PFRS 3 – BUSINESS COMBINATION

GROUP REPORTING

ANILAO, ELIJAH JOYCE M.

AQUINO, ERIKA JOY L.
ARANILLA, CAREN JOY D.

BSA III

C069 TTH 4:00 - 5:30

 Consideration Transferred: Cash plus Contingent Consideration

Pham Company acquired the assets (except for cash) and assumed the liabilities of
Senn Company on January 1, 20x4, paying P 720,000 cash. Senn Company’s
December 31,20x3, balance sheet, reflecting both book values and fair values, showed:

Book Value Fair Value

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . P 72,000 P 65,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000 99,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 162,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369,000 450,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,000 288,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 874,000 P1,064,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 83,000 P 83,000
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 180,000
Common stock, P2 par value . . . . . . . . . . . . . . . . . . 153,000
Other contributed capital . . . . . . . . . . . . . . . . . . . . . . 229,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 874,000

As part of the negotiations, Pham Company agreed to pay the former stockholders of
Senn Company P 135,000 cash if the post combination earnings of the combined
company (Pham) reached certain levels during 20x4 and 20x5.

Required:

1. Determine the amount of goodwill/gain on acquisition on January 1, 20x4 if it is

expected that the earnings target is likely to be met.
2. Assuming the earnings contingent is met, prepare the journal entry on Pham
Company’s books to settle the contingency on January 2, 20x6.
3. Assuming the earnings contingency is not met, prepare the necessary journal
entry on Pham Company’s books on January 2, 20x6.
Solutions:

1.
Consideration transferred:
Cash P 720,000
Contingent consideration 135,000
Total 855,000
Less: Fair value of net identifiable assets
Accounts Receivable P 65,000
Inventory 99,000
Land 162,000
Buildings 450,000
Equipment 288,000
Accounts Payable (83,000)
Note Payable (180,000) (801,000)
GOODWILL P 54,000

The Journal entries by Pham Company to record the acquisition are as

follows:

January 1, 20x4
Accounts Receivable (net) 65,000
Inventory 99,000
Land 162,000
Buildings 450,000
Equipment 288,000
Goodwill 54,000
Accounts Payable 83,000
Note Payable 180,000
Cash 720,000
Estimated Liability for Contingent Consideration 135,000

2. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Cash 135,000
3. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Gain on Contingent Consideration 135,000