Business Combination Asset Acquisition

Third Year

Ma’am Jissle Lapig

Teacher

Rosalie C. Langbay
Student
 2_AFAR 2 - Business Combination Asset Acquisition
(Applying the steps from the first discussion.)

Asset Acquisition (Problem)

On January 1, 2020, ABC Company acquire DEF Company for all its
assets except cash and assume all its liabilities. The statement
of financial position of both entities prior to the business are
as follows:
ABC Company DEF Company
Book Value Fair Value Book Value Fair Value
Cash 300,000 300,000 90,000 90,000
A/R 125,000 125,000 37,500 37,500
Inventory 150,000 154,500 45,000 46,400
Equipment 900,000 756,000 270,000 205,500
Accumulated (180,000) (54,000)
Depreciation
Land 1,500,000 1,560,000 500,000 520,000
Patent 200,000 196,000 50,000 49,000
Investment 450,000 468,000
Property
Total Assets 2,995,000 1,388,500

A/P 120,000 120,000 36,000 36,000

Bonds 150,000 156,000
Payable,
150,000
Face value
Estimated 200,000 200,000
restricting
liability
Ordinary 1,000,000 500,000
Shares, 10
par
Share 500,000 50,000
Premium
Retained 1,475,000 462,500
Earnings
Treasury (100,000) (10,000)
Shares,
5/share
Total 2,995,000 1,388,500
 Liabilities
and
Shareholder

Fair Value 50 30
per share

Case
I. The following are the payments made by ABC Company:
Cash 79,500
Land at Fair Value 520,000
Bonds Payable, at 200,000 face value 180,000
Ordinary shares, 1 share of ABC Company for every 5
outstanding shares of DEF
Contingent Consideration 100,000

Additional Information:
a. ABC Company will pay the former owners of DEF if ABC’s
average net income within 2 years after the business
combination exceeds 300,000. At acquisition date, the entity
estimated that there is a 60% chance that the average net
income in the next 2 years will exceed 300,000.
b. The acquiree has a research and development with a fair
value of 40,000.
c. The cash payments include expenditure as follows:
Finder’s Fee 5,000
Legal Fee 10,000
Stock Registration 12,000
Bond issue cost 2,500
d. On December 31, 2020 one year after the business
combination. ABC’s net income amounted to 350,000. The net
income of ABC in 2021 will amount a 70% livelihood to
320,000. In 2021, the net income of ABC Company is 380,000.
To compute the cash.
(Less the cash payments made including the expenditures)

Cash 79,500
Finder’s Fee (5,000)
Legal Fee (10,000)
Stock Registration (12,000)
Bond Issue Cost (2,500)
TOTAL P50,000
To compute the Land.
Fair Value (dapat ang maging part ng Consideration)
P520, 000 /1,560,000 = 33% or 1/3

Book Value
1,500, 000 /3 = 500,000

Note:
Pag mas yong Fair Value kesa sa Book Value merong gain which is
yong 20,000 kase nag increase yong value nung land.

G/L – nirerecognize lang is yong difference ng Fair Value ng Book

Value ng non-cash assets na ginamit as part of the consideration.
Yong hindi part ng consideration hindi nirerecognize but ini-
ignore sa G/L.

Bonds Payable that recorded at its Fair Value.

To compute Equity Instruments

Issued (Ordinary shares ni DEF) 500,000/10 par value = 50,000

Treasury Shares 10,000/5 cost of treasury = (2,000)
Outstanding Shares 48,000
Divided by 5
ABC ordinary shares to be issue 9,600

Equity Instruments, which is 9, 600 multiply by Fair value of ABC

Company of 50 equals to 480,000.

To compute Contingent Consideration

100,000 x 60% = 60,000

Cash 50,000
 Land 520,000
Bonds Payable 180,000
Equity Instruments 480,000
Contingent Consideration 60,000
Total 1,290,000

Fair Value of net asset acquired

Assets:
Accounts Receivable 37,500
Inventory 46,400
Equipment 205,200
Land 520,000
Patent 49,000
Investment Property 468,000
In Process R&D 40,000
Total assets acquired 1,366,100

Liabilities:
Accounts Payable (36,000)
Bonds Payable (156,000)
Estimated restricting liability (200,000)
Total Liabilities 392,000
Net assets acquired 974,100
Goodwill 315,900

Note:
Once na mas mataas ang asset net acquired ibig sabihin mas
malaki yong binayad mo para don sa value/halaga ng binili mo
which is called “goodwill”.

In business combination purposes yong “In Process R&D” is

part of the asset acquired by the acquirer and it is consider as
identifiable intangible assets as long as it meets the definition
of intangible assets for business combination purposes and that
is yong separability criterion.

Cash (48k/2*3) 72,000

Equity 19,200 50 960,000
Instruments-
ABC Shares
Contingent 19,200 19,200
Consideration-
Stock ABC
Shares
Exp. Decrease X5 X4
12.31.20
Total decrease 96,000 76,800
 Likelihood X70% X30%
Exp. Value 67,200 23,040 90,240
Total 1,122,240
consideration
transferred

Fair Value of the net assets acquired

Assets recorded 1,326,100
Cost to sell (5,000)
the patent
Customer’s List 300,000
Indemnification 468,000 400,000 47,600 1,668,700
Asset (68k x
70%)
Liabilities 392,000
Recorded
Contingent 60,000 452,000 1,216,700
Liability
Bargain (94,460)
Purchase Gain

Note:

Since nag negative yong Bargain Purchase Gain ibig sabihin

mas malaki yong halaga ng binili mo kesa sa binayad mo in effect
parang nagkaroon ka ng discount.

In Acquirer’s book when we compute for the post combination

assets minus yong credit and add naman yong debit.

In liabilities naman plus yong credit and less yong debit.