Business Combination at the Date of Acquisition

Business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.

Business combinations may be in the following forms:

1. Merger (A + B = A / B)

2. Consolidation (A + B = C)

3. Stock Acquisition

Accounting for Business Combination

An entity shall account for each business combination by applying the acquisition method. Applying the acquisition
method requires:

(1) identifying the acquirer;

(2) determining the acquisition date;

(3) recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in
the acquiree; and

(4) recognizing and measuring goodwill or a gain from a bargain purchase.

Measurement Period

The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional
amounts recognized for a business combination.

PROBLEM I

On January 2, 2020, P Company purchased the net assets of S Company by paying P850,000 cash and issuing shares of stocks at
P3,110,000 fair market value. Book value and fair value data on the Statement of Financial Position on January 2, 2020 are as follows:

P Company S Company
Book Value Fair Value Book Value Fair Value
Cash 4,600,000 4,600,000 300,000 300,000
Accounts Receivable 1,000,000 1,000,000 980,000 980,000
Inventory 1,500,000 1,300,000 710,000 600,000
Building, net 1,800,000 1,460,000 1,520,000 1,064,000
Goodwill 90,000 80,000
Total 8,900,000 8,360,000 3,600,000 3,024,000

Liabilities 1,000,000 1,000,000 570,000 570,000

Share Capital 1,600,000 600,000
Share Premium 900,000 960,000
Retained Earnings 5,400,000 1,470,000
Total 8,900,000 3,600,000

P incurred and paid legal and brokerage fees of P25,600 for business combination; share issue costs of P23,000 indirect acquisition
costs. It is determinable that contingency fee of P11,800 would be paid within the year.

1. The total assets after the business combination is

2. The total shareholder’s equity after the business combination is

 PROBLEM II

A condensed Statement of Financial Position of Cable Company at August 1, 2020 and related fair value are presented below:

Book Value Fair Value

Current Assets 368,000 404,500
Plant Assets 592,500 690,000
Patent (net) 58,500 48,000
Total 1,019,000

Current Liabilities 107,500 107,500

Long-term debt 280,000 297,500
Share capital, P20 par 210,000
Retained earnings 421,500
Total 1,019,000

On August 1, 2020, Sky Corporation issued 10,700 shares of its P24 par value ordinary share (current fair value is P33 per share)
and P145,000 cash for the net assets of Cable Company. Of the 47,500 out of pocket costs paid by the acquirer on acquisition
date, P26,500 was indirect cost and the remainder were legal fees and finders fees related to business combination.

1. How much is the net increase in the stockholders’ equity in the books of the surviving company as a result of business
combination?

PROBLEM III

P Company acquired 75% of S Company’s ordinary share for P510,000 cash. At that date, S Company reports identifiable assets
with book value of P1,040,000 and a fair value of P1,280,000 and it has liabilities with book value and a fair value of P716,000. How
much is the goodwill or (gain on acquisition) arising on consolidation if NCI is measured at fair value and that control premium of
P30,000 included in the purchase price?

PROBLEM IV

On January 7, 2017, Rey Co. acquired a 40% interest in Joanne Co. for P4,800,000. Rey already held a 25% interest which had
been acquired for P1,600,000 but which was valued at P1,920,000 at January 7, 2017. The fair value of non-controlling interest(NCI)
at January 7, 2015 was P2,400,000, and the fair value of the identifiable net assets of Joanne Co. was P8,400,000. How much is the
goodwill to be recognized as a result of business combination?