ATENEO DE NAGA UNIVERSITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Supplementary Hand-Out #1 Prepared by: J. I. AVILA

2ndSem2122 To be utilized in discussions in ACCM353 by: P.Oatemar, CPA

ADVANCED ACCOUNTING II MERGER AND CONSOLIDATION

Illustrative Problem I-General Procedures

The statements of financial position of Alliance Global, Inc. (AGI) and Megaworld Co.(MEG) prior
to a business combination are presented below. Assume that all the non-current assets are
depreciable assets.

Shares of stock of AGI is being traded at the stock exchange at 2.50/share.

REQUIREMENTS:
1. Schedule of Allocation of Excess
2. Journal entries in the books of the acquirer company

I. Assume that AGI acquires the net identifiable assets MEG.

1. AGI paid P22,000 for all the net identifiable assets of MEG. Direct cost of acquisition was
P1,000.
2. AGI paid P25,000 for all the net identifiable assets of MEG. Direct cost of acquisition was
P1,000.
3. AGI paid P20,000 for all the net identifiable assets of MEG. Direct cost of acquisition was
P1,000.
4. AGI issued 8,800 shares to MEG in exchange for all their assets and liabilities. Direct cost
of acquisition is P1,000 was incurred. Additional cost in relation to stocks issuance
amounted to P2,000.
5. AGI issued 10,000 shares to MEG in exchange for all their assets and liabilities. Direct cost
of acquisition is P1,000 was incurred. Additional cost in relation to stocks issuance
amounted to P3,000.
6. AGI issued 4,000 shares to MEG and paid MEG additional P2,000 in exchange for all their
assets and liabilities. Direct cost of acquisition is P1,000 was incurred. Additional cost in
relation to stocks issuance amounted to P4,000.

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Illustrative Problem II-General Procedures

REQUIREMENTS:
1. Schedule of Allocation of Excess
2. Journal entries in the books of the acquirer company

Assume that a new corporation (Alliance World) was formed to acquire the net identifiable assets
of the corporation. The market value of the stocks of Alliance World was P5 and par value of P4.

1. Alliance World paid P88,000 and P18,000, respectively for all the net identifiable assets of
AGI and MEG
2. Alliance World issued 10,000 shares to AGI and 9,000 shares to MEG in exchange for all
their assets and liabilities. Direct cost of acquisition is P5,000 while indirect cost of
acquisition is P3,000. Additional cost in relation to stocks issuance amounted to P2,000.
3. Alliance World issued 15,000 shares to AGI and 5,000 shares to MEG in exchange for all
their assets and liabilities. Direct cost of acquisition is P5,000 while indirect cost of
acquisition is P3,000. Additional cost in relation to stocks issuance amounted to P2,000.
4. Alliance World issued 7,500 shares to AGI and 1,500 shares to MEG in exchange for all
their assets and liabilities. In addition, Alliance World also paid AGI cash of P3,000 and
MEG P2,000. Direct cost of acquisition is P5,000 while indirect cost of acquisition is P3,000.
Additional cost in relation to stocks issuance amounted to P2,000.

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Illustrative Problem III
 Determining account balances of the acquirer after the acquisition

The following Statements of Financial Position were prepared for Red and Blue Corporations on
January 2, 2014, just before the business combination:

A. Assume that Red acquires the net assets of Blue Corporation by issuing 15,000 shares of
stocks assuming the market price of Red’s shares is (a) P40 and (b) P20. Assume further
that the following out of pocket costs were paid: direct expenses of P5,000 and cost to
issue and register of P15,000.

Requirements:
1. Prepare Schedule of Allocation of Excess
2. Necessary journal entries in the books of Red Corporation
3. Determine the account balances in the books of Red Corporation immediately after the
combination:
a. Cash and Receivables
b. Inventory
c. Total current assets
d. Building and Equipment (net)
e. Goodwill
f. Total Noncurrent Assets
g. Total Assets
h. Accounts Payable
i. Bonds Payable
j. Ordinary shares/Common stock
k. Shares premium/Additional paid-in capital
l. Retained Earnings
m. Total stockholders equity

A.MERGER
Market Values of Shares of Stocks if P40.

1. Schedule of Allocation of Excess

2. Journal Entries in the Books of RED Corporation

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3.

Market Values of Shares of Stocks if P20.

1.Schedule of Allocation of Excess

2. Journal Entries

3.

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Illustrative Problem IV
 Recording Contingent Consideration
 Changes in Contingent Consideration and net asset valuation during the
measurement period.
 Changes in Contingent Consideration and net asset valuation after the
measurement period.

JIA Corporation acquired the net assets of LVJ Company on January 1, 2014. Assets acquired
from LVJ Co. at fair value included Current Assets, P1,150,000; Equipment, P1,700,000; Land,
P600,000; Building, P3,600,000. Liabilities assumed from the acquired company amount to
P640,000. Fair value of the ordinary shares issued amount to P7,440,000.

The agreement provided that additional cash payments would be made on January 1, 2016, equal
to 135% of the amount by which annual earnings of JIA Corporation exceed P265,000 per year,
prior to January 1, 2016. Net income was P367,500 in 2014 and P462,500 in 2015. Assume that
the liabilities recorded in January 1, 2014 exclude an estimated contingent liability recorded at an
estimated amount of P320,000.

The amount of the estimated contingent liability was determined to be at P272,500 in November
2, 2014. The estimated amount of the contingent liability was determined to increase by P85,000
in August 1, 2015 from the last date of the change of estimate.

1. Prepare the necessary journal entry on the following dates:

a. January 1, 2014,
b. January 1, 2015,
c. January 1, 2016
2. What amount of goodwill will reflect in the financial statement of the acquirer on the
following dates:
a. January 1, 2014,
b. January 1, 2015,
c. January 1, 2016

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