ADVANCED

FINANCIAL ACCOUNTING AND REPORTING

Handout 01 – Business Combination – Date of Acquisition

Numbers 1- 5

On December 31, 2022, PBB Corporation enters into a business combination by acquiring all the assets and
assuming all the liabilities of SUV Corporation in which the latter will be dissolved. PBB’s consideration consists
of the following:

• Cash payment of P1,977,500.
• 60,000 unissued shares of its P100 par ordinary shares with a market value of P101 per share.
• 6% P2,000,00 bonds payable.
• A contingent consideration of P1,500,000 cash on December 31, 2024 if the cash flows from operations
during the 2-year period 2022-2024 exceed P2,500,000 per year. PBB estimates that there is a 40%
change of probability that the P1,500,000 will be required.

In addition, PBB paid the following at the time of the merger:
Finder’s fee P 110,000
Diligent audit fee prior to business combination 75,000
Cost of printing and issuing stock certificates 150,000
General and administration salaries attributable to the merger 75,000

Statement of financial position for the two companies as of December 31 2022 before the merger follow:

PBB Corporation SUV Corporation
Book Value Fair Value Book Value Fair Value
Cash P 2,950,000 P 2,950,000 P 720,000 P 720,000
Receivables 1,200,000 1,200,000 900,000 900,000
Inventories 2,400,000 2,500,000 1,500,000 1,750,000
Land 3,000,000 3,200,000 3,000,000 3,100,000
Building, net 12,000,000 10,000,000 5,500,000 4,500,000
Equipment 2,000,000 2,000,000 900,000 950,000
Goodwill 750,000 750,000 50,0000 -
In process Research and Development - - - 500,000

Accounts payable P 3,600,000 P 3,750,000 P 1,120,000 P 1,200,000
Accrued expense 1,500,000 1,100,000 880,000 900,000
Share capital, P100 par 10,000,000 - 5,000,000 -
Share premium 4,200,000 - 2,500,000 -
Retained earnings 5,000,000 - 3,070,000 -

1. What is the amount of goodwill to be recognized on the acquisition date?
A. 317,500 C. 617,500
B. 1,067,500 D. 1,217,500

2. What is the amount of total assets immediately after the merger?
A. 34,332,500 C. 34,687,500
B. 34,650,000 D. 34,650,000

3. What is the amount of total liabilities immediately after the merger?
A. 9,537,500 C. 9,800,000
B. 10,990,000 D. 9,787,500

4. What are the amounts of share premium and retained earnings immediately after the merger?

Share Premium Retained Earnings
A. 4,110,000 4,740,000
B. 4,740,000 4,110,000
C. 4,050,000 4,650,000
D. 4,650,000 4,050,000

Numbers 6 - 10

On January 1, 2019, Good Corporation and Evil Company decided to enter into a business combination. Good’s
book shows assets and liabilities amounting to P1,350,000 and P300,000, respectively. The shareholders’ equity
is composed of P300,000 common stocks (P10 par); P150,000 Additional-paid in capital and P600,000 retained
earnings. The book value asset of Good is understated by P150,000 while its liability is overstated by P75,000.

Evil Company’s assets inclusive of P15,000 goodwill amounted to P500,000 while liabilities amounted to
P150,000. The shareholders’ equity composed of P120,000 common stocks (P10 par); P105,000 Additional paid
in capital and P125,000 retained earnings. The fair value of assets without goodwill and liabilities should be
reduced both by P75,000.

Good Company acquired the net assets of Evil Company by issuing 25,000 shares and cash of P10,000. Moreover,
a contingent consideration of P80,000 will be paid when the result of the pending litigation existing at the date
of acquisition on the quieting title of the land of Evil is affirmative. The determinable amount the said contingent
consideration at the date of combination amounted to P50,000. The current market price of Good Company’s
stock is traded at P12 per share.

Good Corporation paid the following as a result of business combination:

Finder’s fee P 50,000
Legal, accounting and other consulting fees 50,000
Cost of stockholders’ meeting to vote the acquisition 20,000
SEC registration of the business combination 15,000
General administrative cost 15,000
Cost of printing stock certificates 10,000
Accountant’s fee related to the stock issuance 20,000
SEC registration of new shares issued 40,000

5. How much is the result of the combination on January 1, 2019?
A. 10,000 goodwill C. 25,000 goodwill
B. 10,000 income D. 25,000 income

6. How much is the combined total asset?
A. 1,330,000 C. 1,555,000
B. 1,500,000 D. 1,575,000

7. How much is the combined total liability?
A. 350,000 C. 425,000
B. 375,000 D. 450,000

8. How much is the combined common stock?
A. 420,000 C. 670,000
B. 550,000 D. 720,000

9. How much is the combined additional paid-in capital?
A. 130,000 C. 235,000
B. 150,000 D. 255,000

10. How much is the combined retained earnings?
A. 430,000 C. 520,000
B. 450,000 D. 540,000

Numbers 11 – 12

The balance sheet of Salt Company, along with market values of its assets and liabilities, is as follows:

Book Values Market Values
Current assets P 2,000,000 P 1,500,000
Plant & equipment 30,000,000 35,000,000
Patents 100,000 2,000,000
Completed technology - 10,000,000
Broader customer base - 16,000,000
Technically skilled workforce - 3,000,000
Potentially profitable future contracts - 2,000,000
Licensing agreements - 4,000,000
Potential contracts with new customers - 1,500,000
Advertising jingles - 1,000,000
Future cost savings - 1,800,000
Goodwill 200,000 700,000
Liabilities (28,000,000) (30,000,000)
Common stock (1,000,000)
Additional paid-in capital (5,000,000)
Retained earnings 1,700,000

11. Pail Company pays P100,000,000 in cash for Salt’s Company’s assets and liabilities. Pail records goodwill of
A. 50,800,000 C. 72,500,000
B. 66,800,000 D. 76,500,000

12. Assume three months later, Salt’s patents are determined to have been worthless as of the date of
acquisition. The entry to record this information includes
A. A debit to loss of P2,000,000
B. A debit to patents of P2,000,000
C. A debit to goodwill of P2,000,000
D. A debit to retained earnings of P2,000,000





Numbers 13 – 145

AA Co. bought the net assets of BB Co. by issuing 120,000 shares at P10 par. The fair value of the shares was
P2,550,000. Immediately before the acquisition, the following balances were ascertained for BB Co.

Carrying amount Fair Value
Current assets 1,000,000 1,100,000
Noncurrent assets 1,500,000 2,200,000
Liabilities 300,000 300,000
Ordinary shares 2,000,000
Retained earnings 200,000

AA Co. also incurred the following costs:
• Professional fees to arrange business combination P27,000.
• SEC registration P12,000.
• Printing and issuing of stocks for P3,000.

13. What is the result of the business combination?
A. 450,000 C. 350,000
B. (450,000) D. (350,000)

14. What is the share premium recorded by AA Co.?
A. 1,330,000 C. 1,335,000
B. 1,350,000 D. 1,365,000

15. What is the net increase (decrease) in the retained earnings of AA Co.?
A. 450,000 C. (27,000)
B. 408,000 D. 423,000



Numbers 16 – 19

Entity A acquired the net assets of Entity B by issuing 10,000 ordinary shares with par value of P10 and bonds
payable with face amount of P500,000. The bonds are classified as financial liability at amortized cost.

At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other hand, the bonds
payable are trading at 110. Entity A paid P10,000 share issuance costs and P20,000 bond issue costs. Entity A
also paid P40,000 acquisition related costs and P30,000 indirect costs of business combination.

Before the date of acquisition, Entity A and Entity B reported the following data:

Entity A Entity B

Current assets 1,000,000 500,000
Noncurrent assets 2,000,000 1,000,000
Current liabilities 200,000 400,000
Noncurrent liabilities 300,000 500,000
Ordinary shares 500,000 200,000
Share premium 1,200,000 300,000
Retained earnings 800,000 100,000

At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the noncurrent assets
of Entity B have fair value of P1,300,000. On the same date, the current liabilities of Entity B have fair value of
P600,000 while the noncurrent liabilities of Entity A have fair value of P500,000.

16. What is the goodwill or gain on bargain purchase arising from business combination?
A. 50,000 goodwill
B. 150,000 gain on bargain purchase
C. 120,000 goodwill
D. 70,000 gain on bargain purchase

17. What total amount should be expensed as incurred at the time of business combination?
A. 20,000
B. 70,000
C. 30,000
D. 50,000

18. What is Entity A’s amount of total assets after the business combination?
A. 4,520,000
B. 4,810,000
C. 4,750,000
D. 4,440,000

19. What is Entity A’s amount of total liabilities after the business combination?
A. 2,240,000
B. 2,510,000
C. 2,320,000
D. 2,130,000

Numbers 20 – 21

Summary information is given for San Miguel Brewery (SMB) and Tanduay Philippines at July 1, 2022. The
quoted market price of SMB and Tanduay shares are P36 and P40, respectively.

SMB Tanduay
Book Value Fair Value Book Value Fair Value
Current asset 24,000,000 24,000,000 8,000,000 9,000,000
Plant asset 26,000,000 25,000,000 22,000,000 26,000,000
Liabilities 15,000,000 15,500,0000 5,000,000 5,000,000
Common stock, P10 Par 20,000,000 10,000,000
APIC 3,000,000 1,000,000
Retained earnings 12,000,000 14,000,000

SMB Company acquired all the net assets of Tanduary by issuing 1,000,000 of its own shares. SMB Company
incurred the following out of pocket costs relating to the acquisition:

Legal fees to arrange the business combination P 25,000
Cost of SEC registration 12,000
Cost of printing and issuing new stock certificates 3,000
Indirect cost of combination 20,000
Finder’s fee 35,000

20. Calculate the goodwill from the business combination
A. 10,000,000 C. 10,040,000
B. 10,025,000 D. 10,060,000

21. The total retained earnings of the surviving company after the combination is
A. 13,920,000 C. 11,920,000
B. 13,980,000 D. 11,980,000


Numbers 22 – 24

The statement of Financial Position of Lumina Corporation on June 30, 2022 is presented below:

Current assets P 195,000
Land 1,320,000
Building 660,000
Equipment 525,000
Total assets P 2,700,000

Liabilities P 525,000
Ordinary shares, P5 par 900,000
Share premium 825,000
Retained earnings 450,000
Total liabilities and equities P 2,700,000

All the assets and liabilities of Lumina assumed to approximate their fair values except for land and building. It
is estimated that the land has a fair value of P2,100,000 and the fair value of the building increased by P480,000.
Enigma Corporation acquired 80% of Lumina’s outstanding shares for P3,000,000. The non-controlling interest
is measured at fair value.

The following are independent assumptions.

22. Assuming the consideration paid includes control premium of P222,000, how much is the goodwill (gain on
acquisition) on the consolidated financial statements?
A. 259,500 C. 340,500
B. 439,500 D. 410,100

23. Assuming the consideration paid includes control premium of P852,000, how much is the goodwill (gain on
acquisition) on the consolidated financial statement?
A. 315,000 C. 102,000
B. (750,000) D. 252,000

24. Assuming the consideration paid excludes control premium of P138,000 and the fair value of the non-
controlling interest is P736,000, how much is the goodwill (gain on acquisition) on the consolidated financial
statement?
A. 469,500 C. 301,500
B. 439,500 D. 448,500


Numbers 25 – 26

Great Company has gained control over the operation of Super Corporation by acquiring 85% of its outstanding
capital stock for P15,480,000. This amount includes a control premium of P180,000. Acquisition expenses,
direct and indirect, amounted to P498,000 and P252,000, respectively.

The following is the balance of the Great and Super at book values:

Great Company Super Corporation

Cash P 21,249,000 P 768,000

Accounts receivable 1,800,000 1,950,000

Inventories 3,300,000 2,160,000

Prepaid expenses 891,000 750,000

Land 14,100,000 5,274,000

Building 9,360,000 3,348,000

Equipment 1,800,000 1,110,000

Goodwill - 1,800,000

Total assets P 52,500,000 P 17,160,000

Accounts payable P 4,050,000 P 1,518,000

Notes payable 8,400,000 4,380,000

Ordinary shares, P50 par 20,400,000 4,800,000

Share premium 9,450,000 3,600,000

Retained earnings 10,200,000 2,862,000

Total liabilities and equity P 52,500,000 P 17,160,000

The following were ascertained on the date of acquisition for Super Corporation
• The value of receivable and equipment has decreased by P150,000 and P84,000 respectively.
• The fair value of inventories are now P2,616,000 whereas the value of the land and building have
increased by P2,826,000 and P642,000 respectively.
• There was an unrecorded accounts payable amounting to P162,000 and the fair value of notes is
P4,428,000.

Compute the following balances to be presented in the consolidated financial position on the date of business
combination:

25. Total assets
A. 73,500,000 C. 61,308,000
B. 60,558,000 D. 76,788,000

26. Total shareholders’ equity
A. 42,000,000 C. 39,300,000
B. 45,000,000 D. 40,050,000


Numbers 27 – 28

The balance sheet of Padre Enterprise and Sister Company at December 31, 2021 are summarized as follows:

Padre Sister
Assets 5,000,000 2,000,000
Liabilities 1,500,000 500,000
Capital stock, P40 par 2,500,000
Capital stock, P25 par 1,000,000
Retained earnings 1,000,000 500,000

At the date of acquisition, Sister’s assets are understated while its liabilities are fairly valued. On January 1, 2022,
Padre purchased 80% of Sister Company’s outstanding shares for P2,000,000 when the fair value of Sister
Company’s net asset was P2,000,000. Padre issued 10,000 previously unissued shares in consideration of the
acquisition.

Padre is to assign an amount to the non-controlling interest at the date of acquisition based on the total fair value
of Sister’s outstanding shares.

27. How much is the consolidated assets at the date of acquisition?
A. 9,000,000 C. 8,000,000
B. 9,700,000 D. 8,700,000

28. How much is the consolidated liability at the date of acquisition?
A. 2,000,000 C. 1,800,000
B. 1,500,000 D. 500,000

29. How much is the consolidated liability at the date of acquisition?
A. 7,000,000 C. 6,000,000
B. 5,500,000 D. 6,700,000


Numbers 30 – 31

Entity A acquired 80,000 out of 100,000 outstanding ordinary shares of Entity B which enabled the former to
obtain control of the latter at an acquisition price of P1,000,000. Entity A paid P100,000 acquisition related costs
and P50,000 indirect costs of business combination. At the date of acquisition, the net assets of Entity B are
reported at P1,600,000. An asset of Entity B is overvalued by P60,000 while one liability is undervalued by
P40,000.


30. What is the initial measurement of noncontrolling interest in net assets in the consolidated statement of
financial position?
A. 320,000
B. 300,000
C. 250,000
D. 316,000

31. What is the goodwill or gain on bargain purchase arising from business combination?
A. 250,000 gain on bargain purchase
B. 150,000 gain on bargain purchase
C. 50,000 goodwill
D. 200,000 gain on bargain purchase