BUSINESS COMBINATION PRACTICAL ACCOUNTING 2

DATE OF ACQUISITION

Problem 1. Condensed Statement of Financial Position of Marks Corp. and Spencer Corp. as
of December 31, 2011 were as follows:
Marks Spencer
Current assets P275,000 P65,000
Noncurrent assets 625,000 425,000
Total assets 900,000 490,000

Liabilities 65,000 35,000

Common stock, P23 par 549,700 296,700
Additional Paid-in capital 35,300 28,300
Retained earnings 250,000 130,000
 On January 1, 2012, Marks Corp. issued 30,000 stocks with a market value of
P25/share for the assets and liabilities of Spencer Corp. Marks Corp. also paid
P125,000 cash.
 The book value reflects the fair value of the assets and liabilities, except that the
noncurrent assets of Spencer have fair value of P630,000 and the noncurrent
assets of Marks are overstated by P30,000.
 Contingent consideration, which is determinable, is equal to P15,000. Marks paid
for the stock issuance costs only amounting to P74,000 and incurred other)
acquisition costs amounting to P19,000.
As a result of acquiring the net assets of Spencer Corporation, compute for the following
in the books of the surviving company:
Retained Earnings Liabilities
A. P250,000 P100,000
B. P231,000 P115,000
C. P227,000 P134,000
D. P212,000 P1 15,000

Problem 2. ABC Company acquired all of JKL Corporation's assets and liabilities on October
2, 2011, in a business combination at that date. JKL reported assets with a book value of
P998,400 and liabilities of P569,600.
 ABC noted that JKL included the amount of P64,000 obsolete merchandise at the
acquisition date that did not appear of any value.
 ABC also determined that an old delivery van previously used by JKL had a fair value
of P192,000, but had not been recorded by JKL.
 Except for machinery and equipment, ABC determined the fair value of all other
assets and liabilities reported by JKL approximated the recorded amounts.
 In recording the transfer of assets and liabilities in its books, ABC recorded gain on
acquisition of P148,800. ABC paid P327,200 to acquire JKL's assets and liabilities.
If the book value of JKL's machinery and equipment was P345,600, what was their fair
value?

Using the information presented in problem 3 but assuming ABC recorded goodwill of
P402,000. ABC paid P1,037,000 to acquire JKL's assets and liabilities.

If the book value of JKL's machinery and equipment was P516,500, what was their fair
value?
A. P264,800; P438,300
B. P426,400; P438,300
C. P264,800; P594,700
D. P426,400; P594,700

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 Problem 3. On September 18, 2011, DG Co. acquired all the AX Inc.'s P2,150,000 identifiable
assets and P530,000 liabilities. Book values of the AX's assets and liabilities equal to their
fair values except for the overvalued furniture and fixtures.
 As a consideration, DG issued its own shares of stock with a market value of
PI,715,000 and cash amounting to P375,000.
 Contingent consideration that was probable and reasonably estimated on the date of
acquisition amount to P148,000.
 The merger resulted into P647,000 goodwill.
 Assuming DG Co. had P4,890,000 total assets and P2,731,000 total liabilities prior to
the combination and no additional cash payments were made, but expenses were
incurred for related cost amounting to P28,000.
After the merger, how much is the combined total assets in the books of the acquirer?

After the merger, how much is the increase in liabilities in the books of the acquirer?
a. P7,283,000; P706,000
b. P7,128,000; P678,000
c. P7,658,000 ; P706,000
d. P7,255,000; P678,000

Problem 4. Blue Co. merged into Soda Corp. on June 30, 2011. In
exchange for the net assets at fair market value of Blue Co.
amounting to P2,785,800 , Soda issued 68,000 common shares at P36
par value, then going at a market price of P41 per share.
Relevant data on stockholders' equity immediately before the
combination show;
Soda Blue
Common stock P 8,790,000 P 2,030,000
APIC 3,834,000 782,000
Retained earnings/(deficit) (1,516,000) 495,000
 Legal fees for the contract of business P 174,700
Out of  Audit fee for SEC registration of stock issue 198,400 pocket
costs of  Printing costs of stock certificates 144,900 the
 Broker's fee 135,000
 Accountant's fee for pre-acquisition audit 161,000
 Other direct cost of acquisition 90,400
 General and allocated expenses 115,300
 Listing fees in issuing new-shares 172,000
combination were as follows:

 Included as part of the acquisition agreement is the additional cash consideration of

P163,000 in the event Soda Co.'s share price will reach P32 per share by year-end.
 At acquisition date, the share price is P27.50, and increased by P4.80 by December
31, 2011.
 At acquisition date, there was only a low probability of reaching the target share
price, so the fair value of the additional consideration was determined at P74,000.

What is the amount of expense to be recognized in the statement of comprehensive

income for the year ended December 31, 2011?
A. P676,400
B. P851,700
C. P765,400

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 D. P940,700

Problem 5. On August 1, 2011 the Polo Company acquired the net assets of Sport Company
for a consideration transferred of P17,450,000 cash.
 At the acquisition date, the carrying amount of Sport's net assets was P11,925,000
and a temporary appraisal of P12,385,000.was attributed to the net assets.
 In addition to the consideration transferred above is another P1,015,000 cash to be
transferred nine months after the acquisition date if a specified profit target was met
by the acquirer.
 At the acquisition date there was only a low probability of the profit target being
met, so the fair value of the additional consideration liability was determined to be
P468,000.
 On December 31, 2011, an update of the provisional fair value of P16,815,000 was
attributed to the net assets. Also, at year end the estimated amount of the
consideration liability is determined to decrease by P72,000 from the last date of the
change in estimate.
 On March 31, 2012 the estimated amount of the consideration liability is determined
to be probable at P284,000
 On July 1, 2012 the temporary appraisal decreased by P940,000 from the last
additional valuation date.
 The provisional fair value was finalized on August 31, 2012 with an amount that is
higher by P1,070,000 from the temporary appraisal as of July 1, 2012.
 As a subsequent event, the profit target was met and the P1,015,000 cash was
transferred.

What amount of goodwill is presented in the separate statement of financial position

of the acquirer company as of December 31, 2012?
A. P1,859,000
B. P2,625,000
C. P 789,000
D. P1,555,000

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 Problem 6. On January 2, 2012, the Statement of Financial Position of Body and Shop
Company prior to the combination are:
Body Co. Shop Co.
Cash P 675,000 P 22,500
Inventories 450,000 45,000
Property and equipment (net) 1,125,000 157,500
Total Assets P 2,250,000 P 225,000

Current liabilities P 135,000 P 22,500

Ordinary shares, P100 par 225,000 22,500
Share premium 675,000 45,000
Retained earnings 1,215,000 135,000
Total Liabilities and Stockholder’s Equity P 2,250,000 P 225,000
The fair value of Shop Company’s equipment is P229,500.

Assume the following independent cases:

1. Assuming Body Company acquired all of the outstanding stock of Shop Company
resulting to a goodwill of P99,000, contingent consideration is P54,000, how much
is the price paid to Shop Company's stock?
A. P373,500
B. P472,500
C. P319,500
D. P427,500

2. Assuming Body Company acquired 70% of the outstanding common stock of Shop
Company for P157,500 and Non-controlling interest is measured at fair value of
P91,500, how much is the goodwill (gain on acquisition)?
A. P(25,500)
B. P25,500
C. P34,650
D. P(34,650)

3. Assuming Body Company acquired 80% of the outstanding common stock of Shop
Company for P205,200 and Non-controlling interest is measured at Non-controlling
interest's proportionate share of Shop Company's identifiable net assets, how much
is the consolidated stockholder's equity on the date of acquisition?
A. P2,115,000

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 B. P2,129,400
C. P2,169,900
D. P2,184,300

4. Assuming Body Company acquired 90% of the outstanding common stock of Shop
Company for P364,500 and Non-controlling interest is measured at fair value, how
much is the total consolidated assets on the date of acquisition?
A. P2,313,000
B. P2,677,500
C. P2,605,500
D. P2,241,000

Problem 7. On July 1, 2011, Giordano, Inc. acquired most of the outstanding common
stock of Esprit Company for cash. The incomplete working paper elimination entries on
that date for the consolidated statement of financial position of Giordano, Inc. and its
subsidiary are shown below:

Stockholders’ equity – Esprit 2,437,500

Investment in Esprit 1,584,375
Non-controlling interest 853,125

Inventories 62,500
Equipment 312,500
Patent 61,250
Goodwill ?
Investment in Esprit 468,750
Non-controlling interest ?

Included in the purchase price is a control premium of P68,750.

The amount of goodwill to be reported in the consolidated statement of financial

position on July 1, 2011:
a. Assuming non-controlling interest is measured at fair value

b. Assuming non-controlling interest is measured at the proportionate or relevant

share

c. Assuming non-controlling interest is measured at fair value. The fair value of

the non controlling interest is P1,150,000.

A. P179,135; P185,188; P260,625

B. P284,904; P253,938; P398,125
C. P247,885; P185,188; P329,375
D. P185,188; P284,904; P260,625

Problem 8. CK Company's stockholders' equity as of December 31, 2011 is P406,000.

 On January 1, 2012 CK acquires 30% of RL Company's common stock for P30,000
cash and by issuing its own shares with a fair value of P75,000.
 CK acquired significant influence over RL as a result of the stock acquisition. After
four months, CK purchases another 60% of RL's common stock for a cash payment of
P219,000
 On this date, RL reports identifiable assets with carrying value of P360,000 and fair
value of P640,000 and it has liabilities with a book value and a fair value of
P180,000.

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  At the acquisition date, net loss reported by RL for the four-month ended amounted
to P50,000.
 The fair value of the 10% non-controlling interest is P72,000. Non-controlling
interest is valued using the proportionate basis.
 CK also paid the following: P5,000 for legal fees, P4,000 for finder's fee, P4,300 for
accountant's fee, P3,600 for audit fee for SEC registration of stock issued and PI,100
for printing of stock certificates.

Immediately after the business combinations, what is the consolidated total equity of
CK Company and Subsidiary after the business combination?
A. P553,000
B. P599,000
C. P579,500
D. P513,500

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