Quiz 14

1. National acquired assets and liabilities of Regional for Regional’s book

value at the balance sheet date. At that date, National’s inventory had a
book value and market value of P65,000 and P80,000, respectively while
Regional’s inventory had a book and market value of P25,000 and
P25,000, respectively. What amount of inventory would appear on the
balance sheet?

2. Baker Enterprises acquired assets and liabilities assets and liabilities of

Werner Company for Werner’s book value at the balance sheet date. At
that date, Baker’s equipment had a net book value and market value of
P210,000 and P300,000, respectively while Werner’s equipment had a net
book and market value of P70,000 and P70,000, respectively. What
amount of equipment (net) would appear on the balance sheet?

Use the following information for 3 to 6:

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Platek Enterprises acquired assets and liabilities of Smith Company for
P600,000. At that date, Smith Company had the following book values and

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market values:
Book Value Market Value

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Cash and Receivables P25,000 P25,000
Inventory
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Plant Assets (net) 300,000 475,000
Current Liabilities (60,000) (60,000)
Long-term Debt (120,000) (120,000)
Common Stock (15,000)
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Retained Earnings (255,000)

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3. What amount is included in the balance sheet with regard to inventory?

4. What amount is included in the balance sheet with regard to plant

assets?
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5. What amount is included in the balance sheet with regard to goodwill?

6. Cozzi Company is being purchased and has the following balance sheet
as of the purchase date:
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Current assets . . . . . . . . . . . . P200,000 Liabilities . . . . . . . . . . . . P 90,000

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Fixed assets . . . . . . . . . . . . . . 180,000 Equity . . . . . . . . . . . . . . . . 290,000

The price paid for Cozzi's net assets is P500,000. The fixed assets have a
fair value of P220,000, and the liabilities have a fair value of P110,000.
The amount of goodwill to be recorded in the purchase is:
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7. P Company purchased the net assets of S Company for P225,000. On the

date of P's purchase, S Company had no investments in marketable
securities and P30,000 (book and fair value) of liabilities. The fair values
of S Company's assets, when acquired were:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P120,000

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 Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,00
0
How should the P45,000 difference between the fair value of the net
assets acquired (P270,000) and the consideration paid (P225,000) be
accounted for by P Company?

Use the following information for questions 8 and 9:

Posch Company issued 12,000 shares of its P20 par value common stock for the net
assets of Sato Company in a business combination under which Sato Company will
be merged into Posch Company. On the date of the combination, Posch Company
common stock had a fair value of P30 per share. Balance sheets for Posch
Company and Sato Company immediately prior to the combination were as follows:
Posh Sato
Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 657,000 P 96,000
Plant and Equipment (net) . . . . . . . . . . . . . . . . . . . . . . 863,000 204,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 450,000 P 75,000
Common Stock, P20 par value . . . . . . . . . . . . . . . . . . 825,000 120,000

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Other Contributed Capital . . . . . . . . . . . . . . . . . . . . 109,000 30,000

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Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 136,000 75,000

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8. If the business combination is treated as an acquisition and Sato
Company’s net assets have a fair value of P343,200, Posch Company’s

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balance sheet immediately after the combination will include goodwill of:
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9. If the business combination is treated as an acquisition and the fair value
of Sato Company’s current assets is P135,000, its plant and equipment is
P363,000, and its liabilities are P84,000, Posch Company’s financial
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statements immediately after the combination will include:

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a. Negative goodwill of P54,000 c. Plant and equipment of

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P1,172,000
b. Plant and equipment of d. An extraordinary gain of P54,000
P1,226,000
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Use the following information for 10 to 17:

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On January 1, 20x4, the Moody Company entered into a transaction for acquisition
of assets and liabilities of Osorio Company. Moody issued P400 in long-term
liabilities and 40 shares of common stock having a par value of P1 per share but a
fair value of P10 per share. Moody paid P20 to lawyers, accountants and brokers for
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assistance in bringing about this purchase. Another P15 was paid in connection with
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stock issuance costs. Prior to these transactions, the balance sheets for the two
companies were as follows:
Item Moody Osorio
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 180 P 40
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . 810 180
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Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 280

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 360
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,260 440
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 100
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 450) ( 80)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,290) ( 400)
Common Stock, P1 par . . . . . . . . . . . . . . . . . . . . . . ( 330)
Common Stock, P20 par . . . . . . . . . . . . . . . . . . . . . . ( 240)

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 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . ( 1,080) ( 340)
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,260) ( 340)
Note: Parentheses indicate a credit balance.

In Moody's appraisal of Osorio, three assets were deemed to be undervalued

on the books of Osorio: Inventory by P10, Land by P40 and Buildings by P60.

10. If the transaction is accounted for as an acquisition, what is the amount

of consideration transferred?
11. Compute the amount of inventories after combination.
12. Compute the amount of buildings (net) after combination.
13. Compute the amount of land after combination.
14. Compute the amount of equipment after combination.
15. Compute the amount of common stock at after combination.
16. Compute the amount of additional paid-in capital at after combination.
17. Compute the amount of cash after combination.

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Use the following information for 18 to 27:
Presented below are the financial balances for the Atwood Company and the

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Franz Company as of December 31, 20x4, immediately before Atwood
acquired Franz. Also included are the fair

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values for Franz Company's net assets at that date.
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Book Book Fair Values
Values Values December
December December 31, 20x4
31, 20x4 31, 20x4
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Cash . . . . . . . . . . . . . . . . . . . . . . . P
. 870,000 P P 240,000
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.. 240,000
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Receivables . . . . . . . . . . . . . . . . . . 660,000 600,000 600,000

..
Inventory . . . . . . . . . . . . . . . . . . . . 1,230,000 420,000 580,000
....
Land . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 260,000 250,000
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.....
Buildings 1,800,000 540,000 650,000
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(net) . . . . . . . . . . . . . . . . . . . . .
Equipment 660,000 380,000 400,000
(net) . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . .( 570,000 ( 240,000) ( 240,000)
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)
Accrued expenses . . . . . . . . . . . . . .( 270,000 ( 60,000) ( 60,000)
)
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Long-term (2,700,000) (1,020,000) (1,120,000)

liabilities . . . . . . . . . . . . . . . .
Common stock, P20(1,980,000)
par . . . . . . . . . .
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Common stock, P 5 par . . . . . . . . . . ( 420,000)

Additional paid-in capital . . . . . . . .( 210,000) ( 180,000)
Retained (1,170,000) ( 480,000)
earnings . . . . . . . . . . . . . .
Revenues . . . . . . . . . . . . . . . . . . . .(2,880,000) ( 660,000)
....
Expenses . . . . . . . . . . . . . . . . . . . . 2,760,000 620,000
..

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 Note: Parenthesis indicate a credit balance

Assume a business combination took place at December 31, 20x4. Atwood

issued 50,000 shares of its common stock with a fair value of P35 per share
for all of the outstanding common shares of Franz. Stock issuance costs of
P15.000 and direct costs of P10,000 were paid. Atwood is applying the
acquisition method in accounting for Franz. To settle a difference of opinion
regarding Franz's fair value, Atwood promises to pay an additional P5,200 to
the former owners if Franz's earnings exceed a certain sum during the next
year. Given the probability of the required contingency payment and utilizing
a 4% discount rate, the expected present value of the contingency is P5,000.

18. If the transaction is accounted for as an acquisition, what is the amount

of consideration transferred?
19. Compute the amount of inventory after combination:
20. Compute the amount of land after combination:

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21. Compute the amount of buildings (net) after combination:

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22. Compute the amount of goodwill after combination:

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23. Compute the amount of equipment (net) after combination:

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24. Compute the amount of retained earnings after combination:

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25. Compute the amount of revenues after combination:
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26. Compute consolidated expenses at date of acquisition.
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27. Compute the consolidated cash upon completion of the acquisition.
The following data pertains to questions 28 through 31 inclusively:
Parent and Sub Inc had the following balance sheets on December 31, 20x4:
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Parent Sub
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Current Assets P 60,000 P10,000

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Fixed Assets (net) 100,000 60,000

Total Assets P160,000 P70,000
Current Liabilities P 42,000 P35,000
Bonds Payable 20,000 12,000
Common Shares 90,000 12,000
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Retained Earnings ___8,000 11,000

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Total Liabilities and Equity P160,000 P70,000

On January 1, 20x5 Parent purchased all of Sub Inc’s Common Shares for
P40,000 in cash. On that date, Sub’s Current Assets and Fixed Assets were
worth P26,000 and P54,000, respectively. Assuming that Consolidated
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Financial Statements were prepared on that date, answer the following:

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28. The Current Assets of the combined entity should be valued at:
29. The Fixed Assets of the combined entity should be valued at:
30. The Goodwill arising from this Business Combination would be:
31. The Shareholder’s Equity section of the Consolidated Balance Sheet
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would show what amount?

32. CC Inc., DD Inc., and EE Inc. are parties to a consolidation agreement.
Their respective assets and estimated earnings (based on pre-
consolidation statements) as of January 1, 20x4, the date agreement is to
take effect, are as follows:
CC DD EE

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 P375,00 P750,00 P
Assets at appraised value . . . . . . . . . . . . . . . . 0 0 375,000
33,75
Estimated annual earnings contribution . . . . 41,250 75,000 0

A new corporation, FF Inc., shall issue a single class of shares for the assets.
Earnings in excess of 6% are to be capitalized at 20% in determining goodwill
contribution of the partners. FF Inc. shall issue shares at P10 par value equal
to total assets transferred plus goodwill. Assuming that after consolidation,
dividends are to be distributed to the former shareholders of CC, DD, and EE
in terms of percentage.

Solutions
1. P90,000 = P65,000 + P25,000
2. P280,000 = P210,000 + P70,000
3. P180,000
4. P475,000

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5. P100,000 = P600,000 - (P25,000 + P180,000 + P475,000 - P60,000 - P120,000)

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6. [P500,000 – (P200,000 + P220,000 – P110,000)]= P190,000

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7. Gain of P45,000

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8. [(12,000 shares x P30) – P343,200 = P16,800
9. (P863,000 + P363,000) = P1,226,000

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10. [P400 + (40 shares x P10)] = P800
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11. [P1,080 + (P280 + P10) = P1,370
12. [P1,260 + (P440 + P60) = P1,760
13. [P600 + (P360 + P40)] = P1,000
14. [P480 + P100] = P580
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15. [P330 + (40 shares x P1)] = P370

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16. [P1,080 + 40 shares x (P10 - P1)] – P15, stock issuance costs = P1,425
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17. [P180 + P40 – P20 – P15} =P185

18. [(50,000 shares x P 35) + P5,000] = P1,755,000
19. [P1,230,000 + P580,000] = P1,810,000
20. [P1,800,000 + P250,000] = P2,050,000
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21. (P1,800,000 + P650,000]= P2,450,000

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22. [P1,755,000 – (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000

- P240,000 – P60,000 – P1,120,000)] = P455,000
23. [P660,000 + P400,000} = P1,060,000
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24. P1,280,000
Retained earnings – Atwood, January 1, 20x4 P1,170,000
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Add: Net income – 20-x4

Revenues P2,880,000
Less: Expenses 2,760,000
Direct costs 10,000 110,000
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Retained earnings – Atwood, December 31, 20x4 P1,280,000

25. P2,880,000, parent only on the date of combination
26. (P2,760,000 + P10,000) = P2,770,000
27. [(P870,000 – P15,000 – P10,000) + P240,000] = P1,085,000
28. P46,000 = (P60,000 + P26,000, fair value) – P40,000, cash paid
29. P154,000 = (P100,000 + P54,000, fair value)

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 30. P7,000 = [P40,000 – (P26,000 + P54,000 – P35,000 – P12,000)]
31. P98,000 = (P90,000 + P8,000), only the stockholders’ equity of acquirer
32. CC, 26%; DD, 50%; EE, 24%
CC_____ DD_______ EE Total______
Assets, appraised value P375,000 P750,000 P375,000
P1,500,000
Add: Goodwill:
Annual earnings P41,250 P75,000 P33,750
P150,000
Less: Normal earnings
6% x Assets 22,500 45,000 22,500
90,000
Excess earnings P18,750 P30,000 P11,250
P 60,000
/ capitalized at 20% 20% _ 20%__
20%__
Goodwill P93,750 P150,000 P56,250 P300,000
Total stock to be issued P468,750 P900,000 P431,250

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P1,800,000

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P468,750 P900,000 P431,250

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1,800,000 1,800,000 431,250

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Percentage 26% 50% 24% (c)

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