PROBLEM 1
Measuring goodwill / gain on bargain purchase
Use the following information for the next two questions:
Fact pattern
On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of the
liabilities of SMALL, Inc. As of this date, the carrying amounts and fair values of the assets
and liabilities of SMALL acquired by DIMINUTIVE 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
On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction
costs amounting to ₱400,000 for legal, accounting, and consultancy fees.
1. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and
liabilities of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the
business combination?
a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000
2. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and
liabilities of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the
business combination?
a. (800,000) b. (720,000) c. (880,000) d. 1,200,000
PROBLEM 2
Non-controlling interests
Use the following information for the next four questions:
Fact pattern
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.
Case #1: Non-controlling interest measured at fair value
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 ₱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?
a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000
Case #2: Non-controlling interest measured at fair value
4. 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?
a. (180,000) b. (800,000) c. (160,000) d. (200,000)
Case #3: Non-controlling interest measured at fair value
5. 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?
a. 200,000 b. 1,800,000 c. 2,440,000 d. 1,440,000
Case #4: Non-controlling interest’s proportionate share in net assets
6. 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?
a. 1,440,000 b. 800,000 c. 1,400,000 c. 960,000
PROBLEM 3a
Transaction costs
Use the following information for the next two questions:
Fact pattern
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.
7. 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?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
8. 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 legal fees
amounted to ₱200,000. How much is the goodwill (gain on bargain purchase) on the
business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
7. D
Solution:
Consideration transferred (8,000 sh. x ₱500) 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired(6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000
8.D
Solution:
Consideration transferred (fair value of bonds) 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000
NOTE: CASE 1 – COST OF REGISTERING SHARES IS A DEDUCTION IN SHARE PREMIUM AND
LEGAL FEES IS AN EXPENSE BUT DOES NOT AFFECT GOODWILL. IT AFFECTS EQUITY(FOR
COST OF REGISTERING) AND NET INCOME AND RETAINED EARNINGS FOR THE EXPENSE
