Chapter 1 Business Combination Classroom Activity February 1, 2024

Problem 1 (Adapted). On May 31, 2020, Lim Corp. issued 100,000 shares of its P20 par value common stock for
the net assets of Pan, Inc., in a business combination accounted for by the acquisition method. The market value
of Lim’s common stock on May 31 was P35 per share. Lim paid a fee of P120,000 to the consultant who arranged
this acquisition. No goodwill was involved in the purchase. What amount should Lim capitalize as the cost of
acquiring Pine’s net assets?

100,000 shares x P35 = P3,500,000

Problem 2. (IFRS). The Bronze Corp. acquired 100% of the Gold Co. for a consideration transferred of
P140,000,000. At the acquisition date, the carrying amount of Gold’s net assets was P145,000,000 and their fair
value was P150,000,000. How should the difference between the consideration transferred and the net assets
acquired be presented in Bronze’s financial statements, according to IFRS 3, Business Combination?

Considerations transferred 140,000,000

FMV of Net Assets 150,000,000

Gain on Bargain Purchase 10,000,000 Profit & Loss Statement

Problem 3. 100% of the equity share capital of the Filipino Co. was acquired by the American Co. on April 30,
2018. American Co. issued 500,000 new P2 ordinary shares which had a fair value of P10 each of the acquisition
date. In addition, the acquisition resulted in American incurring fees payable to external advisers of P250,000 and
share issue costs of P150,000. In accordance with IFRS 3. Business Combination, goodwill at the acquisition date
is measured by subtracting the identifiable assets acquired and the liabilities assumed from the consideration
transferred of _____________.

500,000 shares x P10 = P5,000,000

Problem 4 (AICPA). On April 1, 2020, Bart Co. paid P650,000 for all the issued and outstanding common stock of
Well Corp. in a transaction properly accounted as a purchase. The recorded assets and liabilities of Well Corp. on
March 31, 2020 are:

Cash 80,000
Inventory 200,000
Property and equipment, net 350,000
Goodwill 100,000
Liabilities 160,000
Net Assets 570,000

On March 31, 2020, Well’s inventory had a fair value of P180,000 and the property and equipment (net) had a fair
value of P400,000. Prepare the journal entry of the acquirer company.

Inventory 180,000
Property & Equipment 400,000
Goodwill 150,000
Liabilities 160,000
Cash 570,000

Problem 5 (RPCPA). On June 1, 2020, the balance sheet of ABC Co. and XYZ Co. are as follows:

ABC Co. XYZ Co.

Assets P4,000,000 P2,500,000
Liabilities 1,500,000 800,000
Capital stock, no par 2,000,000
Capital stock, P100 par 1,000,000
Additional paid in capital 700,000 300,000
Retained earnings (200,000) 400,000

ABC Co. on this date, agreed to acquire all the assets, and assume all the liabilities of XYZ Co. in exchange for
shares of stock that it will issue. The stock of ABC Co. is selling in the market at P50 per share. The assets of
XYZ Co. are to be appraised, and ABC Co. is to issue shares of its stock with a market value equal to that of the
net assets transferred by XYZ Co. The value of the assets of XYZ Co., per appraisal, increased by P300,000.

a. On the assumption that the acquisition method is applied, the total liabilities and stockholders’ equity of ABC
Co. reflecting the combination is _____6,800,000__________.
b. The capital stock reflecting the combination under acquisition method is _4,000,000__________.

ABC XYZ Total

Assets 4,000,000.00 2,800,000.00 6,800,000.00

Liabilities 1,500,000.00 800,000.00 2,300,000.00

Capital Stock 2,000,000.00 2,000,000.00 4,000,000.00

APIC 700,000.00 700,000.00
Retained Earnings - 200,000.00 - 200,000.00

Total Liabilities & Stockholders' Equity 4,000,000.00 2,800,000.00 6,800,000.00

Problem 6. Presented below are the financial balances for the Atwood Company and the Franz Company as of
December 31, 20x4, immediately before Atwood acquired Franz. Also included are the fair values for Franz
Company's net assets at that date.
Atwood Franz Co. Franz Co.
Book Values Book Values Fair Values
December 31, December 31, December 31,
20x4 20x4 20x4
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . P 870,000 P 240,000 P 240,000
Receivables . . . . . . . . . . . . . . . . . . . . 660,000 600,000 600,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 1,230,000 420,000 580,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 260,000 250,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . 1,800,000 540,000 650,000
Equipment (net) . . . . . . . . . . . . . . . . 660,000 380,000 400,000
Accounts payable . . . . . . . . . . . . . . ( 570,000) ( 240,000) ( 240,000)
Accrued expenses . . . . . . . . . . . . . . ( 270,000) ( 60,000) ( 60,000)
Long-term liabilities . . . . . . . . . . . . . . . . (2,700,000) (1,020,000) (1,120,000)
Common stock, P20 par . . . . . . . . . . (1,980,000)
Common stock, P 5 par . . . . . . . . . . ( 420,000)
Additional paid-in capital . . . . . . . . ( 210,000) ( 180,000)
Retained earnings . . . . . . . . . . . . . . (1,170,000) ( 480,000)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . (2,880,000) ( 660,000)
Expenses . . . . . . . . . . . . . . . . . . . . . . 2,760,000 620,000
 Note: Parenthesis indicate a credit balance
Assume a business combination took place at December 31, 20x4. Atwood issued 50,000 shares of its common
stock with a fair value of P35 per share for all of the outstanding common shares of Franz. Stock issuance costs
of P15.000 and direct costs of P10,000 were paid. Atwood is applying the acquisition method in accounting for
Franz. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional P5,200
to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the
required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is
P5,000.
1. If the transaction is accounted for as an acquisition, what is the amount of consideration transferred?
2. Compute the amount of inventory after combination:
3. Compute the amount of land after combination:
4. Compute the amount of buildings (net) after combination:
5. Compute the amount of goodwill after combination:
6. Compute the amount of equipment (net) after combination:
7. Compute the amount of retained earnings after combination:
8. Compute the amount of revenues after combination:
9. Compute consolidated expenses at date of acquisition.
10. Compute the consolidated cash upon completion of the acquisition.

1. [(50,000 shares x P 35) + P5,000] = P1,755,000

2. [P1,230,000 + P580,000] = P1,810,000
3. [P1,800,000 + P250,000] = P2,050,000
4. (P1,800,000 + P650,000]= P2,450,000
5. [P1,755,000 – (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000
- P240,000 – P60,000 – P1,120,000)] = P455,000
6. [P660,000 + P400,000} = P1,060,000
7. P1,280,000
Retained earnings – Atwood, January 1, 20x4 P1,170,000
Add: Net income – 20-x4
Revenues P2,880,000
Less: Expenses 2,760,000
Direct costs 10,000 110,000
Retained earnings – Atwood, December 31, 20x4 P1,280,000
8. P2,880,000, parent only on the date of combination
9. (P2,760,000 + P10,000) = P2,770,000
10. [(P870,000 – P15,000 – P10,000) + P240,000] = P1,085,000