Chapter 31

Problems 31-1 (IAA)
Judicature Company purchased another entity for P7,500,000 cash. A schedule of the fair value
of the acquired entity’s assets and liabilities as of the purchase date follows:
Cash 50,000
Accounts receivable 800,000
Inventory 1,350,000
Property, plant and equipment 4,300,000 6,500,000
Accounts payable 900,000
Note payable – bank (long-term) 1,000,000 1,900,000
Net assets at fair value 4,600,000
Required:
1. Determine the amount of goodwill using the residual approach.
2. Prepare the journal entry to record the purchase of the entity.
Problem 31-2 (IAA)

Keen Company purchased an entity for P6,000,000 cash at the beginning of the current year. The
carrying amount and fair value of the assets of the acquired entity on the date of acquisition are
as follows:
Carrying
amount Fair value
Cash 50,000 50,000
Accounts receivable 500,000 500,000
Inventory 1,000,000 1,500,000
Patent 0 250,000
Property, plant and equipment 2,000,000 3,000,000
In addition, the acquired entity had accounts payable only totaling P2,000,000 at the time of
acquisition. The acquired entity has no other separately identifiable intangible assets.
Required:
1. Determine the amount of goodwill using the residual approach
2. Prepare the journal entry to record the purchase of the entity.
Problem 31-3 (IAA)

Larceny Company purchased another entity for P8,000,000. The assets and liabilities of the
acquiree at fair value are as follows:
Cash 1,000,000
Inventory 500,000
In-process research and development 5,000,000
Assembled workforce 1,200,000
Accounts payable 2,600,000
Note payable 400,000
Required:
1. Determine the amount of goodwill
2. Prepare the journal entry to record the acquisition
Problem 31-4 (IAA)
Meek Company is considering the acquisition of another entity. The following data relate to the
acquiree:
Shareholder’s equity 5,000,000
Earnings for prior three years 1,500,000
The acquiree has a valuable patent which is not recorded. If the entity is sold, the patent would
be transferred to the buyer for P500,000. Other assets are properly appraised. The patent has a
remaining life of 5 years. The earnings of the entity are expected to increase 10% more than the
average earnings of the past three years before taking into consideration the amortization of the
patent cost.
Required:
Compute the goodwill under the following methods:
1. Average future earnings are capitalized at 8%.
2. Goodwill is measured at the average excess earnings capitalized at 10% with normal rate
at 8%. The present value of an ordinary annuity of 1 for 4 years at 10% is 3.17.
Problem 31-5 (IAA)

Naughty Company assembled the following data relative to a certain entity in determining the
amount to be paid for net assets and goodwill:
Assets at fair value before goodwill 2,600,000
Liabilities 900,000
Shareholder’s equity 1,700,000
Net earnings after elimination of unusual or infrequent items:
2016 200,000
2017 230,000
2018 300,000
2019 250,000
2020 270,000
Required:
Calculate the amount of goodwill under the following:
1. Average earnings are capitalized at 10%
2. A return of 8% is considered normal on set assets at fair value. Excess earnings are
capitalized at 15%.
3. A return of 10% is considered normal on net assets at fair value. Goodwill is measured at
5 years excess earnings.
4. A return of 10% is considered normal on net assets at fair value. Excess earnings are
expected to continue for 10 years.
Goodwill is measured by the present value method using a 12% rate. The present value of
an ordinary annuity of 1 at 12% for 10 years is 5.65.
Problem 31-6 (IFRS)
Brisbane Company has recently diversified by taking over the operations of Darwin Company at
a cost of P9,000,000.
Darwin Company manufactures and sells a cleaning cloth called the “Superswipe” which was
developed by highly trained and innovative research staff.
The unique nature of the coating used on the “Superswipe” has resulted in Darwin company
acquiring a significant share of the South African market.
A recent expansion into the equatorial African market has proved successful.
As a result of the takeover, Brisbane Company acquired the following assets and liabilities at
fair value:
Land 3,500,000
Machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
Accounts payable 3,000,000
In addition, Darwin Company owned, but had not recognized, the following:
 Trademark – “Superswipe” with fair value of P1,000,000
 Patent – Formula for the special coating with fair value of P500,000
The research staff of Darwin Company agreed to join the staff of Brisbane Company and will
continue to work on a number of projects aimed at producing specialized version of the
“Superswipe”.
Required:
1. Determine the goodwill arising from the acquisition
2. Prepare journal entry to record the acquisition.
Problem 31-7 (IAA)

High Company purchased for cash at P50 per share all 150,000 ordinary shares outstanding of
another entity. The statement of financial position of the acquiree on the date of acquisition
showed net assets with a carrying amount of P6,000,000.
The fair value of property, plant and equipment on same date was P800,000 in excess of carrying
amount.
What amount should be recorded as goodwill on the date of purchase?
a. 1,500,000
b. 800,000
c. 700,000
d. 0
Problem 31-8 (IAA)
Cassnova Company purchased another entity for P5,000,000 cash. The following carrying
amount and fair value were associated with this acquisition:
Carrying amount Fair value
Accounts receivable 2,000,000 2,000,000
Inventory 1,000,000 500,000
Government contact 0 1,000,000
Equipment 400,000 500,000
Short-term loan payable (2,000,000) (2,000,000)
Net assets 1,400,000 2,000,000
The fair value associated with the government contract of the acquiree is not based on any legal
or contractual relationship. In addition, for obvious reason, there is no open market trading for an
intangible of this sort.
What is the goodwill arising from the acquisition?
a. 3,000,000
b. 3,600,000
c. 4,000,000
d. 0
Problem 31-9 (IAA)

At the current year-end, Star Company purchased for P30 per share all 200,000 of Moon
Company’s outstanding ordinary shares. On this date, the acquiree’s statement of financial
position showed net assets of P5,000,000.
Additionally, the fair value of the acquiree’s identifiable assets on this date was P400,000 in
excess of carrying amount.
What amount should be reported as goodwill as a result of the acquisition?
a. 1,000,000
b. 400,000
c. 600,000
d. 350,000
Problem 31-10 (IAA)

At the current year-end, Clever Company purchased for P4,000,000 cash all of the outstanding
ordinary shares of another entity when the statement of financial position of the acquiree showed
net assets of P3,200,000.
The acquiree revealed the following fair value and carrying amount of assets and liabilities:
Carrying
amount Fair value
Property, plant and equipment, net 5,000,000 5,750,000
Other assets 500,000 0
Long-term debt 3,000,000 2,800,000
As a result of the transaction, what amount should be reported as goodwill at year-end?

a. 350,000
b. 250,000
c. 750,000
d. 800,000

Chapter 31

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Problems 31-1 (IAA)

Problem 31-2 (IAA)

Problem 31-3 (IAA)

Problem 31-5 (IAA)

Problem 31-7 (IAA)

Problem 31-9 (IAA)

Problem 31-10 (IAA)

As a result of the transaction, what amount should be reported as goodwill at year-end?

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