BUSINESS COMBINATION (PA2.

M-1413)

STRAIGHT PROBLEMS

Problem 1
Agdao corporation paid P5,000,000 to purchase NCR corporation on January 2, 2013, and NCR
was dissolved. The purchase price consisted of 100,000 shares of agdaos common stock with a
market value of P4,000,000 plus P1,000,000 cash. In addition, Agdao paid 100,000 for
registering and issuing the 100,000 shares and P200,000 for other costs in consummating the
combination. The statement of Financial Position for the companies immediately before
combination is summarized as follows;
Agdao NCR
Book Fair Book Fair
Value value Value Value
Cash 6,000,000 6,000,000 480,000 480,000
Accounts Receivable (net) 2,600,000 2,450,000 720,000 720,000
Notes Receivable,(net) 3,000,000 2,900,000 600,000 600,000
Inventories 5,000,000 6,000,000 840,000 1,000,000
Other current assets 1,400,000 1,500,000 360,000 400,000
Land 4,000,000 6,000,000 200,000 400,000
Buildings, (net) 18,000,000 17,000,000 1,200,000 2,400,000
Equipment,(net) 20,000,000 18,550,000 1,600,000 1,200,000
Total Assets 60,000,000 60,350,000 6,000,000 7,200,000

Accounts payable 2,000,000 2,000,000 600,000 600,000

Mortgage payable, 10% 10,000,000 10,500,000 1,400,000 1,200,000
Capital stock, P10 par 20,000,000 2,000,000
Additional Paid-in capital 16,000,000 1,200,000
Retained Earnings 12,000,000 800,000
Total Liabilities and Shareholder's Equity 60,000,000 6,000,000

a. Prepare the journal entries to record Agdaos acquisition of NCR Corporation if it was a
purchase of assets and liabilities; and if it was a purchase of voting shares.
b. Prepare a statement of financial position for Agdao Corporation on January 2, 2013,
immediately after the combination.

Problem 2

Dencio Co. merged into Kit Corp. on July 1, 2013. In exchange for the net asset at fair market
value of Dencio Co. amounting to P696, 450, Kit issued 68,000 common shares at P9 par value
with a market price of P12 per share.
Out of pocket costs of the combination were as follows:

Legal fees for the contract of business combination P35,600

Audit fee for SEC registration of stock issue 90,000
Printing costs of stock certificates 14,500
Brokers fee 23,600
Accountants fee for pre-acquisition audit 80,000
Other direct cost of acquisition 75,000
General and allocated expenses 43,000
Listing fees in issuing new shares 36,000

Dencio will pay an additional cash consideration of P455,000 in the event that kit,s net income
will be equal or greater than P950,000 for the period ended December 31, 2013. At acquisition
date, there is a high probability of reaching the target net income and the fair value of the
additional consideration was determined to be P195,000.

Actual net income for the period ended December 31, 2013 amounted toP1,250,000. The
additional cash consideration was paid.

1. What is the amount of goodwill to be recognized in the statement of financial position as

of December 31, 2013?
2. What is the amount of expense to be recognized in the statemenet of financial position as
of the year ended December 31, 2013?

Problem 3

Summary information is given for DUBAI, Inc. and DAVAO Company at July 1, 2013. The
quoted market price of DUBAI and DAVAO shares are P36 and P40, respectively.

DUBAI Inc. DAVAO Company

Book Book
Value Value Fair value
Current Assets 8,000,000 24,000,000 24,000,000
Plant Assets 22,000,000 26,000,000 25,000,000
Goodwill 1,500,000
Totals 31,500,000 50,000,000

Liabilities 5,000,000 15,000,000 15,500,000

Common Stocks,
P10 10,000,000 20,000,000
APIC 2,000,000 3,000,000
Retained Earnings 14,500,000 12,000,000
Totals 31,500,000 50,000,000

The book values of DUBAI reflects their fair values except for inventory items whose realizable
value is 650000 more than its carrying amount, unreported cash on hand of 350000 and a
building costing 8000000 that is 20% depreciated and is appraised at 10400000

DAVAO Company acquires all the net assets of DUBAI by issuing 700000 of its own shares and
fifthy P100,000 10% bonds. DAVAO company incurred the following out of pocket costs
relating to the acquisition:

Legal fees to arrange the business combination P 25,000

Cost of SEC registration 12,000
Cost of printing and issuing new stock certificates 3,000
Indirect cost of combination 20,000
Finders fee 35,000
Bond issuance transaction cost 15,000

Calculate the following assuming the entities adopt the full IFRS and IFRS for SMEs

a. Net assets required

b. Consideration transferred
c. Goodwill/ gain arising from business combination
d. Total assets immediately after combination
e. Total retained earnings after combination

Problem 4

Condensed statements of financial position of Cure Corp. and Class Corp. as of December 31,
2012 are as follows:

CURE CLASS
Current Asset P 43,750 P 16,250
Noncurrent Asset 181,250 10,6250
Total Asset P225,000 P122,500

Liabilities P18,750 P8,750

Common Stocks, P20 Par 137,500 75,000
Additional Paid in Capital 8750 6,250
Retained earnings 62500 32,500
On January 1, 2013, Cure corp. issued 8750 stocks with a m,arket value on P25/share for the
assets and liabilities of Class corp. the book value reflects the fair value of the assets and
liabilities except that the noncurrent assets of classhas a temporary appraisal of 157500 and the
noncurrent assets of Cure are overstated by P7500. Contingent consideration, which is
determinable, is equal to P3750. Cure also paid for the stock issuance costs worth P8500 and the
other acquisitioncosts amounting to P4750.

On march 1, 2013 the contingent consideration has a determinable amount of P5000. On june 1,
2013, the provisional fair value of the noncurrent assets of class increased by P2250.

How much is the combined total assets at the end of 2013?

Problem 5

On September 1, 2013, SLU acquires 75%(750,000 ordinary shares) of UB company for

P7,500,000. When UB,s shares are trading at P8 per share at the stock market .An independent
appraiser estimated that the fair of UB is P9,7000,000. Assuming that the net identifiable assets
with a carrying value of P6,000,000 has a fair value of P8,000,000, determine the following:

a) Non-Controlling Interest and Goodwill/gain if the non-controlling interest is to be valued

at the proportionate allocation of acquires net assets.
b) Non-controlling interest and Goodwil/Gain if the non-controlling interest is to be valued
at the fair value of shares held by NCI.

Problem 6

The statemet of financial Position of Lancer Corporation on June 30, 2013 is presented below:

Curremt Assets 32,500

Land 220,000
Building 110,000
Equipment 87,500
Total Assets 450,000

Liabilities 87,500
Capital stock, P5 par 150,000
Additional paid in capital 137,500
Retained earnings 75,000
Total Equities P450,000
All the assets and liabilities of Lancer assumed to approximate their fair values except for land
and building. It is estimated that the land have a fair value of P350,000 and the fair value of the
building increased by P80,000.
Krista Corporation acquired 80% of Lancers capital stock for P500,000.

Required
1. Assuming the consideration paid includes control premium of P142,00, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?
2. Assuming the consideration paid excludes control premium goodwill/(gain on
acquisition) on the consolidated financial statement?
3. Assuming the consideration paid includes control premium of P37,000, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?

Problem 7

Baguio Company acquires 15% of San Fernando companys ordinary shares for P5,000,000 cash
and carries the investment using the cost the cost method. A few months later, Baguio purchases
another 60% of San Fernandos ordinary shares for P2,160,000. At that date, San Fernando
company reports identifiable assets with a book value of P3,900,000 a fair value of P5,100,00
and it has liabilities with a book value of and fair value of P1,900,000. The fair value of the 25%
non-controlling interest in San Fernando company is P0900,000.
Determine the:
a. Non-Controlling Interest and Goodwill/ Gain arising from the business combination if
NCI is to be valued using the proportionate basis.
b. Non-Controlling Interest and Goodwill/Gain arising from the business combination if
NCI is to be valued at the NCI shares Fair Value.

Problem 8

FMM Corporation purchased 30% interest in STO Corporation for P90,000 on January 1, 2013
when STO had ordinary shares of P240,000 and retained earnings of P40,000. Any difference
between the cost of investment and book value acquired is due to undervalued equipment with
remaining useful life of 3 years. For the years 2013 to 2015 STO Corporation reported the
following :

Net Income Dividend Declaired

2013 30,000 20,000
2014 50,000 40,000
2015 10,000 40,000
FMM Corporation purchased additional 40% of STO Corporation on January 1, 2013 for P140,000
Assuming that the 30% investment acquired in 2013 is now with a fair value of P90,000 (representing
30% of net assets fair value on that date-difference attributable to land.)

Required:
1.) Journal entire to record the above transaction.
2.) The cost of acquisition on January 1, 2013.
3.) The resulting goodwill/gain from acquisition.
4.) The non-controlling interest on January 1, 2013.

Problem 9
Entity A issued equity instrument to Entity B on 30 September 20X1. Their price combination balance
sheets are:
A B
_______________ ________________
Current Assets P 500 P 700
Non-current Assets 1,300 3,000
_______________ ________________
P 1,800 P 3,700

Current Liabilities P 300 P 600

Non-Current Liabilities 400 1,100
_______________ _______________
P 700 P 1,700

Owners Equity 800 1,400

Retained Earnings
Issued Equity
100 ordinary shares 300
60 ordinary shares 600
_______________ _________________
P 1,800 P 3,700

Additional information:
a. On 30 September 20X1, A issues 2 shares in exchange for each ordinary share of B. All of
Bs shareholders exchange their share in B. A issues 150 ordinary shares in exchange for all
60 ordinary shares of B.
b. The fair value of each ordinary share of B at 30 September 20X1 is P40. The quoted market
price of As ordinary shares at that date is P12.
 c. The fair value of As identifiable assets and liabilities at 30 September 20X1 are the same as
their carrying amounts, with the excemption of non-current assets. The fair value of As non-
current assets at 30 September 20X1 is P1,500.
Required:
1. What is the consideration effectively transferred to effect the combination?_____________
2. How much is goodwill?________________
3. Prepare theconsolidation financial statement after the combination.
4. What is the number and type of equity interest issued to be disclosed in the equity structure
of the consolidated financial statements?________________
5. Assume that only 56 of Bs ordinary shares are tendered for exchange rather than all 60.
a. How much is the minority interests?_______________
b. How much is the cost of business combination?___________________
c. How much is goodwill?________________

MULTIPLE CHOICE QUESTION

1. TBB issued 120,000 shares of its P25par ordinary shares for all the net assets of HAF Company
on July 1, 2013. TBBs ordinary shares were selling at P30 per share at the acquisition date. In
addition a cash payment of P200,000 was made plus an agreement deferred cash payment of
P990,000 payable on July 1, 2013. The market rate ofinterest at the time is 10%.
TBB also agreed to pay additional cash consideration of P250,000 in the event TBBs net income
falls below the current level within the next 2 years. TBBs financial officers were 99% sure the
current level of income at least be sustained during the prescibed period.
The following out-of-pocket costs were paid in cash by TBB.
Legal and accounting fees paid to advisers P 8,000
Brokers fees 4,000
Indirect acquisition costs 3,000
Costs to issue and register the shares 10,400
Total P 25,400

Determine the cost of the investments for TBB

A. 4,700,000
B. 3,800,000
C. 5,040,000
D. 4,950,000

Questions 2 3 are based on the following

On October 1, 2013, Water Corporation acquired all the assets and assumed all the liabilities of Gulaman
Company by issuing 20,000 shares with a fair value of P67.5 per share and an obligation to pay a
contingent consideration with a fair value of P750,000.
In addition, Water paid the following acquisition related costs:
Legal fees P 105,600
Audit fee for SEC registration of stock issue 320,400
Costs of stock certificates 35,000
Brokers fee 49,000
Other direct cost of acquisition 50,000
General and Allocated expenses 14,000

The Statement of Financial Position as of September 30, 2013 of Water and Gulaman, together with the
fair market value of the assets and liabilities are presented below:

Water Gulaman
Book Value Fair Value Book Value Fair Value
Cash P 640,000 P 640,000 P 45,000 P 45,000
Accounts Receivable 360,000 335,000 70,000 54,000
Inventories 475,000 390,000 87,000 78,000
Prepaid Expenses 25,000 - 13,500 5,000
Land 2,000,000 2,900,000 900,000 1,550,000
Building 800,000 900,000 723,000 768,000
Equipment 700,000 585,000 361,500 360,000
Goodwill - - 300,000 -
Total assets P 5,000,000 P 5,750,000 P 2,500,000 P 2,860,000

Accounts Payable 312,500 312,500 200,000 200,000

Notes Payable 937,500 980,000 700,000 765,000
Capital stock,50 par 2,000,000 850,000
Additional paid in cap.1,000,000 400,000
Retained Earnings 750,000 350,000
Total Equities P 5,000,000 P 2,500,000

Compute for the balances that will be shown on October 1,2013 statement of financial position of the
surviving company:

2. Reatained earnings
a. P480,000
b. P540,000
c. P526,000
d. P475,000

3. Total assets
 a. P7,015,000
b. P6,980,000
c. P7,118,000
d. P7,491,000

Question 4-5 are based on the following

Best Company has gained control over the operations of Cure Corporations by acquiring 85% of its
outstanding capital stock for P 2,580,000. This amounts includes a control premium of P30,000.
Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000 respectively.
Best Cure
Book Value Book Value Fair Value
Cash P3,541,500 P128,000
Accounts Receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid Expense 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill 300,000
Total Assets P8,750,000 P2,860,000

Accounts Payable 675,000 253,000

Notes Payable 1,400,000 730,000
Capital Stock,50 Par 3,400,000 800,000
Additional Pain in Capital 1,575,000 600,000
Retained Earnings 1,700,000 477,000
Total Equities P8,750,000 P2,860,000

The following was ascertained on the date of acquisition for Cure Corporation:
The value of receivables and equipment has decreased by P25,000 and P14,000
respectively.
The fair value of inventories is now P436,000 whereas the value of land anfair value of
and building has increased by P471,000 and P107,000 respectively.
There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes is
P738,000.
Compute for the following balances to be presented in the consolidated statement of financial position
at the date of business combination:
4. Total assets
A. P9,875,000
B. P10,093,000
C. P10,112,000
D. P9,215,000
5. Shareholders equity
A. P7,000,000
B. P7,500,000
C. P8,200,000
D. P8,000,000

6. AIG Company acquired a 70% interest in EASTWEST Company for P1,960,000 when the fair value
of EASTWESTs identifiable assets and liabilities was P700,000 and elected to measure the non-
controlling interests at its share of the identifiable net assets. Annual impairment reviews of
goodwill have not resulted in any impairment losses being recognized.

EASTWESTs current statement of financial position shows share capital of P100,000, a

revaluation reverse of P300,000 and retained earnings of P1,400,000.
Under IFRS3 Business combinations, the figure in respect of goodwill should now be carried in
AIGs consolidated statement of financial position?
A. P1,470,000
B. P 160,000
C. P1,260,000
D. P700,000

7. Patrick Company acquired the assets (except for cash) and assumed the liabilities of Steve
Company on January 2,2013 and Steve Company is dissoved. As compensation, Patrick Company
gave 24,000 shares its common stock, 12,000 shares of its 8% preferred stock, and cash of
P240,000 to the stockholders of Steve Company. On the date of acquisition, Patrick Company
had the following characteristics:

Common,par value P5; fair value,P25

Preferred,par value P100; fair value, P100

Immediately prior to acquisition, Steve Companys balance sheet was as follows:

Cash 132,000 Current Liabilities 228,000
Accounts Receivable(net of 170,000 Bonds Payable, 10% 400,000
P4,000 allowance)
Inventory-LIFO Cost 200,000 Common Stock,P5 par value 600,000
Land 384,000 Additional Paid-in Capital 380,000
Buildings and Equipment(net) 1,032,000 Retained Earnings 310,000
Total P 1,918,000 Total P 1,918,000

An appraisal of Steve Company showed that the fair values of its assets and liabilities were equal
to their book values except for the following, which had fair values as indicated:
Accounts Receivable P158,000 Land P540,000
 Inventory 412,000 Bonds Payable 448,000

How much must be the goodwill recognized as a result of this business combination?
A. P322,000
B. P454,000
C. P 94,000
D. P 0

8. On October 2013 BDO Company acquired 100% of PCI Company when the fair value of PCIs net
assets was P116 million and their carrying amount was P120,000 million. The consideratrion
transferred comprised P200 million in cash transferred at the acquisition date, plus another P60
million in cash be transferred 11 months after the acquisition date if a specified profit target was
met by PCI. At the acquisition date there was only a low probability of the profit target being
met, so the fair value of the additional consideration liability was P10 million. In the event, the
profit target was met and the P60 million cash was transferred. What amount should BDO
present for goodwill in its statement of consolidated financial position at 31 December 2014,
according to IFRS3 Business combinations?
A. P94 Million
B. P80 Million
C. P84Million
D. P144 Million

Question 9 and 10 are based on the following :

Giordano Company purchased the net assets of Hanes Company on January 1, 2013, and made the
following entry to record the purchase:
Current assets 100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common stock,P1 par 100,000
Paid-in Capital in excess of par 520,000

9. A contingent consideration agreement was made on Jan. 1, 2013, wherein an additional cash
payment would be on Jan. 1, 2015, equal to twice the amount by which average annual earnings
of the Hanes Division exceed P25,000 per year, prior to January 1, 2015. Net income was
P50,000 in 2013 and P60,000, in 2014. How much goodwill will still be recorded on the books on
January 1, 2015?
A. P60,000
B. P120,000
C. P85,000
 D. None

10. A contigent consideration agreement was made on January 1, 2013, wherein additional shares
would be issued on January 1,2015, to compensate for any fall in the value of Giordano common
stock below P6 per share. The settlement would be to cure the deficiency by issuing added
shares based on their fair value on Jan. 1,2015. The market price of the shares on Jan. 1,2015,
was P4. How many shares will Giordano still issue on January 1,2015?
A. 50,000
B. 100,000
C. 20,000
D. 51,667