Millan-Business-Combinations-Consolidation Financial Statement PDF

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AFAR Drills & Exercises1Business Combinations (Part 1)Multiple Choice – ComputationalMeasuring 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 liabiliti...

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AFAR Drills & Exercises1 Business Combinations (Part 1) Multiple Choice – Computational 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: Carrying amounts Fair values Assets 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 7,200,000 6,400,000 Total assets 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 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

1

From Advanced Accounting by V.Z.MILLAN

fair value ₱620,000.

of

the

20%

non-controlling

interest

in

RASCAL,

Inc.

is

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 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 issuing the bonds 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 Restructuring provisions 9. 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)? a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000 Specific recognition principles – Operating leases Fact pattern 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. Case #1: Acquiree is the lessee – terms are favorable 10. 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)? a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000 Case #2: Acquiree is the lessee – terms are unfavorable 11. 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 patent compared with market terms are unfavorable. The fair value of the differential is estimated at ₱80,000. How much is the goodwill (gain on bargain purchase)? a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000 Case #3: Acquiree is the lessor 12. As of January 1, 20x1, HISTRIONAL is renting a building and a patent from 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)? a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000 Intangible assets – separability and contractual-legal criteria 13. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in exchange for all of the net assets of FLEXIBLE, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of FLEXIBLE acquired by LITHE are shown below:

Carrying amounts Assets Cash 40,000 Receivables 2,760,000 Allowance for probable losses on (400,000) receivables Property, plant and equipment 4,000,000 Computer software 400,000 Patent Goodwill 400,000 7,200,000 Total assets Liabilities Bonds payable (w/ face amount of 1,600,000 ₱1,600,000)

Fair values 40,000 1,480,000 4,400,000 200,000 80,000 6,200,000 1,800,000

In applying the recognition and measurement principles under PFRS 3, LITHE Co. has identified the following unrecorded intangible assets: Type of intangible asset Research and development projects Customer list Customer contract #1 Customer contract #2 Order (production) backlog Internet domain name Trademark Trade secret processes Mask works Total

Fair value 200,000 160,000 120,000 80,000 40,000 60,000 100,000 140,000 180,000 1,080,000

Additional information:  The computer software is considered obsolete.  The patent has a remaining useful life of 10 years and a remaining legal life of 12 years.  FLEXIBLE, Inc. recognized the research and development costs as expenses when they were incurred.  Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and Numbers Co., a customer, wherein FLEXIBLE, Inc. is to supply goods to Numbers Co. for a period of 5 years. As of acquisition date, the remaining period in the agreement is 3 years. LITHE and FLEXIBLE believe that Numbers Co. will renew the agreement at the end of the current contract. The agreement is not separable.  Customer contract #2 refers to FLEXIBLE’s insurance segment’s portfolio of one-year motor insurance contracts that are cancellable by policyholders.  FLEXIBLE, Inc. transacts with its customers solely through purchase and sales orders. As of acquisition date, has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of FLEXIBLE’s customers are also recurring customers. However, as of acquisition date, FLEXIBLE has no open purchase orders or other contracts with those customers.  The internet domain name is registered. How much is the goodwill (gain on bargain purchase)? a. 900,000 b. 600,000 c. 420,000 d. 1,680,000

Other recognition and measurement principles 14. 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)? a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000 Contingent liabilities 15. 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. Noncontrolling 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)? a. 1,880,000 b. 1,200,000 c. 1,560,000

d.

1,520,000

Consideration transferred and indemnification asset 16. 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)? a. 1,721,843 b. 1,561,843 c. 1,641,843 d. 2,320,000 Deferred taxes 17. On January 1, 20x1, ATTAINDER Co. acquired all of assumed all of the liabilities of DISHONOR, Inc. As of carrying amounts and fair values of the assets and DISHONOR acquired by ATTAINDER are shown below: Carrying amounts Assets Cash in bank 40,000 Receivables 800,000 Allowance for probable losses on (120,000) receivables Inventory 2,080,000 Building – net 4,000,000 Goodwill 400,000 7,200,000 Total assets Liabilities Payables

1,600,000

the assets and this date, the liabilities of Fair values 40,000 480,000

1,400,000 4,400,000 80,000 6,400,000

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 combination? a. 1,148,000

the

goodwill

(gain

b. 1,108,000

on

bargain

purchase)

c. 1,028,000

on

the

business

d. 1,240,000

Consideration transferred – Dividends on 18. 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: Carrying amounts Fair values Assets 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 7,200,000 6,400,000 Total assets Liabilities Dividends payable Other payables

400,000 1,600,000 2,000,000

400,000 1,600,000 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)? a. 1,280,000 b. 2,080,000 c. 2,480,000

d. 1,680,000

Business Combinations (Part 2) Multiple Choice – Computational Consideration transferred – Measurement 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: Combined COLLOQUY Co. CONVERSATION, Co. entity (Carrying amounts) (Fair values) Identifiable assets 9,600,000 6,400,000 16,000,000 Goodwill ? 9,600,000 6,400,000 ? Total assets 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 & 9,600,000 6,400,000 ? equity 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. 1. How much is the fair value of consideration transferred on the business combination? a. 4,000,000 b . 2,400,000 c. 4,400,000 d. 4,800,000 2. How many shares were issued in the business combination? a. 40,000 b. 12,000 c. 36,000 d. 10,000 3. How much is the acquisition-date fair value per share? a. 400 b. 440 c. 280 d. 360 4. How much goodwill was recognized on acquisition date? a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000 5. What is the retained earnings of the combined entity immediately after the business combination? a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000 Fair value of acquirer’s shares is reliably determinable Use the following information for the next three questions: On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a business combination effected through exchange of equity instruments. The combination resulted to CONJUNCTION obtaining 100% interest in UNION. Both of the combining entities are publicly listed. As of this date, CONJUNCTION’s shares have a quoted price of ₱400 per share. CONJUNCTION Co. recognized goodwill of ₱300,000 on the business combination. No acquisition-related costs were incurred. Additional selected information at acquisition date is shown below:

Share capital Share premium Totals

CONJUNCTION Co. (before acquisition) 2,400,000 1,200,000 3,600,000

6. How many shares were issued by CONJUNCTION combination? a. 40,000 b. 20,000 c. 12,000 d. 10,000

Combined entity (after acquisition) 2,800,000 4,800,000 7,600,000 Co.

in

the

business

7. What is the par value per share of the shares issued? a. 10 b. 40 c. 12 d. 32 8. What is the acquisition-date fair value of the net identifiable assets of UNION? a. 3,700,000 b. 3,200,000 c. 2,800,000 d. 2,400,000 Business combination achieved in stages – from PFRS 9 Use the following information for the next two questions: Fact pattern On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for ₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3, FORTITUDE recognized net f...