Acquisition of Net Assets

ABC Inc. acquired XYZ Co. on June 30, 2020. Prior to the combination, XYZ Co. has the statement of financial
position as follows:
XYZ Co.
Statement of Financial Position
June 30, 2020

Cash ₱ 200,000.00 Current liabilities ₱ 125,000.00

Marketable securities 300,000.00 Bonds payable 500,000.00
Inventory 500,000.00
Land 150,000.00 Common stock (₱1 par) 50,000.00
Building (net) 750,000.00 Additional paid in capital 700,000.00
Equipment (net) 400,000.00 Retained earnings 925,000.00
Total assets ₱ 2,300,000.00 Total liabilities and equity ₱ 2,300,000.00

Fair values for all accounts have been measured as of June 30, 2020 as follows:

Cash ₱ 200,000.00
Marketable securities 330,000.00
Inventory 550,000.00
Land 360,000.00
Building 900,000.00
Equipment 700,000.00
Unrecognized receivables 225,000.00 ₱ 3,265,000.00

Current liabilities 125,000.00

Bonds payable 500,000.00
Premium on bonds payable 20,000.00 (645,000.00)
Fair value of net
identifiable assets 2,620,000.00
Case 1: Total consideration exceeds the fair value of net assets acquired

ABC Inc. issues 80,000 shares of its P10 par value common stock with a market value of P40 each for XYZ Co.'s
net assets. ABC Inc. pays professional fees of P50,000 to accomplish the acquisition and stock issuance costs
of P30,000.

Solution:
Consideration paid (80,000 shares x P40) ₱ 3,200,000.00
Fair value of net assets acquired (2,620,000.00)
Goodwill ₱ 580,000.00

Journal entries:

Cash 200,000.00
Marketable securities 330,000.00
Inventory 550,000.00
Land 360,000.00
Building 900,000.00
Equipment 700,000.00
Receivables 225,000.00
Goodwill 580,000.00
Current liabilities 125,000.00
Bonds payable 500,000.00
Premium on bonds payable 20,000.00
Common stock (80,000 shares x P10 par) 800,000.00
Additional paid-in capital (80,000 shares x P30) 2,400,000.00
To record the net assets acquired and goodwill.

Acquisition expense 50,000.00

Additional paid-in capital 30,000.00
Cash 80,000.00
To record acquistion-related costs.
h for XYZ Co.'s
uance costs
Case 2: Total consideration is less than the fair value of net assets acquired

ABC Inc. issues 60,000 shares of its P10 par value common stock with a market value of P40 each for XYZ Co.'s
net assets. ABC Inc. pays professional fees of P50,000 to accomplish the acquisition and stock issuance costs
of P30,000.

Solution:
Consideration paid (60,000 shares x P40) ₱ 2,400,000.00
Fair value of net assets acquired (2,620,000.00)
Gain on Bargain Purchase ₱ (220,000.00)

Journal entries:

Cash 200,000.00
Marketable securities 330,000.00
Inventory 550,000.00
Land 360,000.00
Building 900,000.00
Equipment 700,000.00
Receivables 225,000.00
Current liabilities 125,000.00
Bonds payable 500,000.00
Premium on bonds payable 20,000.00
Common stock (60,000 shares x P10 par) 600,000.00
Additional paid-in capital (60,000 shares x P30) 1,800,000.00
Gain on Bargain Purchase 220,000.00
To record the net assets acquired and gain on bargain purchase.

Acquisition expense 50,000.00

Additional paid-in capital 30,000.00
Cash 80,000.00
To record acquistion-related costs.
h for XYZ Co.'s
suance costs
Contingent Consideration

ABC Inc. issues 80,000 shares of its P10 par value common stock with a market value of P40 each for XYZ Co.'s
net assets. ABC Inc. pays professional fees of P50,000 to accomplish the acquisition and stock issuance costs
of P30,000. In addition to the stocks issued, ABC Inc. agreed to pay an additional P200,000 on January 1, 2021 if
the average income for the 2-year period of 2019 and 2020 exceeds P160,000 per year. The expected value is
estimated as P100,000 based on the 50% probability of achieving the target average income.

Solution:
Stocks issued (80,000 shares x P40) ₱ 3,200,000.00
Contingent consideration 100,000.00
Total consideration ₱ 3,300,000.00
Fair value of net assets acquired (2,620,000.00)
Goodwill ₱ 680,000.00

Journal entries:

Cash 200,000.00
Marketable securities 330,000.00
Inventory 550,000.00
Land 360,000.00
Building 900,000.00
Equipment 700,000.00
Receivables 225,000.00
Goodwill 680,000.00
Current liabilities 125,000.00
Bonds payable 500,000.00
Premium on bonds payable 20,000.00
Contingent consideration payable 100,000.00
Common stock (80,000 shares x P10 par) 800,000.00
Additional paid-in capital (80,000 shares x P30) 2,400,000.00
To record the net assets acquired and goodwill.

Acquisition expense 50,000.00

Additional paid-in capital 30,000.00
Cash 80,000.00
To record acquistion-related costs.

Change in contingent consideration

Retrospective adjustment
* Changes that are the result of the acquirer to obtain additional information about facts and
circumstances that existed at the acquisition date
* Occurs within the measurement period (one year from the acquisition date)
 No retrospective adjustment
* Changes resulting from events after the acquisition date
* If classified as liability - changed amount is recognized in profit or loss
* If classified as equity - no remeasurement

Example:
On April 2021, the estimate for the contingent consideration was revised to P160,000 and was revised
again on September 2021 to P200,000.

Journal entries:

Goodwill 60,000
Contingent consideration payable 60,000.00
To record the change in contingent consideration.

Loss on contingent consideration payable 40,000.00

Contingent consideration payable 40,000.00
To record the change in contingent consideration.

Note:
* If the contingent consideration is to issue additional stocks, no liability is recorded at the acquisition date
* The only entry made is at the date when additional shares are issued

Example:
Using the problem in case 1, aside from the 80,000 shares issued, ABC Inc. agreed to issue 20,000 additional
shares if the average income during the 2-year period of 2019 and 2020 exceeds P160,000 per year.

Journal entries:

* Same journal entries with case 1

* If the contingent event occurs, the journal entry would be:

Additional paid-in capital (20,000 shares x P10) 200,000.00

Common stock, P10 par 200,000.00
 for XYZ Co.'s
uance costs
nuary 1, 2021 if
ected value is
d was revised

e acquisition date

e 20,000 additional
00 per year.
Changes in Value During Measurement Period

Measurement period
* Ends when the improved information is available or it is obvious that no better information is available
* Should be at most one year from the acquisition date

Example:
Assuming that the value assigned to the building acquired by ABC Inc. from XYZ Co. on June 30, 2020
is provisional:

Provisional value 900,000.00

Depreciation method:
Straight-line method with 20-year useful life and P660,000 residual value

Cost of Asset - Residual Value 900,000 - 660,000

Depreciation Expense = =
Useful Life of Asset 20 years

240,000.00 12,000 per

Depreciation Expense = =
20 year

Depreciation Expense recorded on December 31, 2020 6,000.00

On January 31, 2021, an improved information regarding the building's value was available. The newly
estimated value and revised depreciation are as follows:

Revised Value 950,000.00

Depreciation method:
Straight-line method with 20-year useful life and P590,000 residual value

Cost of Asset - Residual Value 950,000 - 590,000

Depreciation Expense = =
Useful Life of Asset 20 years

360,000.00 18,000 per

Depreciation Expense = =
20 year

Depreciation Expense should be on December 31, 2020 9,000.00

Journal entries:

Building 50,000.00
Goodwill 50,000.00
To record the building's change in value.
Retained Earnings 3,000.00
Accumulated Depreciation - Building 3,000.00
To adjust depreciation retroactively .
on is available
Journal Entries by the Acquiree (XYZ Co.)

Investment in ABC Inc. 3,200,000.00

Current liabilities 125,000.00
Bonds payable 500,000.00
Cash 200,000.00
Marketable securities 300,000.00
Inventory 500,000.00
Land 150,000.00
Building 750,000.00
Equipment 400,000.00
Gain on sale of business 1,525,000.00
To record the sale of the net assets.

Common stock 50,000.00

Additional paid-in capital 700,000.00
Retained earnings 925,000.00
Gain on sale of business 1,525,000.00
Investment in ABC Inc. 3,200,000.00
To record the liquidation of XYZ Co.

Financial Statements on Date of Acquisition

Statement of Financial Position

* includes assets and liabilities of acquirer @ book value
and assets and liabilities of acquiree @ fair value

Income Statement
* includes the operating results of the acquiree after the acquisition date only.
Acquisition of Stock

Sample Problem

Pharsa Corporation acquired all 10,000 issued and outstanding shares of Saber Company's P100 par value
common stock for P2,000,000 cash on December 1, 2020. Pharsa Corporation incurred professional fees
to effect the business combination amounting to P100,000.

Journal entries:
Books of Pharsa Corporation

Investment in Subsidiary - Saber Company 2,000,000.00

Cash 2,000,000.00
To record the acquisition of stocks from Saber Company.

Acquisition Expense 100,000.00

Cash 100,000.00
pany's P100 par value
ed professional fees