Page 1 of 9 | AFAR Handouts No.

04

Business Combination
Robert Carl Angelo B. Arrojo, CPA

BUSINESS COMBINATION
ROBERT CARL ANGELO B. ARROJO, CPA
PROBLEMS
1. The following are the condensed statement of financial position of Irish and Samantha on January 1, 2021:
Irish Samantha
Total Assets P4,100,000 P 1,223,000

Liabilities 1,110,000 320,000

Common Stocks 1,240,000 518,000
Additional Paid-in Capital 500,000 40,000
Retained Earnings 1,250,000 345,000

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Stewart Corp. acquired the net assets of both Irish and Samantha by issuing 81,250 shares to Irish and 22,550 shares
to Samantha. The par value of these shares is P35/share and market value as of January 1, 2021 is P40/share. Steward
also paid for the following expenses:

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Irish Samantha

Indirect costs P37,500 P 40,500

Finder’s fee
Accounting and legal fees for SEC registration
Printing costs of stock certificates ev
26,500
137,500
50,000
14,000
145,000
37,500
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If Stewart’s retained earnings has a balance of P4,300,000 on January 1, 2021, how much is the (1) goodwill and (2)
adjusted retained earnings to be presented in the statement of financial position of Stewart?

A. P263,000 ; P3,902,000
PA

B. P257,000 ; P3,899,000
C. P 0 ; P 3,902,000
D. P260,000 ; P3,902,000

2. On January 1, 2021, Rolly company pays P 270,000 cash and also issue 18,000 shares of P 10 par common stock with
a market value of P 330,000 for the net asset of Sure Company. In addition, Rolly pays P 30,000 for registering and
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issuing the 18,000 shares and P 70,000 for professional fees to effect the combination. Summary balances immediately
before the combination is as follows (in thousands):
Rolly Book Value Sure Fair Value Sure Fair Value
Cash P 350 P 40 P 40
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Inventories 120 80 100

Other Current assets 30 20 20
Plant assets- net 200 180 180
Total Assets 760 320 340
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Current Liabilities P 160 P 30 30

Other Liabilities 80 50 40
Common stock, P 10 par 420 200
Retained Earnings 100 40
Total Liabilities and equity P70 P320

What is the total assets of Rolly Company after the acquisition?

A. P 1,090,000
B. P 1,080,000
C. P 1,260,000
D. P 1,060,000

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

3. The MAYDAY Company will issue shares of P 10 par value common stock for all the assets and liabilities of the COD
Company. MAYDAY Company common stock has a current market value of P 40 per share.
Current Assets P 320,000
Property, Plant and Equipment 880,000
Liabilities 400,000
Common Stock, P 4 par 320,000
Additional paid in capital 400,000
Retained Earnings 800,000
The fair market value of the current assets is P 400,000 while that of the property, plant, and equipment is P 1,600,000.
All the liabilities are correctly stated MAYDAY Company issued sufficient shares so that the fair market value of the
stock issued is equal the fair market value of COD Company’s net assets.
(1) To have an income from acquisition of P 100,000 the number of shares to be issued by MAYDAY Company should
be

(2) To have a goodwill of P 200,000, the number of shares to be issued by MAYDAY Company is, respectively

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A. 37,500 shares; 45,000 shares
B. 42,500 shares; 35,000 shares

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C. 42,500 shares; 45,000 shares
D. 40,000 shares; 35,000 shares

4. On August 31, 2021, MECQ, Inc. acquired most of the outstanding common stock of Esprit Company for cash. The

Inc. and its subsidiary are shown below:

Stockholders’ equity – Esprit

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incomplete working paper elimination entries on that date for the consolidated statement of financial position of MECQ,

2,437,500
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Investment in Esprit 1,584,375
Non-controlling interest 853,125

Inventories 62,500
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Equipment 312,500
Patent 61,250
Goodwill ?
Investment in Esprit 468,750
Non-controlling interest ?
C

Included in the purchase price is a control premium of P68,750.

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The amount of goodwill to be reported in the consolidated statement of financial position on August 31, 2021:

Assuming non-controlling interest is measured at fair value

Assuming non-controlling interest is measured at the proportionate or relevant share

Assuming non-controlling interest is measured at fair value. The fair value of the non-controlling interest is P1,150,000.
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A. P179,135; P185,188; P260,625

B. P284,904; P253,938; P398,125
C. P247,885; P185,188; P329,375
D. P185,188 ; P284,904; P260,625

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

5. On January 1, 2021, Maya Company acquired all the assets and assumed all the liabilities of Zero Company and merged
Zero into Maya. In exchange for the net assets of Zero, Maya gave its bonds payable with maturity value of P 1,500,000,
a stated rate of 10 % interest payable semiannually on June 30 and December 31, a maturity of January 1, 2026 and
yield rate of 13%.

The following present values are shown below.

PV for 1 for 5 periods at 13 % 0.543
PV of 1 for 10 periods at 6.5 % 0.533
PV of Ordinary Annuity for 5 periods at 13 % 3.517
PV of Ordinary Annuity for 10 periods at 6.5 % 7.189

Balance sheets for Perez and Zero (as well as fair value data on January 1, 2021 were as follows

Maya Zero
Book Value Book Value Fair Value
Cash P 500,000 228,000 228,000

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Receivables 625,000 300,000 270,000
Inventories 1,500,000 464,000 620,000
Land 720,000 200,000 630,000

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Buildings 1,900,000 820,000 108,000
Accumulated depreciation – buildings (650,000) (341,000)
Equipment 525,000 273,000 78,900
Accumulated depreciation- Equipment (140,000) (205,500)
Total Assets
Bonds payable
Common Stock, P 30 par value
Common stock, P 15 par value
Other Contributed Capital
P 4,980,000

2,400,000

200,000
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1,738,500
304,000

709,500
425,000
315,000
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Retained Earnings 2,380,000 300,000
Total equities P4,980,000 1,738,500

In addition to the bond issue, Maya Company agreed to pay an additional P 200,000 on January 1, 2023 to Zero
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Company if the average income of Zero company during the next two year exceeds P 150,000 per year. The expected
value is P 69,000 based on the expected probability of achieving the target average income. On October 1, 2021,
because Zero Company’s accumulated income already amounts to P 200,000, the expected value of the contingent
consideration became P 105,000.

5.1 Compute the goodwill (Gain on bargain purchase) to be reported by Maya Company for the year ended December
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31, 2021.

A. (212,225)
B. (176,225)
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C. (326,225)
D. (14,225)

5.2 How much will be the net effect in profit or loss for the year due to the business combination?
A. 176,225
B. 1,416
C. (210,809)
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D. (37,416)

6. On January 1, 2020, Entity A acquires 30,000 out of 100,000 outstanding ordinary shares of Entity B for P90,000. For
the six months ended June 30, 2020, Entity B reported net income of P40,000.

On July 1, 2020, Entity A acquires additional 60,000 ordinary shares of Entity B at a price of P240,000. Entity A paid
P20,000 acquisition related costs and P10,000 indirect costs of business combination.

The acquisition price of per share of the additional shares clearly reflects the fair value of the existing interest of Entity
A on Entity B. It is the policy of Entity A to initially measure the noncontrolling interest in net assets of the acquiree at
fair value. The fair value of the noncontrolling interest in net assets of the acquire is appraised at P30,000.

At the acquisition date, the net assets of Entity B are reported at P400,000. An asset of Entity B is overvalued by
P50,000 while one of its liability is overvalued by P30,000.

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

6.1 What is the gain on remeasurement of existing Investment in Entity B because of step acquisition?
A. P18,000
B. P30,000
C. P24,000
D. P12,000

6.2 What is the goodwill or (gain on bargain purchase) as a result of business combination?
A. P18,000
B. (P20,000)
C. P24,000
D. P30,000

7. On October 31, 2023 the Spectre Company acquired the net assets of Troll Company for a consideration transferred of
P16,000,000. At the acquisition date, the carrying amount of Troll’s net assets was P10,000,000.

At the acquisition date, a provisional fair value of P12,000,000 was attributed to the net assets. An additional valuation
received on September 30, 2024 increased this provisional fair value to P13,000,000 and on November 31, 2024 this

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fair value was finalized at P14,000,000.

What amount should Spectre present for goodwill in its statement of financial position at December 31, 2024

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A. P6,000,000 C. P4,000,000
B. P3,000,000 D. P2,000,000

8. Mayan Company acquired all of Max Corporation’s assets and liabilities on January 2,2009, in a business combination.

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At that date, Max reported assets with a book value of P624,000 and liabilities of P356,000. Mayan noted that Max had
P40,000 of research and development costs on its books at the acquisition date that did not appear to be of value.
Mayan also determined that patents developed by Max had a fair value of P120,000 but had not been recorded by Max.
Except for a building and equipment, Mayan determined the fair value of all other assets and liabilities reported by Max
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approximated the recorded amounts. In recording the transfer of assets and liabilities to its books, Mayan recorded
goodwill of P93,000. Mayan paid P517,000 to acquire Max’s assets and liabilities. If the book value of Magana’s
buildings and equipment was P341,000 at the date of acquisition, what was their fair value?
a. P441,000 c. P341,000
b. P417,000 d. P427,500
PA

9. The following are the statements of Entity B and Entity A:

Entity A
Assets Liabilities and Owner’s Equity
Current Assets P5,000 Current Liabilities P 3,000
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Non-Current Assets 25,000 Non-Current Liabilities 4,000

Common Stock 1,500 shares, P 10 15,000
par
Additional paid in capital 4,000
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Retained Earnings 4,000

Total Assets P 30,000 Total Liabilities and Owner’s Equity P 30,000

Entity B
Assets Liabilities and Owner’s Equity
Current Assets P18,000 Current Liabilities P 5,000
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Non-Current Assets 32,000 Non-Current Liabilities 9,000

Common Stock shares, P 24 par 21,000
Additional paid in capital 3,000
Retained Earnings 12,000
Total Assets P 50,000 Total Liabilities and Owner’s Equity P 50,000

On December 20, 2021, Entity B, an unlisted company acquires Entity A, a publicly listed entity through an exchange
of equity instruments. Entity A issues 4 shares in exchange for 1 each ordinary share of Private Company. All Entity B’s
shareholders exchange their shares.

The fair value of each share of Entity B is 60 and quoted price of Entity A is 15

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

The fair values of Entity A’s identifiable assets and liabilities at December 20,2021 are the same as their book values,
except that the fair value of Entity A’s non-current assets at December 20,2021 is P 27,500 and current liabilities are
4,000 less than its fair value.

Which of the following statements is correct?

A. The consolidated retained earnings are 13,000.
B. The consolidated total assets are 106,500.
C. The consolidated retained earnings are 12,000.
D. The consolidated ordinary shares are 50,000.

10. Jimmy Corp. acquired 80 % interest in Bam Corp. by issuing 100,000 shares with fair value of P 20 per share and par
value of P 10 per share.

Jimmy Bam
Book Value Fair Value Book Value Fair Value
Cash P 600,000 P 600,000 P 120,000 P 120,000
Accounts Receivable 250,000 240,000 50,000 40,000

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Inventory 350,000 345,000 150,000 140,000
Prepaid Expense 25,000 20,000 5,000 4,000

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Land 2,000,000 2,200,000 800,000 900,000
Building 1,500,000 1,650,000 700,000 950,000
Equipment 400,000 300,000 325,000 300,000
Total Assets

Accounts Payable
Notes Payable
Ordinary Share
P 5,125,000

P 1,500,000
2,000,000
1,200,000
2,100,000
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P 5,355,000

P 1,550,000
P 2,150,000

P 600,000
750,000
500,000
P 2,454,000

P 620,000
760,000
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Share Premium 500,000 200,000
Retained Earnings 125,000 100,000
Total Liab & SHE P 5.325,000 P 2,150,000
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The financial statements of Jimmy Corp. and Bam Corp before the business combination is shown below:

Under Push-Down Accounting, the working paper elimination entry will include the following except:
A. Debit Ordinary Share- Bam P 500,000
B. Debit Push-Down Capital P 1,514,800
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C. Debit Retained earnings-Bam P 1,000,000

D. Credit Investment in Bam P 2,000,000

11. On January 1 ,2030 Selemene Inc. purchase 87,500 shares representing 35 % ownership interest in Mirana Company’s
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250,000 ordinary shares of P 161,500. Selemene accounts for the investment under equity method.

On December 31, 2030, Mirana Company has a net income of P 120,000 and paid dividends amounting to P 10,000 to
its shareholders. On April 1, 2031, Mirana Corporation reacquired its own 125,000 shares so that Selemene Inc. control
over Mirana Company. The following data were available on the date of acquisition.
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The fair value of net identifiable assets of Mirana is P 800,000 Selemene uses the NCI proportionate share of acquiree’s
net identifiable assets to measure its NCI

Which of the following statements is incorrect?

A. The total goodwill from business combination is zero.
B. The gain on remeasurement is P 240,000
C. The parent company-Selemene Inc. shall debit investment in subsidiary in the amount of P 560,000
D. The investment in associate shall be credited in the amount of P 200,000

12. Palawan Corporation acquires all of Spratly Company by issuing 2,000,000 shares with FMV of P40 and par value of P
32. Spratly’s reported assets and liabilities are as follows:
Book Value Dr (Cr) Fair Value Dr (Cr)
Current Assets P 12,000,000 P 13,400,000
Land, Buildings, and 55,000,000 84,000,000
equipment (net)
Liabilities (35,000,000) (45,000,000)

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

Palawan determines that Spratly has the following intangible assets, not reported on its balance sheet:
Fair Value
Capitalized software costs 800,000
Favorable leaseholds 600,000
In process research and 250,000
developments
Potential Contracts 350,000
Advertising Jingles 250,000
Advertising Contracts 2,000,000
Customer List 1,500,000
Customer Contracts 400,000
Brand names 5,125,000
Potentially profitable future contracts 10,000,000

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Future cost savings 1,500,000
Broader Customer Base 2,000,000
Completed Technology 1,200,000

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Spratlys had a contingent liability disclosed in the financial statements due to an impending lawsuit with estimated
amount of payment amounting to P 3,000,000. Palawan has estimated a restructuring provisions of P 6,400,000,
representing costs of exiting the activity, cost of terminating the employees.

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In addition to stock issue, Palawan also agreed to issue additional 500,000 share of if the average post combination
earnings over the next two years equaled or exceeded P 6,000,000 per year. The additional 500,000 shares expected
to be issued are valued at P 10,000,000. Within one year of the business combination, due to additional facts and
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circumstances existing at the acquisition date, it turns out the additional 500,000 shares expected to be issued are
valued at P 15,000,000

Determine the amount of goodwill (gain on bargain purchase).

PA

A. 32,875,000
B. 34,875,000
C. 23,475,000
D. 28,475,000

13. Conan Corporation acquired 65 % stock ownership of Sonya Company on December 31 ,2021, and a consolidated
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statement of financial position was prepared. Partial statement of financial position for Conan, Sonya, and the
consolidated entity follows:
Conan Corporation Sonya Company Consolidated
Entity
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Cash and cash equivalents P 100,000 P 40,000 P 140,000

Accounts Receivable 80,000 20,000 100,000
Inventory 200,000 100,000 340,000
Equipment 500,000 200,000 800,000
Investment in Sonya Company ?
Goodwill ?
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Total P P 360,000 P 1,390,000

Accounts Payable P 70,000 P 40,000 P110,000
Bonds Payable 300,000 300,000
Common stock ? 150,000 413,000
Retained Earnings ? 170,000 ?
Non-controlling interest 163,000
Total P? P360,000 P 1,390,000

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

NCI was measured at given fair value.

What is the allocation of goodwill?

Controlling Interest NCI

A. P 6,500 3,500
B. P 8,000 2,000
C. P 6,000 4,000
D. P 7,000 3,000

14. On June 10,2021 Gerald Company purchases 8,000 shares of Jenna Company for P 64 per share. The NCI is measured
at fair value. Just prior to the purchase, Jenna Company has the following statement of financial position
Assets Liabilities and Owner’s Equity

Current Assets P 20,000 Current Liabilities P 250,000

Inventory 280,000 Common stock , P 20 par 50,000

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Equipment 400,000 APIC 130,000
Goodwill 100,000 Retained Earnings 370,000
Total Assets P 810,000 Total Liabilities and Owner’s Equity P 810,000

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On June 10,2021, Jenna’s inventory has a fair value of P 400,000 and that the equipment is worth P 500,000.

A. 128,000
B. 134,000
C. 120,000
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14.1 What is the amount of the non-controlling interest in the consolidated statement of financial position on the date of
acquisition?
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D. 125,000

14.2 What is the amount of goodwill (gain on acquisition) to be reported in the consolidated statement of financial
position on the date of acquisition?
A. (30,000)
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B. 30,000
C. (24,000)
D. 24,000

15. On January 1, 2020, P Corp. purchased a 70 % interest in S Corp for P 2,366,000. On this date, the book values and
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fair values of S Corp. were as follows

Book Value Fair Value
Cash P 375,000 P 375,000
Accounts Receivable 225,000 235,000
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Inventory 900,000 987,000

Building, net 2,325,000 1,840,000
Equipment, net 750,000 705,000
Long Term Investment 1,500,000 2,028,000
Total P 6,075,000 P 6,170,000
Current Liabilities P 750,000 P 750,000
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Bonds Payable 1,575,000 2,175,000

Ordinary share 1,500,000
Retained Earnings 2,250,000

The total assets of P Corp. in its separate books immediately before the acquisition is P 6,870,000. P Corporation
incurred the following costs

Legal fees to arrange the business combination P 25,000

Broker’s fee 6,000
Accountant’s fee for pre-acquisition audit 10,000
Other direct of acquisition 30,000
Internal secretarial, general, and allocated expenses 20,000

Assuming the entities above are SME, how much is the total consolidated assets on the date of acquisition?

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Business Combination
Robert Carl Angelo B. Arrojo, CPA

A. P 3,043,500
B. P 13,204,500
C. P 13,114,500
D. P 13,134,500

THEORIES

1. Which of the following in a business combination under PFRS 3?

A. A combination which results in the formation of a joint venture
B. A combination involving mutual entities
C. Involves entities or businesses that are not investor owned
D. A combination which results in an entity acquiring the net assets of another entity and the liquidation of the acquired
entity

2. Which of the following costs shall be included in the consideration transferred under business combination (PFRS 3)
I. Cost of maintain an acquisition department

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II. Fees paid to accountant to effect the business combination
A. I only C. Both I and II
B. II only D. Neither I and II

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3. A merger is different from consolidation because
A. A consolidation is created when two entities are combined, but a merger is created when more than two entities
are combined

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B. A consolidation dissolves one of the combining entities, but a merger dissolves all of the combining entities
C. A merger dissolves one of the combining entities, but consolidation dissolves all of the combining entities
D. A merger is formed when two entities are combined, but consolidation is created when more than two entities are
combined
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4. If an entity acquired an asset which is not considered as a business, the entity shall account the transaction as:
A. An adjusting events C. An asset acquisitions
B. A business combination D. A non-controlling interest
5. In determining the acquisition date for a business combination under PFRS 3, the criterion used is
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A. The date on which the consideration was received by the acquired entity
B. The date on which the assets acquired, and liabilities assumed were transferred by the acquired entity
C. The date on which the consideration was paid by the acquirer entity
D. The date when control was achieved by the acquirer entity

6. Which of the following statements in relation to restructuring provisions is correct?

C

Statement 1: Restructuring provisions are not generally recognized as part of business combination unless the acquirer
has at the acquisition date an existing liability for restructuring that has been recognized in accordance with PAS 37
Statement 2: Restructuring provisions that do not meet the definition of a liability at the acquisition date are recognized
as post combination expenses of the combined entity when the costs are incurred
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A. I only C. I and II
B. II only D. Neither I and II

7. In the final settlement of the contingent consideration classified as equity, the amount:
A. Shall be remeasured at fair value with any gain or loss included in other comprehensive income
B. Shall not be remeasured but instead recognized as part of equity
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C. Shall be remeasured at fair value with any gain or loss included in profit or loss
D. Shall be remeasured at fair value with any gain or loss included in retained earnings

8. Under IFRS 3, what is the maximum period of the measurement period?

A. It shall not exceed one year from the acquisition date.
B. It shall not exceed 3 months from the acquisition date.
C. It shall not exceed 6 months from the acquisition date.
D. It shall not exceed 2 years from the acquisition date.

9. Which of the following identifiable assets are recognized in a business combination except:
A. Potential customers contracts
B. Customer lists
C. Research and Development costs
D. Customer contracts

10. The non-controlling interest (NCI) shall be measured at

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A. The fair value

B. At the non-controlling interest’s proportionate share of the acquiree’s identifiable assets
C. Either A and B
D. Neither A and B
11. Under IFRS 3, which of the following is a measurement period adjustment that may be retroactively adjusted to goodwill
or gain on bargain purchase?
A. Additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the
acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date.
B. Changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified
share price or reaching a milestone on a research and development project, are not measurement period
adjustments.
C. Changes in the fair market value of the financial asset at fair value issued as part of the consideration transferred.
D. Changes in the amortized cost of the financial asset at amortized cost issued as part of the consideration
transferred.

12. The following statements are based on PFRS 3 (Business Combinations):

Statement I: An entity shall account for each business combination by applying the acquisition method.

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Statement II:The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition date fair values.
Statement III:For each business combination, the acquirer shall measure any non-controlling interest in the

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acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net
assets.
a. All of the statements are true
b. Only statement I is true
c.
d.
Only statement II is false
Only statement III is false
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13. How shall goodwill arising from business combination be accounted for by the acquirer under the following IFRS?
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FULL IFRS 3 IFRS for SMEs
A. Not amortized but annually tested for Amortized over a presumed life of 10 years
Impairment
B. Not amortized but annually tested for Not amortized but annually tested for impairment
Impairment
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C. Amortized for a presumed life of 10 years Amortized for a presumed life of 10 years
D. Amortized for a presumed life of 10 years Not amortized but annually tested for impairment
C
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