SET A

PROBLEM 1
On December 31, 2018, Powder Corporation enters into a business combination by acquiring the assets and assumed
liabilities of Sentinel Corporation in which Sentinel Corporation will be dissolved. Powder consideration transferred
consists of the following:
a. 30,000 unissued shares of its P10 par value common stock, with a market value of P25 per share.
b. P180,000 in long-term 8% notes payable, and
c. A contingent payment of P120,000 cash on January 1, 2021, if the average income of during the 2-year period of
2019-2020 exceeds P300,000 per year. Powder corporation estimates that there is a 30% chance of probability
that P120,000 payment will be required.
In addition, Pure pays the following at the time of merger:
 Finder’s fee P12,000
 Accounting fees, P24,000
 Legal fees to arrange the business combination P42,000
 Cost of SEC registration, including accounting and legal fees P18,000
 Cost of printing and issuing stock certificates P14,400
 Indirect costs of combining, including allocated overhead and executive salaries P27,600
Balance sheet and fair value information for the two companies on December 31, 2018, immediately before the merger, is
as follows:

POWDER SAINT
Book Value Fair Value Book Value Fair Value
Cash 276,000 276,000 24,000 24,000
Receivables - net 96,000 96,000 48,000 48,000
Inventories 288,000 360,000 120,000 72,000
Land 108,000 240,000 72,000 240,000
Buildings - net (10 year life) 480,000 720,000 240,000 360,000
Equipment - net (5-year life) 432,000 588,000 216,000 300,000
In-process research and
development 0 0 0 60,000
TOTAL ASSETS 1,680,000 2,280,000 720,000 1,104,000

Accounts Payable 216,000 216,000 72,000 72,000

Other Liabilities 240,000 240,000 144,000 168,000
Common Stock, P10 par 720,000 240,000
Additional Paid-In Capital 240,000 192,000
Retained Earnings 264,000 72,000
Total Liabilities and Equities 1,680,000 720,000

Questions:
1. Assume that on August 31, 2019 because of improved information about facts and circumstances that existed at
the acquisition date, the contingent consideration was revised to P60,000, what is the amount of the goodwill?
126,000
2. Assume that if Sentinel Corporation will generate cash flows from operations of P360,000 or more in 2019.
Sentinel Corporation estimates that there is a 35% chance that the P120,000 will be required. Sentinel corporation
uses an interest rate of 4% to intercorporate the time value of money, what is the amount of goodwill? 106,385
3. Assume that instead of contingent payment of P120,000 cash, an additional cash payment would be made on
January 1, 2021, equal to twice the amount by which average annual average earnings of Sentinel Corporation
exceed P30,000 per year, prior to January 1, 2021, Net income was P78,000 in 2019 and P84,000 in 2020. What
is the amount of payment for contingent consideration? P102,000

PROBLEM 2
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 SET A
Piper Company is seeking to expand its share of the market and has negotiated to take over the operations of Samsung
Company on January 1, 2020. The Balance sheet of the two companies on December 31, 2019 were as follows:

Piper Samsung

Cash 523,000 12,000

Accounts Receivable - net 25,000 34,700

Inventory 35,500 27,600

Land 140,000 100,000

Buildings (net) 60,000 30,000

Plant Equipment (net) 65,000 46,000

Patent 10,000 -

Goodwill 25,000 2,000

Totals 883,500 252,300

Accounts Payable 56,000 43,500

Mortgage Loan 50,000 40,000

Bonds Payable 100,000 50,000

Common Stock, 60,000 shares at P10 Par 600,000 -

Common Stock, 8,000 shares at P7.50 Par - 60,000

Additional Paid In Capital 28,500 26,800

Retained Earnings 49,000 32,000

Totals 883,500 252,300

Piper Company is to acquire all the assets, except cash, of Samsung Company. The assets of Samsung Company are all
recorded at fair value except inventory, Land, Buildings and Plant and Equipment which was valued at P39,000,
P130,000, P70,000, P65,000 respectively.
In exchange, Piper Company’s terms of acquisition are as follows:
 Cash of 80,000, 20% of which is to be paid as down payment as of the date of acquisition, 40% to paid at
December 31, 2020 and the remaining balance to be paid on December 31, 2021.
 Piper has a merger and acquisition department, which incurred running costs over the period of completing the
business combination amounted to P20,000.
 Piper is to provide Samsung to with sufficient cash to repay all of its outstanding debts, additional to that already
held. The outstanding bond are to be redeemed at a fair value of P98 per P100 bond (2% discount). Annual leave
entitlement of P15,000 outstanding as of January 1, 2020 and expected liquidation cost of P12,000 have not been
recognized by Samsung Company. Costs to transport and install Samsung Company’s assets at Piper Company’s
premises will be P10,000. An investigation by the liquidator of Samsung Company reveals that on January 1,
2014 the following debts were outstanding but had not been recorded: Accounts payable of P1,000 and Mortgage
Payable of P3,000.
 Holders of 3,000 common stock of Samsung Corporation are to receive two fully paid shares of Piper Company
for every three shares held. Shares issued by Piper Company have a fair value of at least P32, Piper Company
agreed to supply cash to the value of any decrease in the share price below P32 for the shares issued, this
guarantee of the share price lasting until August 31, 2021. Piper Company believed that there was a 80% chance
that the share price would remain at P32 or higher and a 20% chance that it would fall to P30.
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 SET A
 Holders of 4,500 common stocks of Samsung Corporation elect to receive cash at P36 per share, payable 40% at
the date of acquisition and 60% on December 31, 2020.
 Piper Company surrenders his patent to Samsung Company with a carrying amount of P4,000 and has a fair
value of P6,000.
 Piper Company also to give a piece of its own prime land to Samsung Company. The piece of land in question
has a carrying amount of P35,000, a zonal value of P40,000 and a fair value of P60,000.
 A cash payment of P50,000 to former owners representing reimbursement of acquisition-related cost paid by the
former owners and a settlement of P12,000 for an unresolved claim by Samsung Company against Piper
Company.
 A severance payment of P40,000 to the CEO of Samsung Corporation, whose employment is terminated following
the suggestion by Piper Company during negotiations for the business combination.
 A deferred payment of P30,000 to be paid after two years, to two former owners who become employees of Piper
company, the payment of which is dependent on their continuing employment or affected by their termination, and
the amount payable is adjusted for yearly interest.
Piper Company supplied cash on acquisition date as well as surrendering the land. The shares were issued on January 3,
and the costs of issuing the shares amounted to P20,000. The incremental borrowing rate for Piper Company is 12% per
annum. Other acquisition-related costs paid by Piper Company in relation to the acquisition amounted to P12,000. On
December 31, 2021, due to the combination, the fair value of Piper Company’s shares was P33.
Questions:
4. How much is the total value of contingent consideration? 449,467
5. How much is the goodwill after the acquisition? 120,767
6. How much is the total acquisition expense? 104,000
7. How much is the net amount to be closed in the retained earnings on January 1, 2020? 117,000
PROBLEM 3
Papa Corp has gained control over the operations of Anak Corp by acquiring 85% of its Outstanding Capital Stock for P
2,580,000. This amount includes a control premium of P30,000. Acquisition related expenses paid, direct and indirect,
amounted to P83,000 and P42,000 respectively.

PAPA ANAK
Book Value Book Value Fair Value
Cash 3,541,500 128,000
Accounts Receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid Expenses 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill - 300,000
Total Assets 8,750,000 2,860,000

Accounts Payable 675,000 253,000

Notes Payable 1,400,000 730,000
Capital Stock, P50 par 3,400,000 800,000
Additional Paid-In Capital 1,575,000 600,000
Retained Earnings 1,700,000 477,000
Total Liabilities and SHE 8,750,000 2,860,000

The following was ascertained on the date of acquisition of ANAK:

 The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.
 The fair value of inventories is now at P436,000 whereas the value of land and building has increased by
P471,000 and P107,000 respectively.
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 SET A
 There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes is 738,000.
Questions:
8. How much is the total amount goodwill to be presented in the consolidated financial statements? 873,000
9. How much Is the total consolidated Shareholder’s equity? P7,000,000
10. Assuming the amount of premium is P769,500, how much will be the goodwill to be presented? 746,550

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 SET A
PROBLEM 4
On July 1, 2021, Problemado Corp, purchased 1,500,000 shares from Sus Co’s existing owners, payable 50% at the date
of acquisition and 50% on June 30, 2022. The total number of shares issued by Sus Co was 2,000,000. A reliable
measure of the fair value of Sus Co’s shares was P5.25 per share. Problemado Corp was obligated to pay an additional
P1,875,000 to the vendors of Sus Co if Sus Co maintained existing profitability over the subsequent two years from July 1,
2021. It was highly likely that Sus Co would achieve this expectation and a fair value of the contingent consideration was
assessed at P600,000. Fair value of Non-controlling interest on July 1, 2021 was P2,600,000. The tax effects on fair value
differences are recognized on the basis that the tax bases on the identifiable assets acquired and liabilities assumed are
not affected by the business combination. Assume a tax rate of 20% and an implicit interest rate of 10%.
The following financial statement refers to Sus Co.

Book Value Fair Value

Cash 50,000 50,000
Accounts Receivable 400,000 350,000
Inventory 500,000 650,000
Buildings - net 3,000,000 2,800,000
Other Intangible Assets 1,200,000 2,500,000
In-process research and development - 1,000,000
Total Assets 5,150,000 7,350,000

Accounts Payable 500,000 500,000

Estimated liability for contingencies 600,000
Bonds Payable 1,000,000 1,000,000
Common Stock 2,000,000
Additional Paid In Capital 650,000
Retained Earnings 1,000,000
Liabilities and Stockholders Equity 5,150,000 2,100,000

Questions:
11. How much will be the good will at the date of acquisition assuming partial goodwill method? 3,919,545
12. How much will be the good will at the date of acquisition assuming full goodwill method? 5,232,045

PROBLEM 5
On December 31, 2018, Alpha Company acquired 25,000 common stock and 30,000 preferred stock of Beta Company.
The fair value of the shares of Beta Company at that date is P10 par for common stock and P12 par for preferred stock.
On January 31, 2019, Alpha Company purchased another 35,000 common stock of Beta Company at P12 and on that
date the value of the common stock of Beta was P15 par. On January 1, 2021, Alpha Company purchased another 52,500
common stock of Beta company at P20 par which will be paid 50% on the date of acquisition and 50% on December 31,
2021. The outstanding capital stock of Beta was 150,000 and the fair value as of January 1, 2021 was P15 and the implicit
interest rate was 10%. The fair value of the and book value of Beta company’s net assets was P2,500,000.
Questions:
13. What is the amount of goodwill? 52,273
14. Assuming that Alpha company will pay Beta Company an additional P150,000, if the cash flow of the company
exceeds 1,000,000 on 2021, 1,500,000 on 2022, and 3,000,000 on 2023, Alpha Company assessed that on 2021
there is a 20% chance of attaining the cash flow while on 2022 and 2023 there is a 40% chance, it is estimated
that there is a 45% chance that the entire cashflow for the three year period will exceed the corresponding
amounts. what is the amount of goodwill at the date of acquisition? 119,773
15. Assuming, a deferred payment of P25,600 to be paid after three years, to two former owners who become
employees of Alpha company, the payment of which is dependent on their continuing employment or affected by
their termination, and the amount payable is adjusted for yearly interest, the implicit interest on 3 years were
10%,12% and 14%. How much is the amount of goodwill? 52,273

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 SET A

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