gt CITY COLLEGE OF CALAMBA yas Dalubhasaan og Lungsod ng Calamba LEARNING MODUL! INFORMATION I. Course Code ‘ABC301 II. Course Title "ACCOUNTING FOR BUSINESS COMBINATIONS TH. Module Number TWO) TV. Module Title BUSINESS COMBINATION V. Overview of the Module ‘The module focuses on all concepts related to Business Combinations. Acquiring and acquired companies and its difference willbe discussed in this ‘module. End to end procedure of preparing the consolidated financial statement, will be also presented. VI. Module Outcomes ‘At the end of the module, the students should be able to: a. Apply, practice, solve, analyze, and evaluate problems relating to business combinations. b. Prepare individual different financial statements and consolidated statements using different forms of business combination under cost model ©. Apply knowledge and skills to successfully respond to various types of assessments including professional licensure and certifications 1g Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba Lesson Number 1 BUSINESS COMBINATION Lesson Objectives: At the end of this lesson, the students should be able to: a. Apply, practice, solve, analyze, and evaluate problems relating to business combinations. , Prepare individual different financial statements and consolidated statements Using different forms of business combination under cost model. ©. Apply knowledge and skills to successfully respond to various types of assessments; and (including professional licensure and certifications)CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 61 J. CONTENT DISCUSSION ‘A business combination is the term applied to extemal expansion in which separate enterprises are brought together into ‘one economic entity as a result of one enterprise obtaining control over net assets and operations of another enterprise. IPRS 3 defines business combination as a transaction or event in which the acquirer obtains control of one or more businesses. An acquirer must be identified in all business combinations, Acquisition of Control a. Acquisition of assets All the company’s assets are acquired directly. In most cases, the existing liabilities of the acquired company are assumed by the acquirer. When the assets are acquired and the liabilities are assumed, the transaction is referred to as the acquisition of “net assets”. Business combinations may be achieved legally by either statutory consolidation or statutory ‘merger. Statutory consolidation refers to combining of two or more existing legal entities into one new legal entity. Statutory merger refers to the absorption of one or more existing legal entities by another existing company that continues as the sole surviving legal entity b. Stock acquisition A controlling interest (usually more than $0%) of another company’s voting common stock is acquired. The acquiring company is termed as the parent and the acquired company is termed as a subsidiary. Both the parent and subsidiary remain separate legal entities but for external financial reporting purposes, the companies will usually combine their individual financial statement into a consolidated financial statement. Acquisition Method of Accounting for Business Combinations IFRS 3 requires that all business combinations be accounted for by applying the acquisition method listed as follows: 1. Identify the acquirer 2. Determine the acquisition date 3, Determine the consideration given by the acquirer 4, Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Any resulting goodwill or gain from a bargain purchase should be recognized. For further understanding, let’s apply the acquisition method in the problems discussed below. Let us assume that the company to be acquired by the Acquirer, Ine. has the following Statement of Financial Position on June 30, 20x. J&J Company Statement of Financial position June 30, 20xx cash 200,000 Current Liabilities 125,000 Marketable Securities 300,000 Bonds payable 500,000 Inventory 500,000 Land 130,000 Common Stock (PI par) 50,000 Building (net) 750,000 Adgitional Paid in Capital 700,000 Equipment (net) 400,000 Retained Parnings 925,000 Total Assets 2,300,000 Total Liabilities and Equity 2,300,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe 62 Fair values for all accounts have been measured as of June 30, 20xx as follows: Cash, Marketable Securities Inventory Land Building Equipment Unrecognized receivables Current Liabilities Bonds Payable Premium on bonds payable Fair Value of Net Identifiable assets 100,000 00 550,000 360,000 300,000 700,000, 225,000 3,265,000 125,000 500:000 720,000 645,000 2,620,000 Before recording the acquisition, the acquirer should calculate the difference between the price paid and the fair value of the net assets acquired. Case 1. Price paid exceeds the fair value of net identifiable assets acquired Acquirer, Inc, issues 80,000 shares of its P10 par value common stock with a market value of P40 each for J&:J ‘Company's net assets. The acquirer pays professional fees of PS0,000 to accomplish the acquisition and stock issuance cost of P30,000, Price paid (consideration given), 80,000 shares x P40 market value 3,200,000 Fair Value of Net Identifiable Assets Acquired from 14} (2,620,000) Good 580,000 Professional Fees (expense) 50,000 Stock Issue Costs (reduction from additions paid in capital) 30,000 Entries recorded by the Acquirer, Ine. are as follows: I, To record the net assets acquired including the new goodwill: cash Marketable Securities Inventory Land Building Equipment Reccivables-tade Goodwill, ‘Current Liabilities Bonds Payable Premium on bonds payable Common Stock (P10 par, 80,000 shares) Additional Paid in Capital (P30 x 800,000) 2. To record acquisition related costs: ‘Acquisition expense ‘Additional Paid in Capital Cash, 200,000 330,000 550,000 360-000 500,000 700,000 225,000 80,000 125,000 500,000 20,000 800-000, 2,400,000 50,000 30,000 80,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe 63 Case 2. Price paid is less than fair value of net identifiable assets acquired ‘Acquirer, Inc. issues 20,000 shares of its P115 par value common stock with a market value of P120 each for J&J Company's net assets. The acquirer pays professional fees of P50, 000 to accomplish the acquisition and stock issuance cost of P130, 000. Price paid (consideration given), 20,000 shares x P120 market value 2,400,000 Fair Value of Net Identifiable Assets Acquired from 18 (2.620.000) Gain on acquisition (220,000) Professional Fees (expense) 50,000 Stock Issue Costs (reduction from additional paid in capital) 30,000 Entries recorded by the Acquirer, Inc. to record thi 1. To record the acquisition of net assets: quisition and related costs are as follows Cash, 200,000 Marketable Securities 330,000 Inventory 550,000 Land 360,000 Building 00:00 Equipment 700,000 Receivables-irade 225,000 ‘Cursent Liabilities 125,000, Bonds Payable 500,000 Premium on bonds payable 20,000 ‘Common Stock 20,000 x P115 par) 2,300,000 ‘Adtional Pid in Capital (20,000 x PS) 100,000 Gain on acquisition 220,000 2. To record acquisition related costs: Acquisition expense 50,000 Additional Paid in Capital 100,000 Stock Issuance Costs 30,000 Cash 180,000 Recording Contingent Consideration Contingent consideration is an agreement to issue additional consideration (asset or stock) at a later date if specified events occur. It is measured at its acquisition date fair value, Using the data of J&J Company in Case I, assume the Acquirer, Inc. issued 80,000 shares with a market value of P3,200,000. In addition to the stock issued, the acquirer agreed to pay an additional P200, 000 on January 1, 2021, if the average ineome for the 2-year period of 2019 and 2020 exceeds 160,00 per year. The expected value is estimated as P100, 000 based on the 50% probability of achieving the target average income. Total Price Pai Stock issued at market value 3,200,000, [Estimated value of contingent consideration 100,000, 3,300,000 Fair Value of net assets acquired from J&J company 2,620,000) Goodwill 580,000 Acquisition related eos: Professional fees (expense) 0,000 Stock issuance costs (fedution from APIC) 30,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe 64 Entries recorded by the Acquirer, Ine, to record the acquisition and related costs are as follows: 1. To record the net assets acquired including the new goodwill: Cash 200,000 Marketable Securities 330,000 Inventory 550,000 Land 50,000 Building $300,000, Equipment 700,000, Revcivables-tade 225,000 Goodwill 680,000 ‘Current Liabilities 125,000 Bonds Payable 500,000 Premium on bonds payable 720,000 Contingent Consideration Payable 100,000 ‘Common Stock (P10 pat, 80,000 shares) 800,000 Additional Paid in Capital (P30 x 800,000) 2,400,000 2, To record acquisition related costs: ‘Acquisition expense 50,000 ‘Additional Paid in Capital 30,000 Cash, 80,000 Recording Changes in Contingent Consideration If during the measurement period, the contingent consideration was revalued based on additional information, the estimated liability and the goodwill (or gain on acquisition) would be adjusted. For example, if within the measurement period, the estimate was revised to P160, 000, the P60, 000 increased would be adjusted as follows: Goodwill {60,000 ‘Contingent Consideration Payable 60,000 If the estimate is again revised after the measurement period, the adjustment is included in profit or loss of the later period. For example, if the estimate was revised to P200,000 after the measurement period, the P40,000 increase would be recorded as follows: Loss on contingent consideration payable 40,000 Contingent Consideration Payable 40,000 The above procedure only applies to any contingent consideration payable in cash or other assets other than issuing additional shares of stock. An agreement to issue additional stocks upon occurrence of future event is treated as changes in estimated value of the shares issued. No liability is recorded at the acquisition date. Using the example of the acquisition of J&J Company for P3, 200,000, assume that there was an agreement to issue 20,000 additional shares if the average income during the 2-year period of 2019 and 2020 exceeded P160, 000 per year. ‘There would be no change in the entry in Case 1 to record the acquisition of June 30, 2020, Assuming the contingent event occurs, the following entry would be made after December 2022, to issue additional 20,000 shares. AAdsitional paid in capital (20,000 shares x P10) 20,000 miciiiiiiieteleiioe 20,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 65 Dalubhasean ng Lungsod ng Calamba Accounting Procedures for the Acquisition by the Acquiree Using the example of the acquisition of J&J Company for P3, 200,00 in Case 1. The excess of the price received by the acquire (P3,200,000) over the sum of the book value of net assets of P1,675,000 (P2,300,000 assets -P625,000 liabilities) is recorded as a gain on sales. ‘The entries recorded by J&J Company are as follows: 1. To record sale of net assets: Investment in Acquirer, Ine 3,200,000 Current abilities 125,000 Bonds payable 500,000 Cash 200,000 Marketable sceurtes 300,000 Inventory 500,000 Land 150,000 Building 730,000 Equipment 400,000 Gain on sale of business 1,525,000, 2. To record the redistribution of Acquirer, Inc, shares received to its shareholders and the liquidation of J&J Company: ‘Common stock 50,000 Adkitional paid in capital 700,000 Retained earings 925,000 Gain on sale of business 1,525,000 Investment in Acquiter, Ine 200,000 Under the acquisition method, the Statement of Financial Position of Acquirer, Inc. after combination includes all the assets and liabilities of J&J Company at fair values. The Statement of Comprehensive Income of the acquirer for the accounting period in which business combination occurred includes the operating results of the acquiree after the date of acquisition only. Ina stock acquisition, the acquiring company deals only with existing shareholders of the acquired company not the company itself To illustrate, assume that on December 31, 2020, P Company acquired all 10,000 issued and outstanding shares of S Company’s P100 par value common stock for P2, 000,000 eash. In addition, P Company paid professional fees to accomplish the combination of P100, 000. To record the transaction: 1. To record the acquisition of stock from S Company Investment in subsidiary S Company 2,000,000 Cash 2,000,000 2. To record acquisition related costs: Acquistion expense 100,000 Cash’ 100,000 The Investment in Subsidiary account would appear as a long-term investment on P Company's Statement of Financial Pasion, However such presenti is permited only ifconsliation were not required, Assuming consolidated Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 66 statements ate required, the Statement of Financial Position of the two companies must be combined into a single Consolidated Statement of Financial Position. The Accounting process in the preparation of consolidation statements will be discussed in the next lesson. Impairment of Goodwill Goodwill should be tested for impairment annually. The test for impairment to each of the acquirer's cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquire are assigned to those units or group of units. ‘A cash generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. Impairment Testing in Later Periods Goodwill is considered to be impaired if the carrying amount of the unit’s net assets (including goodwill) exceeds the recoverable amount of the unit To illustrate, assume the following estimates were made at the end of the first year: Estimated Recoverable amount of the cash generating unit, based on projected cash flows (value in use) 650,000 Carrying amount of the cash generating unit (including goodwill) 680,000 Since the recorded carrying amount of the cash generating unit exceeds its recoverable amount, goodwill is considered to be impaired. If the recoverable amount exceeds the carrying amount, there is no impairment, and there is no need to proceed to calculate a goodwill impairment loss. Goodwill impairment loss in later periods If the above test indicates impairment, the impairment loss must be estimated. The impairment loss for goodwill is the excess of the carrying amount of the cash generating unit’s net assets (including goodwill) over the recoverable amount of the cash generating unit. These are the values that would be assigned to those accounts if the cash generating unit were purchased on the date of impairment measurement. ‘The following are the calculation of the impairment loss: ‘Carrying amount of the net assets on the date of measurement, (ineluding goodwill of P90,000) 690,000 Estimated recoverable amount ofthe cash generating unit, based on projected cash flows (value in use) 680,000 Estimated impairment loss 40,000 The following entry would be made: Goodwill impairment iss 40,000 Goodwill 40,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 67 A, SUMMARY ‘The lesson highlighted the whole general idea in business combination. It discussed the different process on how to do business combination and the accounting procedure in every transaction accordingly. The lesson also differentiated the acquirer or the parent and the acquiree or the subsidiary. In general, the lesson gave a gist on the accounting process of business combination AI. ENRICHMENT ACTIVITIES Complete the requisites of the following: Fill up the joumals, working papers, trial balances, and computations provided in each exercise, Exercise no. 1 Apple Corporation purchased the net assets of the Orange Corporation for P500, 000 cash. Prior to the combination, Orange Corporation has the following Statement of Financial Position, Orange Corporation Statement of Financial Position January 1, 203% Assets Liabilities and Equity Curtent Asses: (Current Liabilities: 50,000 ‘Accounts receivable 120,000 Stockholders’ Equity Inventories 100,000 220,000 Common Stock P10 par 200,000 Property, plant and equipment 280,000 Retained Eamings 250,000 450,000 ‘Total Assets: 500,000 Total Li and Equit 500,000 Fair market values agree with book values except for inventories and property, plant and equipment, which have fair market values of P140, 000 and P300, 000 respectively. To consummate the transaction, Apple incurs P5, 000 acquisition related costs, Required: 1. Prepare Journal Entries for the books of Apple Corporation to record the acquisition. 2. Prepare Journal Entries for the books of Orange Corporation to record the acquisition Learning Module on Accounting for Bu: ess CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 68 To record acquisition ofnet assets of Orange Computation of Income from Acquisition: “Acquistion cost a Lest: Fae vale of net identfable esses acquired 2 2 Income fom aequistion Books of Orange Corporation : 2 Te record sate of net ases to Apple. To record liquidation ofthe corporation. Exercise no. 2 Love Company acquired the net assets of Hate Corporation on January 3, 20x for P565, 000 cash. In addition, PS, 000 of professional fees were incurred in consummating the combination. At the time of acquisition, Hate Corporation reported the following book value and current market data: Book Value Fair Value Cash and Receivables 50,000 50,000 Inventory 100,000 0,000 Buildings and Equipment (net) 200,000 300,000 Patent 200,000 Total Assets 350,000 70,000 ‘Accounts Payable 30,000 30,000 ‘Common Stock 100,000 Aiton Paid in Capital 80,000 Retained Eamings 140,000, Tota Liabilities and Equities Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 69 Required: Prepare the journal entries to record the Ta record acquisition of the net asets at fir values. Acquisition cos 2 Less: Fair value of net identifiable assets acquired Total assets 2 Accounts payable 2 ? Exercise no. 3 On January 1, 20xx, Binibini Corporation issued 6,000 shares of its P10 par value common stock to acquire the assets and liabilities of Marikit Corporation. Binibini Corporation shares were selling at P90 on that date, Carrying value and fair value for Marikit Corporation at the time of acquisition were as follows: Carrying Value Pair Value Cash and Receivables 50,000 50,000 Inventory, 120,000 200,000, Buildings and Equipment 300,000 Less: Accumulated Depreciation Total Assets 350000 ‘Accounts Payable 50,000 50,000 Common Stock 200,000 Retained Eamings 170,000 Total Liabilities and Equities 420,000 Binibini Corporation paid P25, 000 for SEC registration and issuance of its new shares and paid professional fess of P15, 000. Required: Prepare the journal entries to record the acquisition, To record acquisition ofnet asets acquired. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 70 Purchase price 2 Acquistion cost 2 [Less fair value of net identifiable assets acquired : 2 2 Exercise no. 4 On January 1, 20xx, Folk Corporation issues 12,000 shares of its P10 par value stock to acquire the net assets of Lore Company. Underlying books value and fair value information for the statement of financial position items of Lore Company at the time of acquisition are as follows: Carrying Value Fair Value cash 60,000 60,000 Accounts Receivable 100,000, 190,000 Inventory lito bass) 60,000 115,000 Land 50,000 70,000 Buildings and Equipment 400,000 350,000, Less: Accumulated Depreciation 150,000) Total Assets 520,000 oe, ‘Accounts Payable 10.000 10,000 Bonds Payable 200,000 180,000 Common Stock 150,000, Addition Paid in Capital 70,000 Retained Eamings 90,000 Total Liabilities and Equities $20,000 Lore shares were selling at P18 and Folk shares were selling at P50 just before the merger announcement, Additional cash payments made by Folk Corporation in completing the acquisition were: Broker's fee paid to firm that located Lore 70,000 Audit fee for stock issued by Folk 12,000 Cost of SEC regist [Folk sh: 000, Required: 1. Prepare journal entries to record the acquisition. 2. Prepare journal entries to record the issuance of shares. 5. Prepare journal entries to record indirect costs in the acquisition. wo aa ie ho a of Lr Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA n Dalubhasean ng Lungsod ng Calamba Purchase price ? Professional fees Acquisition co 2 Less: Fair value of net identifiable assets acquired Total asets 2 Total isiltes ? 2 a ? 2 To record costs of issuing and registering of shares issued Ta record indirect acquisition casts, Exercise no. § The following Statement of Financial Position was prepared for Taylor and Swift Corporations on January 1, 20xx just before they entered into a business combination: Taylor Corporation Swift Comporation Book Value Fair Value Book Value Fait Value Cash and Receivables 300,000 300,000 50,000 50,000 Inventory 400,000 600,000 100,000 215,000 Buildings and Equipment 800,000 870.000 300,000 20,000 ess: Accumulated Depreciation 200,000 (150,000) Total Assets 1,300,000 1,770,000 300.000 515,000 ‘Accounts Payable 100,000 100,000 40,000 40,000 Bonds Payable 400,000 440,000 60,000 85,000 Common Stock P10 par value 300,000 PS par value 100,000 Aiton Paid in Capital 100,000 20,000 Retained Eamings 400,000 80,000 Total Liabilities and Equities 130,000 300,000 Requried: ‘Assume that Taylor acquires the net assets of Swift by issuing 15,000 shares of stock. Prepare a Statement of Financial Position for the combined company immediately after the acquisition if the market price of Taylor shares is P40 and P20 at the time the acquisition occurs. Learning Module on Accounting for Business Combinations2O CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 72 ‘Cash and Recevables Inventor Building and Squipment ‘Accumulated depreciation ‘Goodwill Total assets Based on Pél/share Based on P20share ‘Accounts payable ‘Bonds payable ‘Common stock PIO Par value Aditional paid-in capital Retained eamings(including income For aaquiiion) [otal Tiabiities and stockholders" equity Computation of GoodwilliGain on Acquisition — Based on P40 per share: Acquisition cost Less: Fair value of net identifiable assets Computation of Goodwill/Gain on Acquisition — Based on P20 per share, ‘Acquisition cost (15,000 shares x P20) Less: Fur vale of net identifiable assets Exercise no. 6 December Company and Avenue Company agreed to a combination on January 1, 20xx. On the date of combination, the companies report the following data: December Company ‘Avene Company Book Value Pai Book Value Pair Value Cash and Receivables 90,000 20,000 20,000 Inventory 100:000 30,000 42,000 Land 100,000 10,000 15,000 Buildings and Equipment 400-000 200,000 140,000 Less: Accumulated Depreciation 130,000), (80,000) Total Assets 540,000, 0,000 180,000 27000 ‘Accounts Payable 80,000 80,000 20,000 20,000 ‘Common Stock 200,000 20,000 Addition Paid in Capital 20,000 5,000 Retained Eamings 240,000, 135,000, ‘Total Liailtes and Equities 540.000, 180,000, December has 10,000 shares of its P20 par value shares outstanding on January 1, 20xx and Avenue has 4,000 shares of PS par values stock outstanding, the market values of the shares are P300 and P50 respectively. Required: a, December issues 700 shares of stock in exchange for all the net assets of Avenue, Prepare a Statement of Financial Position for the combined entity immediately following the acquisition. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 3 Dalubhasean ng Lungsod ng Calamba ASSETS. Cash and receivables Inventory Land Plant and equipment Less: Accumulated depreciation Goodwill Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Capital stock, P20 par value apital in excess of par Retained earnings Total abilities and stockholders’ equity Acquisition cost 2 ‘Less: Fair value of net identifiable assets acquired 2 b. Prepare the stockholders’ equity section of the combined company. Assuming December acquires all the net assets of Aventie by issuing the following shares and stack issuance costs of P350, 000 was incurred: With 1,100 shares issued Capital sock Capital in excess of par Retained earnings Total 2) With 1,800 shares issued Capital stock ‘apital in excess of par Retained earnings Total 8) ‘With 3,000 shares issued Capital stock 2 Capital in excess of par Retained earnings Total Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 74 Dalubhasean ng Lungsod ng Calamba Exercise no. 7 Mirror Company entered into @ business combination agreement with Ball Corporation. Under the terms of agreement, Mirror issued 180,000 shares of its PI par common stock in exchange for all the assets and liabilities of Ball. Mirror shares then were distributed to the shareholders of Ball, and Ball was liquidated. Immediately prior to the combination, Ball’s statement of financial position appeared as follows, with fair values also indicated: Book Values Fair Values Asses: Cash’ 28,000 28,000 ‘Accounts Receivable 258,000 251,500 Less Allowance for Bad Debts (6500) Inventory 381,000, 395,000 Long term Investments 150,000, 175,000 Land 55,000 100,000 Rolling Stock 130,000 163,000 Plant and Equipment 2,425,000 2,500,000 Less: Accumulated Depreciation (614,000) Patents 125,000 500,000 Special Licenses 95,800 190,000 Total Assets 3.027.300 E12,500 Liabilities: Curent Payables 137,200 137,200 Mortgages Payable 500,000 520,000 Equipment Trust Notes 100,000, 95,000 Debentures Payable 1,000,000 980,000 Less: Discount on Debentures 40,000 Total Liabilities 7,697,200 770300, Stockholders Equity Common Stock (PS par) Additional Paid in Capital ffom Common Stock ‘Additional Paid in Capital from Resirement of Prefered Stock Retained Eamings Less: Treasury Stock (1,500 shares) (12,000) Total Liabilities and Equity 3,027,300 Immediately prior to the combination, Mirror common stock was selling for P14 per share. Mirror incurred professional fees of P135, 000 in arranging the business combination and P42, 000 of stock issue costs. Required: a, Prepare journal entries in the books of Mirror to record the acquisition. . Prepare journal entries in the book of Ball to record the acquisition. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 15 Dalubhasean ng Lungsod ng Calamba a. Books of Mirror To record acquisition ofasets and liabilities a fair values Purchase price 2 Direct acquisition cost 2 ‘Acquisition cos ? ‘Less fair value of net identifiable asses acquired Total assets 2 Total liabilities ? 2 Ta record indirect cost b. Books of Ball: To record retirement of treasury stock mum Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 76 To record sale of assets and liabilities to Mirror. To record retirement of Ball stock and distribution of Mirror stock ‘On May 6, 20x, Tears Corporation acquired all of Ricochet Company's assets and liabilities by issuing its PS par common stock, Ricochet’s P10 par value common shares had a market price of PSS each at the time of combination. Tears Corp Ricochet Company Book Value Book Value Fair Value Combined Cash, 50,000 20,000 20,000 70,000 ‘Accounts Receivable 2 55,000 55,000 145,000 Inventory 100,000 ? 110,000 210,000 330,000 140,000? 570,000 Goodwill 30,000 40,000 2 Total Assets 620.000 00 ‘Accounts Payable 70,000 30,000 30,000, 100,000 Bonds Payable 300,000 100,000? 400,000 Bonds Premium : : 5.000 Common Stock 129,000 0,000 190,000 apic 55,000 262,000 Retained Eamings 2 2 Total Liabilities and Equity 890,000 0 Complete the partial Statement of Financial Position for Tears and Ricochet prior to the business combination and immediately following the combination presented above. In addition to that, assume that prior to the time the business combination was completed, Teats paid professional fees of P8, 500 and P6, 300 for stock registration and transfer fees in connection with the combination Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 7 Dalubhasean ng Lungsod ng Calamba Required: a, Prepare journal entries to record the acquisition and its related costs +b, Compute for the reported goodwill. ¢. Compute for the Additional Paid-In Capital to be reported. 1 2 2 2 Goodwill previously computed 7 Merger costs added to investment account —_2 Total goodwill reported B 3. Additional paid-in capital reported following combination Stock issue costs Total addtional paid-in capital reported ess Combinations Learning Module on Accounting for Bu:CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 78 IV. ASSESSMENT Encircle the letter of the correct answer. Refrain from having erasures. Support your answer with a solution to the answer. Solution paper is provided in the last page of the lesson. 1. The net assets of Acquired Company have a book value of P150, 000 and a fair value of P180, 000, Acquiring Company paid P250, 000 cash for all the net assets of Acquired Company. Acquiring Company also paid PSO, 000 to an investment house as finder’s fee. At what amount should goodwill be recorded on Acquiring Company’s books? a. P120,000 b. — P-70,000 c.— P80,000 dé. P100,000 2. On June 30, 20xx White Company issued 100,000 shares of its P20 par value common stock for the net assets of Black ‘Company in a business combination accounted for by the acquisition method. The market value of White’s common stock ‘on June 30 was P36 per share, White paid a fee of P100, 000 to the broker who arranged this acquisition. Costs of SEC registration and issuance of the equity securities amounted to P50, 000, Contingent consideration determined to be paid to Black Company after acquisition amounts to P120, 000. ‘What amount should White capitalize as the cost of acquiring Black’s net assets? a. 3,620,000 b, —_P3,650,000 ©. 3,720,000 4. P3,750,000 3. Abel and Cain Corporations were combined on April 1, 2020 in a business combination, and Cain Corporation was dissolved and liquidated. For the year 2013, the companies had the following net income records: . Abel Corporation (Janl-Aprl) P80, 000 Abel Corporation (Aprl-Dec31) 1,320,000 ‘© Cain Corporation (Jan! -Aprl) 200,000 * Cain Corporation (Aprl-Dee31) 400,000 Abel Corporation, the surviving corporation, will report income for 2020 of: a. 1,320,000 b.-P1.400,000 c.— P1,720,000 4. P1,800,000 4. On April 27, 20xx, Peter, Inc. paid P800,000 for the assets of Ana Company. The recorded assets and liabilities of Ana Company on April 27, 20xx follow: Cash 160,000 Inventory 480,000 Property and Equipment (net of accumulated depreciation of P640,000) 960,000 Liabilities 360,000 ‘On April 27, 20xx, it was determined that the inventory of Ana had a fair value of P380, 000, and property and equipment (net) had a fair value of PI, 120,000. What is the amount of goodwill (income from acquisition) resulting from the business combination? Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 9 Dalubhasean ng Lungsod ng Calamba a (P500,000) b. —-P100,000 ©. 300,000 &— (P360,000) 5, On March 1, 20xx, SS Corporation acquired for P1, 400,000 all the net assets of MM Company. On the date of the combination, the carrying value of MM’s identifiable net assets was PI, 150,000. The current fair value of MM’s inventories was P200, 000 less than their carrying values, and the current fair value of MM’s plant assets was P400, 000 larger than their carrying amount. The current fair values of all identifiable net assets of MM were equal to their carrying value. The journal entry prepared by SS Corporation to record the business combination includes: a. A debit of P200,000 to Inventories b. A credit of P400,000 to Plant Assets (net) © A debit of P350,000 to Goodwill dA debit of P50,000 to Goodwill Statement of Financial Position reflecting uniform accounting procedures, as well as fair values that are to be used as basis of the combination are prepared on September 1, 20x as follows: ACompany __B Company _C Company Assets 5,250,000 __ 6,800,000 _ 900,000 Liabilities 3,950,000 2,650,000 530,000 Capital Stock, all P10 par 1,700,000 1,200,000 275,000 Additional Paid in Capital 500,000 140,000 Retained Earnings (deficit (400,000) __2,450,000___(45,000) ‘Total Liabilities and Equity 5,250,000 {680,000 __ 900,000 A Company shares have a market value of P22 per share, Market values is available for shares of B Company and C Company. On September 1, 20xx A Company acquires all of the assets and assumes the liabilities of B Company and C Company by issuing 200,000 shares of its stock to B Company and 29,000 shares of its stock to C Company. A Company pays P10, 000 for registering and issuing securities and P20, 000 for other acquisition costs of combination. 6. What is the goodwill to be recorded by A Company on September 1, 20xx? 518,000 250,000 268,000 500,000 7. What is the total asset of A Company after Combination? a P13,438,000 b. —P12,920,000 © P12,730,000 éP13,248,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 80 Dalubhasean ng Lungsod ng Calamba 8 What is the total stockholders’ equity in the combined statement of financial position after combination on September 1, 20x? a. P6,308,000 b. —-P7,148,000 c.— P6,728,000 4. -P'1,300,000 Condensed Statement of Financial Position for Pablo and Siso Corporations at December 31, 20x are as follows: (in thousands) Pablo Siso Current assets 130 60 Noncurrent assets 570 440 Total Assets 700 300 Liabilities 50 60 Capital Stock, all P10 par 500 200 Additional Paid in Capital 50 140 Retained Eamings (deficit) 100 100 ‘otal Liabilities and Equity On January 2, 20xy, Pablo issues 30,000 shares of its stock with a market value of P20 per share for the assets and liabilities of Siso Corporation, Siso is dissolved. The book values reflect fair values, except noncurrent assets of Pablo, which have a fair value of P400, 000, and the current assets of Siso, which have a net realizable value of P100, 000. Pablo pays the following expenses in connection with the business combination + Cost of registering and issuing securities issued 15,000 + Other acquisition costs of combination 25,000 Contract of contingent consideration is to be paid to Siso, P75, 000. This is determined on the date of acquisition, 9. What is the total asset of Pablo Corporation after acquisition? a. 1,410,000 bd, —P1,265,000 c.— P1,395,000 4. -P'1,385,000 10, What is the total stockholders’ equity of Pablo Corporation after acquisition? a. 1,210,000 b. 1,250,000 c. — P1,150,000 4. -P'1,285,000 Write your solutions here: (use an extra sheet for your solution), Learning Module on Accounting for Business Combinations® CITY COLLEGE OF CALAMBA 81 y Dalubhasean ng Lungsod ng Calamba V. REFERENCES RERO, P. & PERALTA, J. (2016). Business Combination. Advanced Accounting Volume 2. GIC & Enterprises GUE! Co,, Ine, DAYAG, A. (2010). Business Combination. Practical Accounting 2. GIC & Enterprises Co., Ine. Learning Module on Accounting for Business CombinationsE>] errcorrese or cayanon LEARNING MODUL RMATION I. Course Code ‘ABC301 II. Course Title ACCOUNTING FOR BUSINESS COMBINATIONS, TH. Module Number THREE G) TV. Module Title ‘CONSOLIDATED FINANCIAL STATEMENTS, 'V. Overview of the Module ‘The module focuses on the procedures needed to prepare consolidated financial statements in periods at the date of acquisition and period subsequent to date of acquisition, The module shows an overview of the consolidation process for wholly-owned and partially-owned subsidiary acquired at book value and other than book value as well as the stock acquisition method. VI. Module Outcomes At the end of the module, the students should be able to: a. To prepare the consolidated statement of financial position of acquirer and acquiree at date of acquisition. b. To prepare the consolidated statement of financial position at periods subsequent to date of acquisition, ©. Apply knowledge and skills to successfully respond to various types of assessments including professional licensure and certifications um Learning Module on IT Applications in Bu: essCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba Lesson Number 2 Consolidated Statement of Financial Position - Date of Acquisition Lesson Objectives: At the end of this lesson, the students should be able to: . Apply, practice, solve, analyze, and evaluate problems relating to consolidated balance sheet as of date of acquisition, b. Present business consolidation at date of acquisition s. _ Apply knowledge and skills to successfully respond to various types of assessments; and (including professional licensure and certifications)CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 84 J. CONTENT DISCUSSION Busi -ss combination is achieved by acquisition of stock when an existing company acquires @ majority or all ofthe stock of another existing company. The acquirer records the acquisition by debiting the Investment in Stock account for the consideration given (price paid), which includes cash disbursed, the fair value of other assets given or securities issued, After the acquisition of stock a relationship exist that of parent/subsidiary relationship, The acquirer is called the parent and the acquiree is called the subsidiary Consolidated Financial Statements These are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. Consolidated financial statements are prepared when an entity controls one or more other entities. Consolidation Procedures ~ Basic Principles When preparing consolidated financial statements, an entity first combines the financial statements of the parent and the subsidiaries on a “line-by-line” basis by adding together like items of assets, liabilities, equity, income, and expenses. So that the consolidated financial statements present financial information about the group as that of a single economic entity, the following adjustments are made: The carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity in each subsidiary are eliminated. Goodwill or gain on a bargain purchase if any is recognized. 2. Non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting period are identified; and 3. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the parent's ownership interests in them. Non-controlling interests in the net assets of the subsidiaries consists of: a. The amount of those non-controlling interests at the date of the original combination; and b. The non-controlling interests’ share of changes in equity since the date of the combination Non-controlling interest is defined as the equity in a subsidiary not attributable directly or indirectly, to a parent Problems involving stock investments usually involve the following: (a) Preparation of Consolidated statement of financial position at Date of Acquisition. (b) Preparation of Consolidated Financial Statements on date subsequent to acquis (©) Accounting for Intercompany Profits in: i. Inventories fi, Plant Assets Preparation of Consolidated Statement of Financial Position at Date of Acquisition — Wholly Owned Subsidiary The following are the accounting procedures for the preparation of the consolidated statement of financial position for a parent and its wholly owned subsidiary: Learning Module on Accounting for Bu: ess Combinations+ The amounts of the consolidated assets and liabilities (except goodwill) are the parent company’s book CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba values and the subsidiary’s current fair values, ‘* Intercompany accounts (parent's investment account and subsidiary’s equity accounts) are excluded (eliminated) from the consolidated statement of financial position. ©The book value of the net asset is adjusted to their current fair values. * Goodwill is recognized in the consolidated statement of financial position, if the consideration given (price paid) exceeds the fair value of the subsidiary’s identifiable net assets. On the other hand, of the consideration given is less than the fair value of the subsidiary’s identifiable net assets, gain on acquisition (closed to parent's retained earnings) is recognized. P Company and S Company Statement of Financial Position December 1, 20xx Assets Cash ‘Accounts Receivable Inventory Egquipment-net Investment in Total Assets Company Liabilities and Equity Accounts Payable Common Stock Acditional Paid in Capital Retained Eamings Total Liabilities and Equity Case I. Acquisition at Book Value P Company acquires all of § Company's outstanding common stock for P100, 000 cash. The consideration given (price P Company Company 130,000 : 40,000 32,000 50,000 20,000 180,000 158,000 100,000 50,000 270,000 280,000 110,000 100,000 50,000 80,000 30,000 40,000 20,000 300.000 210.000, paid) of P100, 000 is equal to books value of subsidiary’s net assets as shown below: Consideration given (price paid) Less book value of interest acquired (100%) Common stock, $ Company APIC: S Company Retained Eamings- S Company Excess Working Paper Elimination Entry Common stock- S Company Additional Paid in Capital-S Company Retained Earnings. $ Company Investment in § Company 100,000 50,000 30,000 26,000 100,000 50,000 30,000 20,000 100,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 86 P Company and Subsidiary Consolidation Working Paper December 1, 20ex Tiiminaoions P Compan S Compan Debit_—[ Cee Conined Assets cash 130,000 130,000 ‘Accounts Receivable 40,000 32,000 72,000 Inventory 50,000 20,000 70,000 Equipment-nt 180,000 138,000 338,000 Investment in § Company 100,000 100,000 Total Assets 500,000 FIO 610,000 Liabilities and Equity ‘Accounts Payable 280,000 110,000 390,000 Common Stock ? Company 100,900 100,000 S Company 50,000 | 50,000 Additonal Paid in Capital P Company 80,000 30,000 S Company 30.000 Retained Barings P Company 40,000 40,000 S Company 20.000 | 20,000 ‘Total Liabilities and Equity 300500 210,000 [100.000 | 100,000, iano P Company and Subsidiary lated Statement of Financial Position Consol December 1, 20x Assets Curtent Assets Cash, Accounts Reesivable Inventory Total Current Assets Noncurrent Assets Equipment Total Assets Liabilities and Equity Curent Liabilities Accounts Payable Stockholders Equity Common Stock Addition Paid in Capital Retained Eamings Total 390,000 100,000 80,000 40,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 87 Dalubhasean ng Lungsod ng Calamba Case 2. Acquisition at More than Book Value Assume that P Company acquires 100% of S Company’s outstanding common stock for P110,000 in cash on December I, 20xx. On the date of acquisition, P Company records the acquisition of stock on its book with the following entry: Investment in S Company 110,000 ‘Cash 110,000 Consideration given (price paid) 110,000 [Less book value of interest acquired (1008) ‘Common stock, $ Company 50,000, APIC. S Company Retained Eamings Goodwill Company 20,000 100,000 Working Paper Elimination Entry Common stock- S Company 50,000 Additional Paid in Capital- S Company 30,000 ‘Retained Earnings- S Company 220,000 Goodwill 0,000 Investment in S Company 110,000 P Company and Subsidiary Consolidation Working Paper December 1,200 iminations P Company ‘Company Debit Cred Combined Assets Cash 130,000 120,000 ‘Accounts Receivable ‘40,000 32,000 72,000 Inventory 50,000 20,000 70,000 Equipmentenet 180,000 158,000, 338,000 Goodwill 10,000 10,000 Investment in S Company 110,000 110,000 Total Assets 500,000, 210000 610,000 Liabilities and Equity ‘Accounts Payable 20,000 110,000 390,000 (Common Stock P Company 100,000 100,000 $ Company 50,000 50,000 Acditiosal Paid in Capital P Company 80,000 80,000 Company Retained Eamings P Company 40,000 40,000 $ Company 20,000 20,000 Toil Liabilities and Equity 500,000, 210.000 | 110,000 | 170.000, 610,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 88 Dalubhasean ng Lungsod ng Calamba P Company and Subsidiary Consolidated Statement of Financial Position December 1, 20x Assets Curtent Assets Cash 120,000 Accounts Receivable 72,000, Inventory 70,000 Total Current Assets 262,000 Noncurtent Assets Equipment 338,000 Goodwill 10,000 Total Assets 10,000 Liabilities and Equity Current Liabilities ‘Accounts Payable 390,000 Stockholders Equity Common Stock 100,000 ‘dition Pad in Capital 80,000 Retained Eamings 40,000 220,000 Total sand Eq 10,000 Case 3. Acquisition at Less than Book Value- Bargain Purchase ‘Assume that P Company paid only P80, 000 for the 100% interest in the stockholders’ equity of S Company. P Company would make the following entry to record the acquisition: Investment in S Company 80,000 Cash 80,000 Consideration given (price paid) 80,000 = book value of interest acquired (100%) $ Company Company Retained Eamings» S Company 100,000 Gain on Acquistion 20,000) Working Paper Elimination Entry ‘Common stock: S Company 50,000 Additional Paid in Capital- S Company 30,000 Retained Earnings- S Company 20,000 nvestment in S Company 80,000 Retained Earnings- P Company (Gain) 20,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 89 P Company and Consolidation Working Paper December 1,200 liminations Pompey | SCompaay [Debit Credit [Combined Assets Cash 150,000 150,000, Accounts Receivable 40,000 32,000 72,000 Inventory 50,000 20,000 70,000 Equipment-net 180,000 158,000 338,000 Investment in Company 80,000 80,000 Total Assets 30,000 210000 630,000 Liabilities and Equity ‘Accounts Payable 280,000 110,000 390,000 ‘Common Stock P Company 100,000 190,000 $ Company 50,000 | 50,000 Aitional Paid in Capital P Company 80,000 80,000 S Company 30,000 | 30,000 Retained Eamings P Company 40,000 20,000 60,000 $ Company 20,000 | 20,000 ‘Total Liabilities and Equity 300,000 [210.000 [100,000 | To000 | 0000 P Company and Subsidiary Consolidated Statement of Financial Position December 1, 20x Assets (Current Assets Cash 150,000 ‘Accounts Receivable 72,000 Inventory 70,000 Total Current Assets 22,000 [Noncurrent Assets Equipment 338.000 Total Assets (630,000, Liabilities and Equity Curtent Liabilities ‘Accounts Payable 390,000 Stockholders’ Equity Common Stock 100,000 Aiton Paid in Capital 80,000 Retained Eamings 60,000 Total Liabilities and Equity Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 90 Dalubhasean ng Lungsod ng Calamba Preparation of Consolidated statement of financial position at Date of Acquisition — Partially Owned Subsidiary The consolidation of a parent company and its partially owned subsidiary differs from the consolidation of a wholly owned subsidiary in one major aspect ~ the recognition of non- controlling interest (formerly minority interest). Non controlling interest (NCI) represents the claims of the other stockholders other than the parent company (controlling interest) to the net income or losses and net assets of the subsidiary. Non-controlling interest is recognized only in the consolidation process. It is not a result of any business transaction or event of either the parent or the subsidiary and therefore not recorded in the books of the either the parent or the subsidiary, Measurement of Non-Controlling Interest IFRS 3 (2008) provides two options of measuring non-controlling interest in an acquiree: * At fair value, or At the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets (Proportionate Method). ‘There is no requirement within IFRS 3 to measure non-controlling interest on @ consistent basis for similar types of business combinations and therefore, an entity has a free choice between the two options for each transaction undertaken. However the fair value option is more appropriate than the non-controlling interests’ proportionate share of the acquiree’s identifiable net assets, since it results in the recognition of the non-controlling interest’s share of goodwill [IFRS 3 (2008),] For the purpose of measuring non-controlling interest at fair value, it may be possible to determine the acquisition-date fair value on the basis of active market prices of the equity shares not held by the acquirer. When the market price is not available, the acquirer should estimate the implied fair value of the non-controlling interest using other valuation techniques. The fair value of the non-controlling interest on the date of acquisition should not be less than the NCI percentage of the fair value of the net assets of the subsidiary. If this is the case the NCI should be raised to the percentage of the fair value of the net assets of the subsidiary, P Company Statement of Financial Position December 1, 20x Assets Liabilities and Equity Curent Assets Liabilities Cash 218,000 Accounts payable 160,000 Accounts Receivable 144,000 Bonds Payable 400,000 Inventory 160,000_ Total Liabilities 360,000 Total 522,000 Stockholders ‘Noncutrent Assets ‘Common Stock, PIO par value 400,000 Land 200,000 APIC 500,000 Buin (net) 40,000 Retained Earnings 502,000 Equipment (net) 400,000 Total equity Total 1,440,000, Total Assets 1,962.000_ Total Liabilities and Equity Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba ” 8 Company Statement of Financial Position December 1, 20x Book Falue Fair Value Assets Accounts Receivable 40,000 40,000 Inventory 100,000 110,000 Land 80,000 130,000 Building (net) 300,000 500,000 Equipment (net) 80,000 120,000 Total Assets 00,000 300,000, Liabilities and Equity ‘Accounts payable 80,000 80,000 Bonds Payable 200,000 00 Total Liabilities 240,000 20,000 Stockholders’ Equity ‘Common Stock, PI par value 20,000 APIC 140,000 Retained Eamings 120,000, Total equity 320,000 Net Assets "320,000 620,000 Case 4. Acquisition at More than Fair Value with Adjustment of Subsidiary Accounts Assume that instead of paying cash, P Company issued 16,000 shares of its P10 oar value common stock for 80% (16,000 shares) of the outstanding shares of S Company. The fair value of P Company’s stock is P50 and the fair value of the 20% NCL is assessed to be P170, 000. P Company also pays P50, 000 in professional fees to accomplish the acquisition. P ‘Company would make the following entries, Investment in S Company (16,000 shares x P50) 300,000 ‘Common Stock (16,000 shares x P10) 160,000 Addlitional Paid Capital 640,000 Retained Earnings- P Company 50,000 Cash 50,000 Goodwill or Gain on Acquisition The principal problem in the consolidation process on the date of acquisition is the measurement of goodwill or gain on acquisition when there is a non-controlling interest (NCD. IFRS 3 (2008) prescribes the following procedures: Goodwill is measured as the excess of «The aggregate of i. the acquisition date fair value of the consideration given, the amount of NCI, and the fair value of the parent's previously held interest in the subsidiary; over + The net of the acquisition-date value of the net assets acquired. Learning Module on Accounting for Business CombinationsUsing the above, goodwill is computed as follows: Price paid ‘Non-contolling interest (at fae value) Total Less fair value of net assets acquired Goodwill On the other hand, gain on acquisition (bargain purchase) is recognized when the fair value of identifiable net assets is, ‘more than the aggregate of the consideration given, the non- controlling interests and the fair value of any previously-held CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 800,000, 170,000 970,000, 620,000 10 35 interest in the acquire, The gain is to be recognized only by the acquirer (Parent). Working Paper Elimination Entry ‘Camman stock. § Company Additional Pailin Capital-S Company Retained Earnings- S Company Investment in S Company ‘Non-controlling Interest (NCD Inventory Land Building Equipment Goodwill Investment in S Company ‘Non-controlling Ineresi (NCD 20,000 180,000 120,000 10,000 30,000 200,000 ‘40,000 Learning Module on Accounting for Business Combinations 256,000 6,000 350,000 344,000 196,000CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 93 P Company and Consolidation Working Paper December 1,200 Tliminations and Adjustments F-Conpany | —S Compan Debit ‘Creai___[ Comsat Assets cash 168,000 168,000 ‘Accounts Receivable 144,00 40,000 184.00 Inventary 160,000 100,000 10,000 270,000 Land 200,000 80,000 50,000 00 Building 340,000 300,000 200,000 1,340,000 Equipment 400,000 80,000 40,000 520,000 Investment in S Company 00,000 256,000 51,000 Goodwill 350,000 380.000 Total Assets 272,000, 900 3.162.000 Libilities and Equity Accounts Payable 160,000 80,000 240,000 Bonds Peyable 400,000 200,000 00,000 Common Stock 560,000 60,000 20.000 20,000 Aaditonal Pid in Capital P Company 1,140,000 1,140,000 $ Company 180,000 180,000 Retained Earings P Company 452,000 452,000 $ Company 120,000 120,000 [Cite consolidated 196,000 170,00 64,000 Total 2712-000, 0900 | Troe 370.00 | 3.162,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 94 P-Company and Subsidiary Consolidated Statement of Financial Position December 1, 20x Assets Curent Assets Cash 168,000 ‘Accounts Receivable 184,000 Inventory 270,000 622,000 ‘Noncurrent Assets Land 330,000 Building 1,340,000 Equipment ‘520,000 Goodwill 350,000 2,540,000 Total Assets 162,000 Current Liabilities Accounts Payable 240,000 Bonds Payable ‘600:000, 840,000 Stockholders’ Equity Common Stock 560,000 Addition Paid in Capital 1,140,000 Retained Eamings 452,000 2,152,000 Non-controlling Interest 170,000 Total Liabilities and Equity 3.162.000 Case 5, Acquisition at Less than Fair Value with Adjustment of Subsidiary Accounts Using the same data except that P Company issued 8,000 shares of its P10 par value common stock at 80% of the outstanding shares of S Company. The fair value of a share of P Company stock is PSO. P Company also pays PSO, 000 in professional fees to complete the combination. P Company would make the following entries: Investment in S Company (3,000 shares x P50) 00,000 ‘Common Stock (8,000 shares x P10) 30,000 Additional Paid in Capital 320,000 Retained Earnings- P Company 50,000 Cash 30,000 Assuming that the fair value of 20% NCI is not given, the following assumption would be made to estimate its value. If the parent pays P400, 000 for an 80% interest, then it may be assumed that the entire subsidiary company is worth P500, (000 (P400, 000/80%). Refer this as the “implied value” of the subsidiary company. Assuming this is to be true, the NCI is worth 20% of the total subsidiary company value (PS00, 000 x 20%= P100, 000). The NCI value, however can never be less than its share of net identifiable asset (P124, 000). Therefore, the NCI share of company value is to be increased to 124, 000. Price paid 400,000 Non-controlling interest (at fair value) 124,000 Total 524,000 Less fair value of net assets acquired 620,000 Goodwill (96,000) Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 95 Dalubhasean ng Lungsod ng Calamba Working Paper Elimination Entry Common stock- § Company 20,000 Additional Paid in Capital-§ Company 130,000 ‘Retained Earnings- S Company 120,900 Investment in S Company 256,000 ‘Non-controling Inerest (NCD 4,000 Inventory 10,900 Land $0,000 Building 200,000 Equipment 140,000 Retained Earnings- P Company 96,000 Investment in S Company 144,000 Non-controllin Ineresi (NCD 60,000 P Company and Subsidiary Consolidation Working Paper December 1,200 Tiininatons and Asim FCompan | SCompany [Debit | Credit [Comoe ro cash 16,000 168,000 Accounts Reesvable 144000 40,000 184.000 Inventory 160,000 100,000 | 10,000 270,000 Land 200,000 80,000 | 50,000 30,000 Building 840,000 300,000 | 200,000 1,340,000 Fgupment 400,000 0,000 | 40,000 320,000 Investment in S Company 00,000 286,000 144,000 Total Assets 000 co EXPAT Liabilities and Equity Accounts Payable 160,000 30,000 240,000 Bonds Payable 400,000 200,000 600,000 Common Stock P Company 480,000 480,000 $ Company 20.000 | 20,000 Aaditioal Pai in Capital P Company 820,000 320,000 $ Company 180,000 | 180,000 Retained Earings P Company 452,000 96,000 548,000 S Company 120,000 | 120,000 Netto consolidated 4,000 124.000 60,000 ‘Tova Liar and Egaly La ouxoan | exn.900 | 620.000, Za 000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe %6 P Company and Subsidiary Consolidated Statement of Financial Position December 1, 20x Assets Current Assets Cash 168,000, Accounts Receivable 184,000, Inventory 270,000 622,000 Noncurtent Assets Land 330,000 Building 1,340,000 Equipment '520,000 Goodwill 2,190,000 al Assets Liabilities and Equity Current Liabilities ‘Accounts Payable 240,000 Bonds Payable 600,000 840,000 Stockholders Equity Common Stock 480,000 Acdition Paid in Capital 320,000 Retained Eamings 548,000 1,848,000 Non-controlling Interest 124,000, ‘Total Liabilities and Equity 2,812,000 I, SUMMARY ‘The lesson focused on the process of preparing the consolidated statement of financial position of the combined companies immediately after the acquisition. It discussed different cases encountered in a business combination and showed how to account each transaction. The lesson presented the step by step procedure on how to prepare consolidated statement of financial position. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 97 Dalubhasean ng Lungsod ng Calamba AI. ENRICHMENT ACTIVITIES Complete the requisit Exercise no. 1 of the following: ‘Mumshie Company purchased 100% of the common stock of Nakshie Company by issuing 20,000 shares of Mumshie PS par value common stock. The market value of the stock issued on the date of combination, January 2, 20xx was P6 per share. Summarized statement of financial position data at December 31. 20x are as follows: Cursent Assets Properyy And Equipment Other Assets Total Debits (Curtent Liabilit Mortgage Payable ‘Accumulated Depr Common Stock APIC Retained Eamings Total Credits Mumshie Nakshie 375,000 100,000 270,000 75,000 30,000 40,000 215,000. r 60,000 25,000 15,000 100,000 35,000 45,000 180,000 80,000 675,000, 215.000 On the date of combination Nakshie’s property and equipment had a fair value of P85, 000. The book value of all other assets approximated fair value. Required: Prepare the consolidated Balance Sheet for Mumshie Company for 20xx. Mumshie Company and Subsidiary Consolidated Balance Sheet January 2, 20% Current assets Property, plant and equipment Other assets Total assets Current liabilities Mortgage payable ‘Common stock Additional paid-in capital Retained earnings (including income ftom subsidiary of P20,000) Tota liabilities and stockholders” equity Investment cost Less: Book value of interest acquired ‘Common stock Retained eari Difference Allocated to property and equipment Goodwillineome from acquisition lL TL. Learning Module on Accounting for Business Combinations