Bus Combi: Midterm Long Quiz (Part 2)

Direction: Provide what is asked. Show your solution. No solution means wrong.

1. On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for ₱2,500,000 cash. ABC Co. incurred transaction costs of
₱250,000 for legal, accounting and consultancy fees in negotiating the business combination. ABC Co. elected to measure NCI at
the NCI’s proportionate share in XYZ, Inc.’s identifiable net assets. The carrying amounts and fair values of XYZ’s assets
and liabilities at the acquisition date were as follows:

Assets Carrying amounts Fair values

Cash in bank 25,000 25,000
Accounts receivable 425,000 300,000
Inventory 1,300,000 875,000
Equipment – net 2,500,000 2,750,000
Goodwill 250,000 50,000
Total assets 4,500,000 4,000,000
Liabilities
Payables 1,000,000 1,000,000

How much is the goodwill (gain on a bargain purchase)?

Use the following information for the next four questions:

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

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair values of ₱4,800,000 and ₱1,600,000, respectively.

2. KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent consultant was engaged who
determined that the fair value of the 20% non-controlling interest in RASCAL, Inc. is ₱620,000.

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?

3. KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent consultant was engaged who
determined that the fair value of the 20% non-controlling interest in RASCAL, Inc. is ₱620,000.

If KNAVE Co. paid ₱2,400,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?

4. KNAVE Co. elects the option to measure non-controlling interest at fair value. A value of ₱1,000,000 is assigned to the 20% non-
controlling interest in RASCAL, Inc. [(₱4M ÷ 80%) x 20% = 1,000,000].

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?

5. KNAVE Co. elects the option to measure the non-controlling interest at the non-controlling interest’s proportionate share
of RASCAL, Inc.’s net identifiable assets

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc. and, how much is the goodwill (gain on
bargain purchase) on the business combination?

Use the following information for the next two questions:

On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed all of the liabilities of OBSCENE, Inc. On this date,
the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.

SMUTTY incurred the following acquisition-related costs: legal fees, ₱40,000, due diligence costs, ₱400,000, and general
administrative costs of maintaining an internal acquisitions department, ₱80,000.

6. Case #1: As consideration for the business combination, SMUTTY Co. transferred 8,000 of its own equity instruments with par
value per share of ₱400 and fair value per share of ₱500 to OBSCENE’s former owners. Costs of registering the shares amounted
to ₱160,000. How much is the goodwill (gain on bargain purchase) on the business combination?
7. Case #2: As consideration for the business combination, SMUTTY Co. issued bonds with face amount and fair value of
₱4,000,000. Transaction costs incurred in issuing the bonds amounted to ₱200,000. How much is the goodwill (gain on bargain
purchase) on the business combination?

8. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets and assumed all of the liabilities of BEG, Inc. by paying
cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and
₱3,600,000, respectively. ENTREAT Co. has estimated restructuring provisions of ₱800,000 representing costs of exiting the
activity of BEG, costs of terminating employees of BEG, and costs of relocating the terminated employees. How much is the
goodwill (gain on bargain purchase)?

9. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of the liabilities of THEATRICAL, Inc.
by paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000
and ₱3,600,000, respectively.

As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to THEATRICAL, Inc. under operating
leases. HISTRIONAL 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 ₱80,000. How much is the goodwill (gain on bargain purchase)?

10. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable assets and assumed all of the liabilities of DECEPTION,
Inc. by paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of
₱6,400,000 and ₱3,600,000, respectively.

Additional information:
 SUBTERFUGE intends to sell immediately a factory plant included in the identifiable assets of DECEPTION. All of the
“held for sale” classification criteria under PFRS 5 are met. As of January 1, 20x1, the factory plant has a fair value of
₱1,200,000 and a carrying amount of ₱1,000,000 in the books of DECEPTION. Costs to sell the factory plant is ₱80,000.
 Not included in the identifiable asset of DECEPTION is a research and development intangible asset that SUBTERFUGE does not
intend to use. The fair value of this asset is ₱200,000.
 Also, not included in the identifiable asset of DECEPTION is a customer list, with an estimated value of ₱40,000, in the form of a
database where the nature of the information is subject to national laws regarding confidentiality.

How much is the goodwill (gain on bargain purchase)? _

11. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets and assumed all of the liabilities of SCOLD, Inc. by paying
cash of ₱4,000,000. On this date, SCOLD’s identifiable assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively. Non-controlling interest has a fair value of ₱320,000.

As of January 1, 20x1, SCOLD had the following which were not included in the acquisition-date fair value measurement of liabilities:
 SCOLD has an existing contract with a customer to deliver products at a specified future date. In accordance with the agreement,
SCOLD shall pay a penalty for failure to deliver the said goods. CHIDE determined that the fair value of the penalty is ₱40,000.
However, because CHIDE expects to comply with the agreement, it was assessed that payment of penalty is improbable.
 SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace SCOLD as the guarantor. If the third party defaults on
the loan, CHIDE will be held liable for the guarantee. CHIDE determined that the fair value of the guarantee is ₱120,000.
However, both SCOLD and CHIDE 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 SCOLD. CHIDE determined that the fair value of settling the
litigation is ₱200,000. However, because the legal counsels of both CHIDE and SCOLD strongly believe that they will win the
case, it was assessed that payment for the settlement of the litigation is improbable.

How much is the goodwill (gain on bargain purchase)?

12. On January 1, 20x1, PRODIGIOUS Co. acquired all of the identifiable assets and assumed all of the liabilities of
EXTRAORDINARY, Inc. by paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have
fair values of ₱6,400,000 and ₱3,600,000, respectively.

The terms of the business combination agreement are shown below:

 Half of the ₱4,000,000 agreed consideration shall be paid on January 1, 20x1 and the other half on December 31, 20x5. The
prevailing market rate as of January 1, 20x1 is 10%.
 In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of ₱2,000,000 and fair value of ₱1,200,000 shall be transferred to the former owners of
EXTRAORDINARY.
b. After the combination, EXTRAORDINARY’s activities shall be continued by PRODIGIOUS. PRODIGIOUS agrees to provide a
patented technology for use in the activities of EXTRAORDINARY. The patented technology has a carrying amount of
₱240,000 in the books of PRODIGIOUS and a fair value of ₱320,000.
 Included in the liabilities assumed is an estimated liability on a pending lawsuit filed against EXTRAORDINARY by a third party
with an acquisition-date fair value of ₱400,000. The carrying amount of the liability in EXTRAORDINARY’s books immediately
before the business combination is ₱480,000. EXTRAORDINARY guarantees to indemnify PRODIGIOUS for any settlement
amount of the liability in excess of ₱480,000.

How much is the goodwill (gain on bargain purchase)? _

13. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and assumed all of the liabilities of DISHONOR, Inc. As of this
date, the carrying amounts and fair values of the assets and liabilities of DISHONOR acquired by ATTAINDER are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000

Liabilities
Payables 1,600,000 1,600,000

ATTAINDER Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of DISHONOR, Inc. It was determined on
acquisition date that DISHONOR, Inc. has an unrecorded patent with a fair value of ₱120,000 and a contingent liability with fair value
of ₱80,000.

Although adjustments are to be made to the carrying amounts of the assets and liabilities, no adjustments shall be made to their tax
bases. All adjustments to the carrying amounts of assets and liabilities result to temporary differences. ATTAINDER’s tax rate is
30%.

How much is the goodwill (gain on bargain purchase) on the business combination?

14. On January 1, 20x1, FARCICAL Co. acquired all of the assets and liabilities of ABSURD, Inc. for ₱6.4M. As of this date, the
carrying amounts and fair values of the assets and liabilities of ABSURD are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000

Liabilities
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000

The dividends payable pertain to dividends declared by ABSURD, Inc. on December 28, 20x0 to shareholders of record on January 15,
20x1. The dividends will be distributed on January 31, 20x1.

How much is the goodwill (gain on bargain purchase)?

Use the following information for the next five questions:
On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable assets and assumed all of the liabilities of CONVERSATION, Inc.
by issuing its own ordinary shares. Information at acquisition date is shown below:
COLLOQUY Co. CONVERSATION, Co. Combined entity
(carrying amounts) (fair values)
Identifiable assets 9,600,000 6,400,000 16,000,000
Goodwill - - ?
Total assets 9,600,000 6,400,000 ?
Liabilities 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities & equity 9,600,000 6,400,000 ?

Additional information:
 COLLOQUY’s share capital consists of 60,000 ordinary shares with par value of ₱40 per share.
 CONVERSATION’s share capital consists of 3,000 ordinary shares with par value of ₱400 per share.

15. How much is the fair value of consideration transferred on the business combination?
16. How many shares were issued in the business combination? _
17. How much is the acquisition-date fair value per share?
18. How much goodwill was recognized on acquisition date?
19. What is the retained earnings of the combined entity immediately after the business combination?

20. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in STUBBORN, Inc. for ₱400,000. Because the investment
gave OBDURATE significant influence over STUBBORN, the investment was accounted for under the equity method in
accordance with PAS 28.

From 20x1 to the end of 20x3, OBDURATE recognized ₱200,000 net share in the profits of the associate and ₱40,000 share in
dividends. Therefore, the carrying amount of the investment in associate account on January 1, 20x3, is ₱560,000.

On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in STUBBORN, Inc. for ₱3,200,000. As of this date,
OBDURATE has identified the following:
a. The previously held 30% interest has a fair value of ₱720,000.
b. STUBBORN’s net identifiable assets have a fair value of ₱4,000,000.
c. OBDURATE elected to measure non-controlling interests at the non-controlling interest’s proportionate share of
STUBBORN’s identifiable net assets.

How much is the goodwill?

Use the following information for the next two questions:

On January 1, 20x1, Entity A acquires Entity B in a business combination. The financial statements of the combining constituents are
shown below:

Entity A Entity B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in subsidiary 90,000 -
Building, net 216,000 48,000
Total assets 402,000 96,000

Accounts payable 60,000 7,200

Share capital 204,000 60,000
Share premium 78,000 -
Retained earnings 60,000 28,800
Total liabilities and equity 402,000 96,000
Additional information:
 Entity B’s assets and liabilities are stated at their acquisition-date fair values, except for the following:
- Inventory, ₱37,200
- Building, net, ₱57,600

 The goodwill determined under PFRS 3 is ₱3,600.

 The NCI in the net assets of the subsidiary, also determined under PFRS 3, is ₱21,600.

21. How much is the consolidated total assets on January 1, 20x1?

22. How much is the consolidated total equity on January 1, 20x1?

Use the following information for the next eleven questions:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. The business combination resulted to goodwill of ₱3,000. On this
date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000 retained earnings. NCI was measured at its proportionate share
in XYZ’s net identifiable assets.

XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following:
Carrying Fair Fair value
XYZ, Inc.
amount value adjustments (FVA)
s s
Inventory 23,000 31,000 8,000
Equipment (4 yrs. remaining life) 50,000 60,000 10,000
Accumulated depreciation (10,000) (12,000) (2,000)
Totals 63,000 79,000 16,000

During 20x1, the following intercompany transactions occurred:

a. ABC Co. sold goods costing ₱12,000 to XYZ, Inc., for cash, at a markup of 40% on selling price. A quarter of these goods are
held in inventory by XYZ, Inc. by year-end.
b. ABC Co. acquired inventory from XYZ, Inc. for ₱12,000 cash. XYZ, Inc. uses a normal markup of 25% above its cost. ABC's
ending inventory included ₱4,000 from this purchase.

The year-end individual financial statements are shown below:

Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 41,000 67,750
Accounts receivable 75,000 22,000
Inventory 97,000 10,400
Investment in subsidiary (at cost) 75,000
Equipment 200,000 50,000
Accumulated depreciation (60,000) (20,000)
TOTAL ASSETS 428,000 130,150

LIABILITIES AND EQUITY

Accounts payable 43,000 30,000
Bonds payable 30,000 -
Total liabilities 73,000 30,000
Share capital 170,000 50,000
Share premium 65,000 -
Retained earnings 120,000 50,150
Total equity 355,000 100,150
TOTAL LIABILITIES AND EQUITY 428,000 130,150

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
Sales 330,000 150,750
Cost of goods sold (185,000) (96,600)
Gross profit 145,000 54,150
Depreciation expense (40,000) (10,000)
Distribution costs (32,000) (18,000)
Interest expense (3,000) -
Profit for the year 70,000 26,150
23. How much is the total unrealized gross profit from the intercompany sales of inventory?
24. How much is the NCI in net assets as of December 31, 20x1?
25. How much is the consolidated retained earnings?
26. How much is the consolidated profit or loss?
27. How much is the consolidated profit or loss attributable to owners of parent and NCI?
28. How much is the consolidated ending inventory? _
29. How much is the consolidated sales?
30. How much is the consolidated cost of sales?
31. How much is the consolidated total assets?
32. How much is the consolidated total liabilities?
33. How much is the consolidated total equity?

34. At December 31, 1989, Grey Inc. owned 90% of Winn Corp., a consolidated subsidiary, and 20% of Carr Corp., an investee in
which Grey cannot exercise significant influence. On the same date. Grey had receivables of P 300,000 from Winn and P 200,000
from Carr. In its December 31, 1989 consolidated balance sheet, Grey should report accounts receivable from affiliates of:

35. Sun Inc. is a wholly owned subsidiary of Patton, Inc. On June 1, 1993, Patton declared and paid a P 1 per share cash dividend to
stockholders of record on May 15, 1993. On May 1, 1993, Sun bought 10,000 shares of Patton’s common stock for P 700,000 on
the open market, when the book value per share was P30. What amount of gain should Patton report from this transaction in tis
consolidated income statement for the year ended December 31, 1993?