,520,000
(3,600,000)
2,920,000
Total
Goodwill
4,000,000
4,000,000
(2,920,000)
1,080,000
15. A
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Total fair value of liabilities assumed:
Fair value of contingent liabilities assumed:
Contractual contingent liability assumed
Contractual contingent liability assumed
Non-contractual contingent liability assumed
6,400,000
3,600,000
40,000
120,000
200,000
Total
Goodwill
(3,960,000)
2,440,000
4,000,000
320,000
4,320,000
(2,440,000)
1,880,000
Consideration transferred and indemnification asset

16. B
Solution:
The fair value of the consideration transferred is determined as follows:
Cash payment (4M x 50%)

Present value of future cash payment (Note payable)
(4M x 50% x PV of 1 @10%, n=5)
Land transferred to former owners of XYZ at fair value
2,000,000
1,241,843
1,200,000
4,441,843
Fair value of consideration transferred
The fair value of the net identifiable assets acquired is computed as

follows:
Fair value of assets
6,400,000
80,000
Indemnification asset (480,000 400,000)
6,480,000
Total
Fair value of liabilities
(3,600,000)
2,880,000
4,441,843
Total
4,441,844
(2,880,000)
Goodwill / (Gain on a bargain purchase)
1,561,843
17. B
Solution:
The deferred tax liability and asset are computed as follows:
Carrying
amounts
Cash in bank
Receivables net
Inventory
Building net
Patent
Payables
Contingent liability
40,000
680,000
2,080,000
4,000,000
1,600,000
-
Fair
values
Taxable/ (Deductible)
Temporary difference
40,000
480,000
1,400,000
4,400,000
120,000
1,600,000
80,000
200,000
680,000
(400,000)
(120,000)
80,000
Total taxable temporary difference (400K + 120K)

Multiply by: Tax rate
Deferred tax liability
520,000
30%
156,000
Total deductible temporary difference (200K + 680K + 80K)

Deferred tax asset
960,000
30%
288,000
The fair value of the net identifiable assets of the acquiree is

computed as follows:
Fair value of identifiable assets acquired excluding
6,728,000
recorded goodwill (6.4M 80K goodwill + 120K unrecorded
patent + 288K deferred tax asset)
Fair value of liabilities assumed (1.6M + 80K contingent

6
(1,836,000)
liability + 156K deferred tax liability)

Goodwill is computed as follows:
Total
Goodwill
4,892,000
6,000,000
6,000,000
(4,892,000)
1,108,000
18. D
Solution:
The consideration transferred is adjusted for the dividends purchased
as follows:
6,400,000
Dividends-on (Dividends purchased)
(400,000)
Adjusted consideration transferred
6,000,000
Total
FV of net identifiable assets acquired (6.4M 80K - 2M)
Goodwill
6,000,000
6,000,000
(4,320,000)
1,680,000
Exercises
1. Solutions:
Case #1
(1) Consideration transferred
(2) Non-controlling interest in the acquiree
(3) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired*
Goodwill
3,000,000
3,000,000
(2,360,000)
640,000
* Fair value of identifiable assets acquired excluding goodwill

(3.2M 40K)
3,160,000
( 800,000)
2,360,000
Case #2:
Total
2,000,000
2,000,000
(2,360,000)
(360,000)
2. Solutions:
Case #1:
Total
Goodwill
2,000,000
310,000
2,310,000
(1,600,000)
710,000
Case #2:
Total
1,200,000
310,000
1,510,000
(1,600,000)
(90,000)
Case #3:
Total
Goodwill
2,000,000
500,000
2,500,000
(1,600,000)
900,000
Case #4:
(2) Non-controlling interest in the acquiree*
Total
Goodwill
2,000,000
320,000
2,320,000
(1,600,000)
720,000
(1)
(2)
(3)
*The non-controlling interests proportionate share of acquirees

identifiable net assets is computed as follows:
2,400,000
( 800,000)
1,600,000
Multiply by: Non-controlling interest
20%
Non-controlling interests proportionate share
in net identifiable assets
320,000
3. Solutions:
Case #1:
(1) Consideration transferred (8,000 sh. x P250)
Total
Goodwill
2,000,000
2,000,000
(1,400,000)
600,000
Case #2:
(1) Consideration transferred (fair value of bonds)
Total
Goodwill
2,000,000
2,000,000
(1,400,000)
600,000
4. Solution:
Total
Goodwill
2,000,000
2,000,000
(1,400,000)
600,000
5. Solutions:
Case #1:
Total
Goodwill
2,000,000
2,000,000
(1,440,000)
560,000
*The fair value of net identifiable assets acquired is computed as

follows:
Fair value of identifiable assets acquired , including
intangible asset on the operating lease with
3,240,000
favorable terms (P3.2M + P40K)
(1,800,000)
1,440,000
Case #2:
2,000,000
2,000,000
Total
(1,360,000)
640,000
Goodwill
* The fair value of net identifiable assets acquired is computed as
follows:
Fair value of liabilities assumed, including liability
on the operating lease with unfavorable terms
(P1.8M + P40K)
3,200,000
(1,840,000)
1,360,000
Case #3:
2,000,000
2,000,000
Total
(1,400,000)
600,000
Goodwill
6. Solution:
follows:
Fair value of identifiable assets before recognition of unrecorded
assets, excluding recorded goodwill (3.1M 40K)
3,060,000
Fair value of unrecorded identifiable intangible assets
(all of the items listed above)
540,000
Total fair value of identifiable assets acquired
3,600,000
10

( 900,000)
2,700,000

3,000,000
3,000,000
Total
(2,700,000)
300,000
Goodwill
7. Solution:
The fair value of net identifiable assets is computed as follows:
3,200,000
Fair value of identifiable assets
(40,000)
Costs to sell of the held for sale asset
100,000
Fair value of unrecognized research and development
3,260,000
Adjusted value of identifiable assets
(1,800,000)
1,460,000
2,000,000
2,000,000
Total
(1,460,000)
540,000
Goodwill
8. Solution:
Cash payment (P2M x 50%)
Present value of future cash payment
(2M x 50% x PV of P1 @10%, n=5)
Piece of land transferred to former owners at

fair value
1,000,000
620,922
600,000
2,220,922
The fair value of the net identifiable assets acquired is computed as

follows:
Fair value of assets
3,200,000
40,000
Indemnification asset (240,000 200,000)
Total
3,240,000
11
Fair value of liabilities
(1,800,000)
1,440,000

2,220,922
2,220,922
Total
(1,440,000)
780,922
Goodwill / (Gain on a bargain purchase)
9. Solutions:
Requirement (a): Fair value of consideration transferred
Increase
COLLOQUY Co. Combined entity
1,200,000
1,400,000
200,000
Share capital
600,000
2,400,000
1,800,000
Share premium
1,800,000
3,800,000
2,000,000
Totals
The fair value of the shares transferred as consideration for the
business combination is P2,000,000 (i.e., total increase in
COLLOQUYs share capital and share premium accounts).
The number of shares issued in the business combination is
Increase in COLLOQUYs share capital account
(see table above)
200,000
Divide by: COLLUQUYs par value per share
10
Number of shares issued
20,000
The acquisition-date fair value per share of the shares issued is
2,000,000
Divide by: Number of shares issued
20,000
Acquisition-date fair value per share
200
Requirement (b): Goodwill
2,000,000
Total
2,000,000
(1,400,000)
12
Goodwill
600,000
Requirement (c): Retained earnings of the combined entity

Because CONVERSATIONs retained earnings will be eliminated
after the business combination, the retained earnings of the combined
entity immediately after the business combination is equal to
COLLOQUYs acquisition date retained earnings (i.e., P1,600,000)
10. Solution:
The consideration transferred is adjusted for the dividends purchased
as follows:
3,200,000
Dividends-on (Dividends purchases)
( 200,000)
Adjusted consideration transferred
3,000,000
Total
FV of net identifiable assets acquired
Goodwill
3,000,000
3,000,000
(2,160,000)
840,000
11. Solution:
The deferred tax liability (asset) is determined as follows:
Carrying
amounts
Cash in bank
Receivables net
Inventory
Building net
Patent
Payables
Contingent liability
Fair values
20,000
340,000
1,040,000
2,000,000
800,000
-
20,000
240,000
700,000
2,200,000
60,000
800,000
40,000
Temporary
taxable/
(deductible)
difference
(100,000)
(340,000)
200,000
60,000
(40,000)
Total taxable temporary difference (200K + 60K)

Deferred tax liability
260,000
30%
78,000
Total deductible temporary difference (100K + 340K + 40K)

480,000
30%
13
Deferred tax asset
144,000

Total
Goodwill
3,000,000
3,000,000
(2,446,000)
554,000
*The fair value of the net identifiable assets of the acquiree is

Fair value of identifiable assets acquired excluding goodwill
(3.2M 40K recorded goodwill + 60K unrecorded patent
+ 144K deferred tax asset)
3,364,000

(800K + 40K contingent liability + 78K deferred tax liability)
14
( 918,000)
2,446,000

Chapter 13 - Bus. Combination Part 1

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Chapter 13 - Bus. Combination Part 1

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Chapter 13 Business Combinations (Part 1)

Multiple Choice Theory

Multiple Choice Computational

Fair value of net identifiable assets acquired

The 800,000 restructuring provisions are ignored because these are

Fair value of liabilities assumed

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

Fair value of identifiable assets acquired

Fair value of net identifiable assets acquired

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

Total fair value of identifiable assets acquired

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

Consideration transferred and indemnification asset

Cash payment (4M x 50%)

Land transferred to former owners of XYZ at fair value

Fair value of consideration transferred

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

Total taxable temporary difference (400K + 120K)

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

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

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

liability + 156K deferred tax liability)

Fair value of net identifiable assets acquired

* Fair value of identifiable assets acquired excluding goodwill

*The non-controlling interests proportionate share of acquirees

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

Fair value of net identifiable assets acquired

Fair value of liabilities assumed

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

Piece of land transferred to former owners at

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

Fair value of liabilities

Fair value of net identifiable assets acquired

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

Requirement (c): Retained earnings of the combined entity

Total taxable temporary difference (200K + 60K)

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

Deferred tax asset

Goodwill is computed as follows:

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

Fair value of liabilities assumed

Fair value of net identifiable assets acquired

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