Problem 1

Below is the condensed balance sheet of Sons, Inc., along with estimates of fair values. Pop, Inc. is planning to
acquire Sons by issuing 100,000 shares of its P1 par value common stock (market value P8/share) in exchange for
all the outstanding common stock of Sons. Pop also guarantees the value of its shares issued. The expected present
value of this stock price contingency is P200,000.
Pre-Combination Condensed Balance Sheet
Book value Fair value
Current assets P 380,000 P 350,000
Plant assets ___740,000 810,000
Total assets P1,120,000
Liabilities P 500,000 450,000
Common stock 50,000
Additional paid-in capital 170,000
Retained earnings ___400,000
Total liabilities and equity P1,120,000
Required:
1. Statutory Merger (Chapter 1): prepare Pops’ (acquirer/acquiring) entry(ies) to record the acquisition.
2. Stock Acquisition (Chapters 2-5): prepare Pops’ (parent/acquirer/acquiring) entry to record the
acquisition.

Solution:
1.

Consideration transferred:
Common stock (100,000 shares x P8) 800,000
Expected/Probability PV of Stock Price Contingency 200,000
Consideration transferred 1,000,000
Less: FMV of Assets and Liabilities Acquired:
Current Assets 350,000
Plant Assets 810,000
Liabilities (450,000) 710,000
Positive excess: Goodwill 290,000

Books of Acquirer/Acquiring
Acquisition of Assets and Liabilities:
Current assets 350,000
Plant assets 810,000
Goodwill 290,000
Liabilities 450,000
Common stock P1 par (100,000 shares) 100,000
Additional paid-in capital/ Share premium 700,000
(P8 – P1, par) x 100,000
APIC – Stock Contingent Consideration 200,000

2.
Fair Value of Subsidiary
Consideration transferred:
 Common stock (100,000 shares x P8) 800,000
Expected/Probability PV of Stock Price Contingency 200,000
FV of Subsidiary 1,000,000
Less: Book Value of SHE of Subsidiary - Sons
Common stock 50,000
Additional paid-in capital/Share premium 170,000
Retained earnings / Accumulated Profit/Loss 400,000 620,000
Allocated excess 380,000
Add (Deduct): Over/undervaluation of Assets and Liabilities
Decrease in Current Assets (P350,000 – P380,000) (30,000)
Increase in Plant Assets (P810,000 – P740,000) 70,000
Decrease in Liabilities (P450,000 – P500,000 50,000 90,000
Positive excess: Goodwill 290,000

Acquisition of Stocks (Common):

Investment in Subsidiary – Pop 1,000,000
Common stock P1 par (100,000 shares) 100,000
Share premium/Additional paid-in capital 700,000
(P8 – P1, par) x 100,000
APIC – Stock Contingent Consideration 200,000

Problem 2
Tony Inc. acquires all of Jaramillo Co.’s assets and liabilities on January 1, 20x5. Tony incurs the following costs
for the acquisition:
Consideration transferred:
Cash paid to former stockholders of Jaramillo: there
were 200,000 shares of Jaramillo outstanding, and
Tony agreed to pay P90 in cash for each share of
outstanding Jaramillo stock ………………………………… 18,000,000 Cash payment
50,000shares of new Tony common stock, par value
P2/share, market value P80/share, issued to the former Fair value of stock
stockholders of Jaramillo…………………………………….. P 4,000,000 issued
Acquisition-related costs:
Registration fees connected with issuing the new shares,
paid in cash…………………………………………………….. 300,000 Cash payment
Costs of issuing and printing shares/stock certificates……. 200,000 Cash payment
Consulting/professional fees paid to brokers………………. 1,000,000 Cash payment
Legal fees, audit fees, and finder’s fees for acquisition…. 100,000 Cash payment
The balance sheets of both companies immediately prior to the acquisition are as follows:
Tony, Inc. Jaramillo Co.
Assets Book Value Book Value Fair Value
Cash…………………………...................... P 25,000,000 P 90,000 P 90,000
Receivables…………………………………. 2,000,000 200,000 190,000
Inventories…………………………………… 20,000,000 8,110,000 7,000,000
Plant & equipment, net…………………... 99,500,000 50,000,000 40,000,000
Trademarks………………………………….. 5,000,000 1,000,000 4,000,000
Goodwill……………………………………... ____________ ____600,000
Total Assets……………………………………. P151,500,000 P 60,000,000
Liabilities &Equity Book Value Book Value Fair Value
Current liabilities……………………………. P 500,000 P 400,000 P 400,000
Long-term liabilities………………………… 70,000,000 45,000,000 47,000,000
Ordinary share/Common stock, par…… 2,000,000 1,000,000
Share premium/APIC……………………… 55,000,000 10,000,000
Accumulated P&L/Retained earnings… 25,000,000 6,600,000
Treasury shares……………………………… (1,000,000) ( 3,000,000)
3
Total Liabilities &Equity………………………. P151,500,000 P 60,000,000
In addition to the assets and liabilities already reported, Jaramillo has the following previously unrecorded
intangible assets at fair value that meet the requirements for capitalization:
Brand names…………………………………………………………….. P 5,000,000
Secret formulas…………………………………………………………. 7,000,000
Tony, Inc. will pay an additional cash consideration of P1,000,000 on January 1, 20x7 in the event that average
income for the two (2) year period of 20x5 and 20x6 will be equal or greater than P5,000,000 per year. At
acquisition, there is a high probability of reaching the target average income and the fair value of the additional
consideration was determined to be at an expected value of the contingency at P400,000 based on a 40% probability
of achieving the target average income.
Required:
1. Goodwill. Prepare the journal entry or entries to record the acquisition on Tonys’ books (the
acquirer/acquiring company). – (Nikki)
2. Bargain Purchase Gain/Gain on Acquisition (Dawn). Assume the same information as above, but
Jaramillo has an additional previously unreported intangible that meets the requirements for capitalization:
a noncompetition agreement with a fair value of P10,000,000. All fair value calculations have been double
checked for accuracy and found to be correct. Prepare the journal entry or entries to record the acquisition
on Tonys’ books.
3. Prepare Tony’s balance sheet for (1)(Abi) and (2)(Aljie) above immediately following the merger.
4. Determine the following amounts immediately following the merger for requirement (1) (Alyssa) and (2)
(Regine):
(a) Total assets; 201,700,000 205,180,000
(b) Total liabilities; 118,300,000 118,300,000
 (c) Additional paid-in capital (share premium); 58,400,000 58,400,000
(d) Retained earnings (accumulated profit or loss); and 23,900,000 27,380,000
(e) Stockholders’/Shareholders’ equity;83,400,000 86,880,000

Solutions:

1.
Consideration transferred:
Cash 18,000,000
Prob. PV of Contingent Consideration - given 400,000
or, P1,000,000 x 40% probability
Common stock (P80 x 50,000 shares) 4,000,000
Consideration transferred 22,400,000
Less: MV of Assets and Liabilities Acquired:
Cash 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment, net 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Current liabilities (400,000)
Long-term liabilities (47,000,000 15,880,000
Positive excess: Goodwill 6,520,000

Books of Acquirer/Acquiring
Acquisition of assets and liabilities:
Cash 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Goodwill 6,520,000
Current liabilities 400,000
Long-term liabilities 47,000,000
Cash 18,000,000
Estimated liability for Contingent Consideration 400,000
Common stock, P2 par x 50,000 shares 100,000
Share premium/APIC (P80 – P2) x 50,000 shares 3,900,000

Acquisition expenses
Acquisition-related expenses/Retained earnings/Accum. P&L 1,100,000
Cash 1,100,000

Costs to Issue and Register Stocks

Share premium/APIC 500,000
Cash 500,000
Post-Combination Balance Sheet: (requirement 1)

Assets Liabilities and Stockholders’ Equity

Cash 5,490,000
Current liabilities P 900,000
Receivables 2,190,000
Estimated liability for Cont. Cons 400,000
Inventories 27,000,000
Long-term liabilities 117,000,000
Plant and equipment 139,500,000sure
Trademarks 9,000,000
Common stock 2,100,000
Brand names 5,000,000
Paid-in capital – par 58,400,000
Secret formulas 7,000,000Retained earnings* 23,900,000
Goodwill 6,520,000
Treasury stock (1,000,000)
Total 201,700,000
Total 201,700,000

2.
Consideration transferred:
Cash 18,000,000
Prob. PV of Contingent Consideration - given 400,000
or, P1,000,000 x 40% probability
Common stock (P80 x 50,000 shares) 4,000,000
Consideration transferred 22,400,000
Less: MV of Assets and Liabilities Acquired:
Cash 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment, net 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Noncompetition agreements 10,000,000
Current liabilities (400,000)
Long-term liabilities (47,000,000) 25,880,000
Negative excess: Gain on acquisition (3,480,000)

Books of Acquirer/Acquiring
Acquisition of assets and liabilities:
Cash 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment 40,000,000
 Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Noncompetition agreements 10,000,000
Current liabilities 400,000
Long-term liabilities 47,000,000
Cash 18,000,000
Estimated liability for Contingent Consideration 400,000
Common stock, P2 par x 50,000 shares 100,000
Share premium/APIC (P80 – P2) x 50,000 shares 3,900,000
Retained earnings (Gain on acquisition) 3,480,000

Acquisition expenses
Acquisition-related expenses/Retained earnings/Accum P&L 1,100,000
Cash 1,100,000

Costs to Issue and Register Stocks

Share premium/APIC 500,000
Cash 500,000

Post-Combination Balance Sheet: (requirement 2)

Assets Liabilities and Stockholders’ Equity

Cash P 5,490,000
Current liabilities P 900,000
Receivables 2,190,000
Estimated liability for Cont. Cons 400,000
Inventories 27,000,000
Long-term liabilities 117,000,000
Plant and equipment 139,500,000
Trademarks 9,000,000
Common stock 2,100,000
Brand names 5,000,000
Paid-in capital – par 58,400,000
Secret formulas 7,000,000Retained earnings* 27,380,000
Noncompetition agreement _10,000,000
Treasury stock (1,000,000)
Total 205,180,000
Total 205,180,000