BUSINESS COMBINATIONS

Problem 1:
On January 1, 2022, Parent Company acquired the net assets of Subsidiary Company. The statement of
financial position of Parent and Subsidiary immediately before the acquisition is as follows:
Parent Subsidiary
Book value Fair value Book value Fair value
Cash P 2,140,000 P 2,140,000 P 45,000 P 45,000
Accounts receivable 360,000 335,000 70,000 54,000
Inventories 475,000 390,000 87,000 78,000
Prepaid expenses 25,000 - 13,500 5,000
Land 500,000 900,000 900,000 1,550,000
Building, net 800,000 900,000 723,000 768,000
Equipment, net 700,000 585,000 361,500 360,000
Goodwill - - 300,000 ?
Accounts payable 312,500 312,500 200,000 200,000
Notes payable 937,500 980,000 700,000 765,000
Share capital, P50 par 2,000,000 850,000
Share premium 1,000,000 400,000
Retained earnings 750,000 350,000

Case A: Parent paid P2,000,000 cash which excludes a contingent consideration to pay P500,000 if Subsidiary
will be able to report net income of at least P2,500,000 for the year 2022. It was estimated that there is only a
40% probability that the Subsidiary will be able to generate at least P2,500,000. The fair value of the
contingent consideration on date of acquisition was P150,000. Parent paid the following acquisition-related
costs:
Legal fees P55,600
Broker’s fee 49,000
Other direct cost of acquisition 50,000

Case B: Parent paid P1,000,000 cash which excludes a contingent consideration to pay P500,000 if Subsidiary
will be able to report net income of at least P2,500,000 for the year 2022. It was estimated that there is only a
40% probability that the Subsidiary will be able to generate at least P2,500,000. The fair value of the
contingent consideration on date of acquisition was P150,000. Parent paid the following acquisition-related
costs:
Legal fees P55,600
Broker’s fee 49,000
Other direct cost of acquisition 50,000

Case C: Parent issued 20,000 shares with a fair value of P67.50. The purchase agreement also included a
contingent consideration to pay P500,000 if Subsidiary will be able to report net income of at least P2,500,000
for the year 2022. It was estimated that there is only a 40% probability that the Subsidiary will be able to
generate at least P2,500,000. The fair value of the contingent consideration on date of acquisition was
P150,000. Parent paid the following acquisition-related costs:
Legal fees P 55,600
SEC registration of stock issue 320,400
Costs of stock certificate 35,000
 Broker’s fee 49,000
Other direct cost of acquisition 50,000

Problem 2:
Parent Company acquired 85% of the outstanding shares that carrying voting rights of Subsidiary on January
1, 2022 for P2,580,000. Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000,
respectively. The statements of financial position of Parent and Subsidiary immediately before the acquisition
are as follows:
Parent Subsidiary
Cash P3,541,500 P 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 200,000 185,000
Goodwill 100,000 300,000
Total assets P8,750,000 P2,860,000

Accounts payable P 675,000 P 253,000

Notes payable 1,400,000 730,000
Share capital, P50 par 3,400,000 800,000
Share premium 1,575,000 600,000
Retained earnings 1,700,000 477,000
Total Equities P8,750,000 P2,860,000

The following information was ascertained on the date of acquisition:

a. The value of the receivables and equipment of S has decreased by P25,000 and P14,000, respectively.
b. The fair value of S’ inventories was P436,000, whereas the value of land and building has increased
by P471,000 and P107,000, respectively.
c. There was an unrecorded accounts payable amounting to P27,000 and the fair value of the notes
payable is P738,000.

Case A: Assume that the Parent did not pay any control premium and that non-controlling interests are
measured at its fair value of P480,000.
Case B: Assume that the Parent did not pay any control premium and that non-controlling interests are
measured at its proportionate share in net identifiable assets.
Case C: Assume that the Parent did not pay any control premium.
Case D: Assume that the purchase price paid by the parent included control premium of P30,000.
Case E: Assume that the purchase price paid by the parent was P1,000,000.

Problem 3:
On January 1, 2022, Parent Company purchased the net assets of Subsidiary Company by issuing 100,000
shares of its P1 par value ordinary shares when the fair value of the share was P6.20. it was further agreed that
the Parent Company would pay an additional amount of P300,000 on January 1, 2017 if the average income
during the two-year period 2022-2023 exceeded P80,000 per year. The expected value of this consideration
was calculated as P184,000 on date of acquisition. As a result, a goodwill of P284,000 was appropriately
recorded.

On August 1, 2022, the expected value of the contingent consideration was revised to P170,000. On February
1, 2023, the expected value was further revised to P175,000.