BUSINESS COMBINATION

STRAIGHT PROBLEMS

Problem 1 – Computations of Goodwill or IFA Problem 2 – Merger Combination

HARD Company acquired the net assets of SOFT The following summarized balance sheets were prepared
Enterprises on August 1, 2018 The carrying and fair for the RED Company and WHITE Company on December
values of SOFT Enterprises at the date of acquisition 31, 2018, just before the combination. On this date, RED
follows: acquires the net assets of WHITE and issues 12,000 new
Carrying shares in consideration thereof. The issued shares have a
Value Fair Value market value of P35 each.
Cash P20,000 P20,000
Accounts receivable 40,000 40,000 Assets Red White
Merchandise Inventory 60,000 70,000 Cash P140,000 P50,000
Plant and Property 450,000 460,000 Accounts Receivable 120,000 35,000
Patent 60,000 55.000 Land 220,000 50,000
Total assets P630,000 P645,000 Buildings (net) 350,000 210,000
Equipment (net) 410,000 125,000
Accounts Payable P30,000 P30,000 TOTAL P1,240,000 P470,000
Long-term-debt 400,000 370,000
Capital Stock 120,000 Liabilities & Equity
APIC 20,000 Accounts payable P160,000 P55,000
Retained Earnings 60,000 Bonds payable 200,000 100,000
Total Equities P630,000 P400,000 Common stock, P 10 par 400,000 180,000
Paid-in Capital in excess of par — 25,000
HARD issued the following considerations in exchange for Retained earnings 480,000 110,000
the net assets of SOFT. TOTAL P1,240,000 P470,000
1. 50,000, P1 par shares of HARD Company. Fair value-
P2.75 at August 1, 2018. The following market values have been agreed upon by
2. HARD agreed to pay additional cash consideration for the parties over some of WHITE’s net assets items:
the value of any decrease in the share price below
P2.75 for the 50,000 shares issued. The guarantee is Accounts Receivable, P30,000; Land, 60,000; Buildings,
for 90 days and is to expire on October 30, 2018. P250,000; Equipment, P150,000; and Bonds payable,
HARD believes there was only a 20% chance the price P110,000.
of the shares would fall to P2.60 during the guarantee
period. RED Company also paid out-of-pocket costs: P8,000 for
3. Cash of P90,000; P30,000 to be paid on date of direct acquisition costs; P15,000 for stock issuance and
exchange and the balance in one year's time. The registration; and P2,000 for indirect acquisition expenses.
incremental borrowing rate of HARD is 10% per
annum. Required:
4. SOFT Enterprises was currently being sued by an 1. Prepare a schedule for the computation of goodwill or
enraged client; the company's lawyers believe there's income from combination.
a 95% chance it will win the case. The expected 2. Prepare the necessary journal entries in the books of
damages in the event SOFT lost the case is P250,000. RED Company and WHITE Company.
5. An old-model Toyota delivery van carried in the books 3. Balance sheet of Red Company immediately after the
of HARD at P50,000, net of P10,000 accumulated merger business combination.
depreciation. The fair value at the date of the
exchange is P35,000.
 In addition to the purchase consideration HARD
had an out-of-pocket costs of P8,520 for direct
acquisition cost; P2,000 for issuing and
registering the shares; and P1,500 indirect cost.

Required:
1. Prepare a schedule for the determination of the cost
of combination.
2. Prepare a schedule for the computation of the fair
value of the net assets.
3. Determine goodwill or excess from the business
combination, and
4. Prepare journal entries to record the acquisition of
the net assets of SOFT in the books of HARD.