Accounting for Business Combination Handout No.

Problem 1

On August 1, 2021, Wood Corporation issued 100,000 shares of its P20 par value common stock for the
net assets of Pine, Inc., in a business combination accounted for by the acquisition method. The market
value of Wood's common stock on August 1 was P35 per share. Wood paid a fee of P200,000 to the
consultant who arranged this acquisition. Cost of registering and issuing the equity securities amounted to
P50,000.

Required
1. What amount should Wood capitalize as the cost of acquiring Pine's net assets?
2. How much is the goodwill (gain) on combination assuming the fair value of Pine’s net assets is
P3,000,000?

Problem 2

On June 30, 2021 White Corporation issued 50,000 shares of its P20 par value common stock for the net assets
of Black Company. 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. Below is the structure of assets and liabilities of Black Company as of
the date of acquisition.
Book Value Fair Value
Accounts Receivable (net) 500,000 550,000
Inventory 600,000 400,000
PPE (net) 1,400,000 1,600,000
Accounts Payable 300,000 300,000
Notes Payable 700,000 700,000

Required
1. Determine the amount of consideration.
2. Compute the goodwill (gain) on combination.
3. Journalize the transactions in the books of White Corporation.

Problem 3

On January 2, 2022, P Company purchased the net asset of S Company by paying P500,000 cash and issuing
100,000 shares of stocks at P3,000,000 fair market value. The par value of P’s shares is P24 per share. Book
value and fair value data on the Statement of Financial Positions on January 2, 2022 are as follows: (refer
to next page)

P Company S Company
Book Value Fair Value Book Value Fair Value
Cash 4,600,000 4,600,000 300,000 300,000
Accounts Receivable 1,000,000 1,000,000 980,000 980,000
Inventory 1,500,000 1,300,000 710,000 600,000
Building & Equipment, net 1,800,000 1,460,000 1,520,000 1,064,000
Goodwill 90,000 80,000
Total 8,900,000 8,360,000 3,600,000 3,024,000
 Liabilities 1,000,000 1,000,000 570,000 570,000
Share Capital 1,600,000 600,000
Share Premium 900,000 960,000
Retained Earnings 5,400,000 1,470,000
Total 8,900,000 3,600,000

P incurred and paid legal and brokerage fees of P50,000 for business combination; share issue costs of
P30,000 and P20,000 indirect acquisition costs. It is determinable that contingency fee of P150,000
(estimated fair value) would be paid within the year.

Required
1. Determine the amount of consideration.
2. Compute the goodwill (gain) on combination.
3. Journalize the transactions in the books of the acquirer.

Problem 4

On May 1, 2022, Kingdom Corporation paid cash of P600,000 for all of the net assets of United Company and
United is dissolved. The carrying value of the assets and liabilities of United on May 1, 2022 follow:

Cash P60,000
Inventory 180,000
Plant and equipment (net of accumulated
Depreciation of P220,000) 320,000
Goodwill 100,000
Liabilities 120,000

On May 1, 2022, United’s inventory had a fair value of P150,000, and the plant and equipment (net) had a fair
value of P380,000.

What is the amount of goodwill recorded in the books of Kingdom as a result of the business combination?

Problem 5

Acquirer Corporation issued 120,000 shares of P15 par ordinary shares with a fair value of P2,880,000 for all
the outstanding shares of Acquired Company. In addition, Acquirer incurred the following costs:

Professional fees to arrange the business combination P47,000

Cost of SEC registration 20,000
Cost of printing and issuing stock certificates 3,000
Immediately before the business combination, Acquired Company's assets and equities were as follows (in
thousands):

Book value Fair value

Current assets P1,000 P1,100
Plant assets 1,500 2,200
Liabilities 300 300
Common stock 2,000
Retained earnings 200
What is the amount of goodwill (gain on acquisition)?

Problem 6

Lee Land Company acquired 75% of Way Maker Company’s ordinary share for P510,000 cash. At that
date, Way Maker reports identifiable assets with book value of P1,040,000 and a fair value of P1,280,000,
and it has liabilities with book value and fair value of P716,000. How much is the goodwill or (gain on
acquisition) arising from combination if control premium of P30,000 is included in the purchase price?

Assuming:
1. NCI is measured at Fair Value.
2. NCI is measured at Proportionate.

Problem 7

On January 2, 2022, the Statement of Financial Position of Love and Hope Company prior to combination
are:
Love Company Hope Company
Cash P225,000 P7,500
Inventories 150,000 15,000
PPE (net) 375,000 52,500
Total Assets P750,000 P75,000
Current Liabilities P45,000 P7,500
Ordinary Share, P100 par 75,000 7,500
Ordinary Share Premium 225,000 15,000
Retained Earnings 405,000 45,000
Total Liabilities & Equity P750,000 P75,000

The fair market value of Hope Company’s PPE (net) is P76,500.

Required
1. Assuming Love Company acquired all the outstanding share of Hope Company resulting to a
goodwill of P33,000, contingent consideration is P18,000, how much is the cash paid to Hope
Company’s share? Journalized the transactions in the books of Love Company.

2. Assuming Love Company acquired 90% of the outstanding ordinary share of Hope Company for
P121,500 and NCI is measured at fair value, how much is the goodwill (gain) on the date of
acquisition? Journalized the transactions in the books of Love Company.

Problem 8

Mathew Corporation purchased a 10% interest in Finest Company on January 2, 2020, as an equity
investment at fair value through profit or loss, for price of P200,000. Fair values of Mathew’s 10% interest
classified as EI @ FVTPL on December 31, 2020 and 2021 are P190,000 and P 205,000, respectively. On
February 28, 2022, Mathew purchases 17,500 additional shares of Finest from existing shareholders for
P1,575,000. The purchase raised Mathew’s interest to 80%. Finest had the following statement of financial
position just prior to Mathew’s second purchase:
 Assets Liabilities & Equity
Current Assets P825,000 Current Liabilities P325,000
Land & building (net) 700,000 Ordinary Share, P20 par 500,000
Equipment (net) 500,000 Retained Earnings 1,200,000
Total Assets P2,025,000 Total Liabilities & Equity P2,025,000

On the date of second purchase, Mathew determines that Finest Company’s equipment was undervalued by
P250,000 and had a 5-year remaining life. All other book values approximate fair values. Any remaining
excess is attributable to goodwill.

Required
1. What is the estimated fair value of 20% NCI on February 28, 2022?
2. How much is the goodwill on combination on February 28, 2022?
3. Journalized the foregoing transactions in the books of Mathew Corporation.

Problem 9

On July 1, 2022, Philip Company acquired the net assets of Shayne Company for a consideration transferred
of P32,000,000. At the acquisition date, the carrying amount of Shayne’s net assets was P20,000,000 and a
temporary appraisal of P28,000,000 was attributed to the net assets. At December 31, 2022, a provisional
fair value of P27,000,000 was attributed to the net assets. An additional valuation received on March 31,
2023 increased this provisional fair value by P2,000,000 and on May 31, 2023 this fair value was finalized
at P30,000,000. Goodwill is tested for impairment on December 31, 2023 and deemed impaired by
P200,000.

Required
1. What amount should the surviving company present for goodwill in its separate statement of
financial position at December 31, 2023?
2. Journalized the transactions from July 1, 2022 up to December 31, 2023 in the books of acquirer.

Problem 10

On 1 June 2021, Casio Ltd. acquired all the assets and liabilities of Aurora Ltd. with Casio Ltd. issuing
100,000 shares to acquire these net assets. The fair value of Aurora Ltd.'s assets and liabilities at this date
were:

Cash P50,000
Furniture and fittings 25,000
Accounts receivable 5,000
Plant 125,000
Accounts payable 15,000
Current tax liability 8,000
Provision for annual leave 2,000

The financial year for Casio Ltd. is January - December. The fair value of each Casio Ltd. share at
acquisition date is P2.15. At acquisition date, the acquirer could only determine a provisional fair value for
the plant. On March 1, 2022, Casio Ltd. received value of plant from the independent appraisal for
P130,000. On July 1, 2022 the fair value was finalized at P132,000. The plant had a further five-year life
from the acquisition date.
The amount of goodwill arising from the business combination to be reported on December 31, 2022
Financial Statements is:

Problem 1 – 14

On January 1, 2022, Petron acquired the identifiable net asset of Shell Inc. On this date, the identifiable
assets acquired and liabilities assumed have fair values of P6,400,000 and P3,600,000, respectively. Petron
incurred the following acquisition-related costs: legal fees, P40,000, due diligence costs, P400,000; and
general and administrative costs of maintaining an internal acquisition, P80,000.

As consideration, Petron transferred 8,000 of its own shares with par value and fair value per share of P400
and P500, respectively, to Shell’s former owners. Costs of registering and issuing the shares amounted to
P180,000 (P60,000 pertains to fees paid to professional for filing and registering with SEC).

Required
1. How much is the goodwill (gain on bargain purchase) on the business combination?
2. How much is the total amount charged to P/L in relation to the transaction above?
3. Entry to record the transaction in the book of acquirer.

Problem 11

On October 1, 2022, the Grateful Co. acquired 100% of the Prayerful Co. when the fair value of Prayerful
net assets was P118,000,000 and their carrying amount was P120,000,000 The consideration transferred
comprised P200,000,000 in cash transferred at the acquisition date, plus another P5,000,000 in cash to be
transferred 10 months after (August 1, 2023) the acquisition date if a specified profit target was met by
Prayerful. 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 P1,000,000.

Required
1. In the event, the profit target was met and the P5,000,000 cash was transferred, what amount
should Grateful Co. present for goodwill in its statement of consolidated financial position at
December 31, 2023?

2. Journal entry in the books of Grateful Co. on August 1, 2023, in relation to #1.

3. In the event the profit target was not met, what amount should Grateful Co. present for goodwill in
its statement of consolidated financial position at December 31, 2023?

4. Journal entry in the books of Grateful Co. on August 1, 2023, in relation to #3.

Problem 12

Humility Inc. acquired 70% interest of Forgiveness Company, a printing business. The sale and purchase
agreement specify the amount payable as:

a. Cash of P12 million to be paid on acquisition date, and

b. Additional 2,000 shares of its P100 par value ordinary shares to be issued after two (2) years if
specified product receives the target market share.
The fair value of Forgiveness Company’s net assets is P11 million and estimated fair value of the
contingent consideration is P300,000. NCI is measured using the proportionate method.

Required
1. Assuming the target was met and shares was issued to the former shareholders of Forgiveness, the
estimated fair value of contingent consideration is P400,000, how much goodwill will be presented
in the consolidated financial statements two years after the acquisition?

2. Journal entry in the books of Humility Inc. (a) on the date of business combination and (b) on the
issuance of 2,000 shares, in relation to #1.

3. Assuming the target was not met and no shares will be issued to the former shareholders of
Forgiveness, the estimated fair value of contingent consideration is P400,000, how much goodwill
will be presented in the consolidated financial statements two years after the acquisition?

4. Journal entry in the books of Humility Inc. (a) on the date of business combination and (b) on the
date when issuance of 2,000 shares was forfeited, in relation to #3.

Problem 13

On July 1, 2022, Victorious Company acquired 700,000 shares of Corona Company at a price of P13 per
share. Victorious Company estimated that the price paid include P1.50 premium in order to gain control
over Corona. On this date, the fair values of Corona’s identifiable assets and liabilities and their carrying
values are given below:

Book Value Fair Value

Current assets P2,000,000 P2,000,000
Property, plant and equipment 9,000,000 11,000,000
Liabilities P3,000,000
Ordinary shares, P5 par 5,000,000
Retained earnings 3,000,000

Determine the amount of goodwill (gain) assuming:

a. NCI is measured at Fair Value.
b. NCI is measured at Proportionate.

Problem 14

On January 1, 2022, P Company acquired a 50% interest in S Company for P60M. P Company already held
20% interest which had been acquired for P20M a year ago but which was valued at P24M at January 1,
2022. The book value of identifiable net assets of S Company on this date was P115M. The price difference
is allotted to property plant and equipment with 10 years remaining life as of date of acquisition. P Company
opted to measure NCI at fair value.

What amount of goodwill or gain on bargain purchase is recognized on the date of acquisition?
Problem 15

On January 7, 2022, ABC Co. acquired a 40% interest in XYZ Co. for P4,800,000. ABC already held a
25% interest which had been acquired for P1,600,000 but which was valued at P1,920,000 at January 7,
2022. The fair value of non-controlling interest (NCI) at January 7, 2022 was P2,400,000, and the fair value
of the identifiable net assets of XYZ Co. was P8,400,000.

How much is the goodwill to be recognized as a result of business combination?

Problem 16

On January 1, 2022, Alpha Company acquired 100% control of Beta Company’s shares for an amount
which is P500,000 over the book value of interest acquired. On this date, the balance sheet of Alpha
Company and Beta Company are as follows:

Alpha Company Beta Company

Assets
Cash P7,500,000 P1,300,000
Accounts Receivable 1,700,000 450,000
Inventories 1,150,000 800,000
Equipment (net) 5,000,000 1,050,000
Patents 200,000 50,000
Total Assets P15,550,000 P3,650,000

Liabilities & Equity

Accounts Payable P600,000 P200,000
Notes Payable 2,000,000 -
Ordinary Share Capital 5,000,000 2,000,000
Ordinary Share Premium 6,750,000 600,000
Retained Earnings 1,200,000 850,000
Total Liabilities & Equity P15,550,000 P3,650,000

The identifiable assets and liabilities of Beta Company are fairly valued except for inventories which is
overvalued by P100,000 and equipment which is undervalued by P250,000. Business combination
expenses incurred and paid by the acquirer: legal fees – P50,000 & finder’s fee – P30,000.

Required
1. How much is the goodwill (or gain on acquisition)?
2. Journalized the transaction in the book of the acquirer.
3. Assuming the transaction is classified as “net asset acquisition” (acquiree was dissolved),
journalized the transactions in the book of the acquirer.