ACCOUNTING FOR BUSINESS COMBINATION

1. . Malakas Company acquired all of Maganda Corporation's assets and liabilities on January
2,2013, in a business combination. At that date, Maganda reported assets with a book value of
P624,000 and liabilities of P356,000. Malakas noted that Maganda had P40,000 of research and
development costs on its books at the acquistion date that did not appear to be of value. Malakas
also determined that patents developed by Maganda had a fair value of P120,000 but had not
been recorded by Maganda. Except for building and equipment, Malakas determined the fair
value of all other assets and liabilities reported by Maganda approximated Malakas recorded
amounts. In recording the transfer of assets and liabilities to its books, Malakas recorded
goodwill of P93,000. Malakas paid P517,000 to acquire Maganda's asset and liabilities.

If the book value of Maganda's buildings and equipment was P341,000 at the date of acquisition, what
was their fair value?
a. P441,000
b. P417,000
c. P341,000
d. P417,000
Answer: B.
Solution
Computation of Fair Value
Amount paid P517,000
Book Value of assets P624,000
Book Value of liabilities. (356,000)
Book Value of net assets. P268,000
Adjustment for RandD costs. (40,000)
Adjusted book value. P228,000
Fair value of patent. 120,000
Goodwill recorded. 93,000 (441,000)
Fair value increment of
building and equipment P76,000
Book value of building and Equipment. 341,000
Fair Value of buildings and equipment P417,000

2. The Boy George, Company acquired the net assets of the Girl Conrad Company on January 1,
2015, and made the following entry to record the purchase:
Current Assets100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common stock,P1 par 100.000
Paid in capital in excess at par 520,000

Assuming that additional shares on January 1, 2017 would be issued on that date to compensate for any
fall in the value at Boy George common stock below P16 per share. The settlement would be to cure the
deficiency by issuing added shares based on their fair value on January 1,2017. The fair price of the
shares on January 1, 2017 was P10.

What is the additional number of shares issued on January 1, 2017 to compensate for any fall in the
value at the stock?

a. 160,000
b. 100,000
c. 60,000
d. 10,000
Answer: C
Solution
Deficiency: (P16 - P10) x100,000 shares issued to acquire P600,000
Divided by: fair value of share P 10
Additional number of shares to issued 60,000

Another example at contingencies is where the acquirer issues to the acquiree and the acquiree is
concerned that the issue of these shares may make the market price at the acquirer ’s shares decline over
time.

Therefore the acquirer may offer additional cash or shares if the market price falls below specified
amount over a specific period of time.

3. Using the same information in No. 1, what amount will be reported for retained earnings?
a. P1,065 c. P1,525
b. 1,080 d. 1,560

Answer: A.
Acquirer - Fay (at book value) P1,080
Less: Acquisition-related costs 15
Acquiree - May (not acquired) 0
Retained Earnings P1,065