Chapter 1 Business Combinations PROBLEM 2 - TRUE or FALSE

PROBLEM 2: TRUE OR FALSE
1. Entity A acquires 100% interest in the voting shares of Entity B for 100. Entity B’s
identifiable assets and liabilities have fair values of 200 and 120 respectively. The
goodwill is 80.
FALSE - ₱20
Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [200-120] (80)
Goodwill / (Gain on a bargain purchase) 20
Entity A acquires 90% interest in the voting shares of Entity B for 100. Entity B’s
identifiable assets and liabilities have fair value of 200 and 120, respectively.
2. If the NCI is measured at its proportionate share in the acquirer's net identifiable
assets, the goodwill would be 28.
TRUE {100 + [(200 – 120) x 10%]} – (200 – 120) = 28
Non-controlling interest in the acquiree [(200-120) x 10%] 8
Total 108
3. If the NCI is measured at fair value 10, the goodwill would be 18.
FALSE (100 + 10) – (200 – 120) = 30
Total 110
Entity A acquires all the identifiable assets and assumes all the liabilities of Entity B for
100. Entity B’s identifiable assets and liabilities have fair values of 200 and 120
respectively. (p.23)
4. Entity A incurred legal fees of 20 in negotiating the business combination. The

goodwill is 40.
FALSE 100 – (200 -120) = 20
Total 100
*legal fees (acquisition-related costs) are expensed
5. Entity A estimates liquidation costs of 10 in existing the business activities of Entity B.
the goodwill is 20
TRUE 100 – (200 -120) = 20 (the liquidation costs are ignored because these are post-
combination expenses)
Total 100
*liquidation costs (acquisition-related costs) are expensed
6. Entity A is renting out a license to Entity B under an operating lease. The terms of the
lease compared with market terms are favorable. The fair value of the differential is 5.
The goodwill is 25. (p.27)
FALSE 100 – (200 + 5 intangible asset -120) = 15
Total 100
Less: Fair value of net identifiable assets acquired [(200+5)-120] (85)
7. Entity B has an unrecorded patent with a fair value of 30. The gain on bargain
purchase is 10. (p.30)
TRUE 100 – (200 + 30 -120) = (10)
Total 100
Goodwill / (Gain on a bargain purchase) (10)
*Acquirer recognized Patent even if the acquiree already expensed the related costs
8. Entity B has an unrecognized contingent liability with a fair value of 30. The
contingent liability is a present obligation but has an improbable outflow of economic
resources. The goodwill is 50. (p.33)
TRUE 100 – (200 -120 – 30 contingent liability) = 50
Total 100
Less: Fair value of net identifiable assets acquired [200-(30+120)] (50)
*contingent liability is recognized even if it is improbable because it (a) represents a
present obligation and (b) has a fair value.
9. Entity B’s assets and liabilities have carrying amounts of 150 and 120, respectively.
Fair value adjustments to the acquired assets and liabilities have deferred tax
consequences but do not affect their tax bases. The income tax rate is 30%. The
goodwill is 53. (p.35)
FALSE 100 – (200 -120 – 15 DTL*) = 35
*(200 CA for financial reporting – 150 tax base) = 50 TTD;
50 x 30% = 15 DTL
Total 100
Less: Fair value of net identifiable assets acquired (59)*
* Fair value of assets acquired [200+((200-150) x30%)] 215**
Fair value of liabilities assumed [120+(120x30%)] (156)***
Fair value of net identifiable assets 59
** Asset fair value 200
Asset carrying amount (150)
Deductible Temporary Difference 50
Tax rate 30%
Deferred tax asset 15
Asset fair value 200
Fair value of asset acquired 215
*** No difference from liability’s fair value and carrying amount
10. Entity A agreed to share its trade secret process with entity B after the business
combination. The trade secret process has a fair value of 25. The goodwill is 20. (p.31)
TRUE 100 – (200 -120) = 20 The trade secret processes are not ‘consideration
transferred’ to Entity B’s former owners.
Or
FALSE:
Total 100
Goodwill / (Gain on a bargain purchase) (5)
*trademarks, trade secret process, and mask works acquired in a business combination
normally meet the contractual-legal criterion

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PROBLEM 2: TRUE OR FALSE

4. Entity A incurred legal fees of 20 in negotiating the business combination. The

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