Lesson 1: Introduction to Business Combination (Wholly owned)

Exercises and Problems:

Refer to the following Balance Sheets (As of December 31, 2013) for Situations 1 to 3:

Go Binggo
Book Value Fair Value Book Value Fair Value
ASSETS
Cash 915,000.00 915,000.00 1,005,000.00 1,005,000.00
Inventory 192,000.00 220,800.00 175,000.00 183,750.00
Land 420,000.00 840,000.00 350,000.00 525,000.00
Equipment 620,000.00 682,000.00 580,000.00 430,000.00
Accumulated Depreciation (380,000.00) (418,000.00) (170,000.00) (126,035.00)

TOTAL ASSETS 1,767,000.00 2,239,800.00 1,940,000.00 2,017,715.00

LIABILITIES
Accounts Payable 40,000.00 40,000.00 66,000.00 66,000.00
Provisions 27,000.00 27,000.00 34,000.00 34,000.00
Long term Payable 800,000.00 713,485.00 950,000.00 1,007,655.00

867,000.00 780,485.00 1,050,000.00 1,107,655.00

STOCKHOLDERS' EQUITY
Common stock 500,000.00 350,000.00
Additional paid in capital 50,000.00 300,000.00
Retained earnings 350,000.00 240,000.00
900,000.00 890,000.00

TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY 1,767,000.00 1,940,000.00

Problem 1
On January 1, 2014, Go purchased 100% of Binggo’s net assets for P1.5 Million from its stockholders.
According to the contract of sale between Go and Binggo, Go acquired all of Binggo’s assets and assumed
all its outstanding liabilities. After the merger, the surviving entity will be Go Incorporated.

Additional information:
(1) Following IAS on Intangible Assets, Binggo did not recognize brand name as asset in its books
because it was internally generated. The brandname was registered at insignificant amounts. MMG
approximates the value of the brand name at P300,000.
(2) Go paid MMG P40,000 to help in the appropriate valuation of Binggo’s net assets.
(3) Go does not have sufficient cash to buy the assets and liabilities of Binggo. In order to finance its
acquisition, Go borrowed P1M (net of any transaction costs) from Piggy Bank.

Accounting for Subsidiaries and Business Combinations

1.
Type of business combination
Identifying the acquirer
Determining the acquisition date
Recognizing and measuring the identifiable Journal entry in the books of Go
assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree;
Recognizing and measuring goodwill or a gain
from a bargain purchase

2. How to record Go’s borrowings from Piggy Bank? (Journal Entry)

3. What will happen in the books of the acquiree? (Journal Entries)

4. Common CPA Board examination questions ask for

a. goodwill from business combination (see above computation)
b. total assets, liabilities and stockholders’ equity of the surviving entity as of date of business
combination.

Problem 2
On January 1, 2014, Binggo purchased Go Incorporated’s net asset for P1.5 Million. Binggo will absorb
Go’s operations including its employees. After the merger, Binggo Corporation remains as the surviving
entity.

Additional information:
(1) Following IAS on Intangible Assets, Go did not recognize patent as asset in its books because it was
internally generated. The consultants approximates the value of the patent at P100,000.
(2) Binggo borrowed P500,000 from Piggy Bank to finance its acquisition of Go Incorporated. Binggo paid
transaction cost of P30,000.

Problem 3
Go Incorporated and Binggo Corporation are talent management agencies. Together, they manage 80% of
local actors, actresses, singers and models. On January 1, 2014, they decided to bring their operations
together to form Gobinggo Constellation of Stars. The Memorandum of Agreement between the two
companies contains the following:

(1) Gobinggo will issue 25,000 shares of its P50 par value common stock distributed as follows: 15,000
shares to Go and 10,000 shares to Binggo.
(2) The 15 person Board of Directors of the new corporation will be composed of 9 from Go’s old BOD and
6 from that of Binggo.

Gobinggo paid P100,000 for various expenses related to issuance of common shares.

Requirements for Problems 2 and 3:

1. Prepare all necessary journal entries to account for the above transactions.
 2. Compute for the goodwill or gain from bargain purchase, total assets, total liabilities and total
stockholders’ equity as of date of business combination of the surviving entity.

Assignments:

Assignment 1

Barker Corporation has been looking to expand its operations and has decided to acquire the assets of Verk
Company and Kent Company and Vert Company and Kent Company will be dissolved. Barker will issue
30,000 shares of its P10 par common stock to acquire the net assets of Verk Company and will issue
15,000 shares to acquire the net assets of Kent Company. Verk and Kent had the following balance sheets
as of December 31, 2013:

Assets Verk Kent

Accounts receivable P200,000 P 80,000
Inventory 150,000 85,000
Property, plant and equipment:
Land 150,000 50,000
Building and equipment 500,000 300,000
Accumulated depreciation ( 150,000) ( 110,000)
Total assets P850,000 P 405,000

Liabilities and Equity

Current liabilities P160,000 P 55,000
Bonds payable 100,000 100,000
Stockholders’ equity:
Common stock (P10 par) 300,000 100,000
Retained earnings 290,000 150,000
Total liabilities and equity P850,000 P405,000

The following fair values are agreed upon by the two firms:
Assets Verk Kent
Inventory P200,000 P100,000
Bonds payable 90,000 95,000
Land 300,000 80,000
Buildings and equipment 450,000 400,000

Barker’s stock is currently trading at P40 per share. Barker will incur the following costs:
Verk Kent
Direct acquisition costs P13,000 P 11,000
Indirect acquisition costs 7,000 6,000
Barker’s stockholders’ equity is as follows:
Common stock, P10 par P1,200,000
Paid-in capital in excess of par 800,000
Retained earnings 750,000

Required:
1. Prepare all the necessary journal entries to record the acquisition of Verk and Kent.
2. Determine the following:
a. The cost of acquisition
b. The goodwill/gain arising from business combination
c. The increase in assets of Barker resulting from business combination
d. The total stockholders equity of Barker after business combination
Assignment 2

Effective December 31, 2013, Warly Corporation proposes to acquire, in a one-for-one exchange of
common stock, all the assets and liabilities of Sally Corporation and Erly Corporation, after which the latter two
corporations will distribute the Warly stock to their shareholders in complete liquidation and dissolution.
Warly proposes to increase its outstanding stock for purposes of these acquisitions. Balance sheets of each
of the corporations immediately prior to merger on December 31, 2013, are given here. The assets are
deemed to be worth their book values:

Warly Sally Erly

Current assets P 2,000,000 P 500,000 P 25,000
Fixed assets (net) 10,000,000 4,000,000 200,000
Total P12,000,000 P4,500,000 P225,000
Current liabilities P 1,000,000 P 300,000 P 20,000
Long-term debt 3,000,000 1,000,000 105,000
Common stock (P10 par) 3,000,000 1,000,000 50,000
Retained earnings 5,000,000 2,200,000 50,000
Total P12,000,000 P4,500,000 P225,000

Other data relative to acquisition:

Shares outstanding 300,000 100,000 5,000
Fair market value per share Number P40 P40 P30
shares of Warly stock to be
exchanged for Sally assets 100,000
Number of shares of Warly stock to be
exchanged for Erly assets 5,000

The fair market value of the common shares of Warly reflects the impact of the increased number of
shares to be issued.

Required:
1. Prepare all the necessary journal entries to record the acquisition of Sally and Erly.
2. Determine the following:
a. How much goodwill will be recognized as a result of the business combination?
b. How much is the total assets of Warly after the business combination?
c. How much is the total equity of Warly after the business combination?