Refresher 3

Activity No. 1 – Business Combination

Problem 1

On April 1, 2023, Gold Corporation acquired all the assets and assumed all the liabilities of
Silver Company by issuing 20,000 shares with a fair value of P67.50 per share and an
obligation to pay a contingent consideration with a fair value of P750,000.

In addition, Gold paid the following acquisition-related costs:

Legal fees P105,600

Audit fee for SEC registration of stock issue 320,400
Costs of stock certificates 35,000
Broker’s fee 49,000
Other direct costs of acquisition 50,000
General and allocated expenses 14,000

The Statement of Financial Position as of March 31, 2023 of Gold and Silver, together with the
fair market value of the assets and liabilities are presented below:

Gold Silver
Book Value Fair Value Book Value Fair Value
Cash P640,000 P640,000 P45,000 P45,000
Accounts receivable 360,000 335,000 70,000 54,000
Inventories 475,000 390,000 87,000 78,000
Prepaid expenses 25,000 - 13,500 5,000
Land 2,000,000 2,900,000 900,000 1,550,000
Building 800,000 900,000 723,000 768,000
Equipment 700,000 585,000 361,500 360,000
Goodwill - - 300,000 -
Total assets P5,000,000 P5,750,000 P2,500,000 P2,860,000

Accounts payable P312,500 P312,500 P200,000 P200,000

Notes payable 937,500 980,000 700,000 765,000
Share capital P50 par 2,000,000 - 850,000 -
Share premium 1,000,000 - 400,000 -
Retained earnings 750,000 - 350,000 -
Total liabilities and equities P5,000,000 P2,500,000

Required: Compute for the balances that will be shown on the April 1, 2023 statement of
financial position of the surviving company:
1. What is the total amount of goodwill to be reported by the surviving company?
2. What is the total amount of cash to be reported by the surviving company?
3. What is the total amount of total assets to be reported by the surviving company?
4. What is the amount of liabilities to be reported by the surviving company?
5. What is the amount of share capital to be reported by the surviving company?
6. What is the amount of share premium to be reported by the surviving company?
7. What is the amount of retained earnings to be reported by the surviving entity?

Problem 2

On July 1, 2023, King Co. acquired all of Queen, Inc.’s P2,150,000 identifiable assets and
P530,000 liabilities. Book values of the Queen’s assets and liabilities equal to their fair values
except for the overvalued furniture and fixtures.

 As a consideration, King issued its own shares of stocks with a market value of P1,715,000
and cash amounting to P375,000.
 Contingent consideration that was probable and reasonably estimated on the date of
acquisition amount to P148,000.
 The merger resulted into P647,000 goodwill.
 Assuming King Co. had P4,890,000 total assets and P2,731,000 total liabilities prior to the
combination and no additional cash payments were made, but expenses were incurred for
related cost amount to P28,000.

Required:

1. After the merger, how much is the combined assets in the books of the acquirer?
2. After the merger, how much is the increase in liabilities in the books of the acquirer?

Problem 3

Aldrin Company acquired the net assets of Jeniffer Company on January 1, 2023. Since the
parties cannot agree on the definite value of the company in terms of potential future earnings,
they agreed to include in the purchase agreement provision for contingent consideration
whereby the acquirer will pay an additional cash payment on January 1, 2025 equal to twice the
amount by which average earnings of Jeniffer exceed P250,000 per year prior to January 1,
2025. Net income was P500,000 in 2023 and P600,000 in 2024. Assume that the liabilities
recorded on January 1, 2023 include an estimated contingent liability amounting to P400,000,
what was the entry made by Aldrin in January 1, 2025?

Problem 4

On July 1, 2023, Anna Company acquired the net assets of Belle Company for a consideration
transferred of P17,450,000 cash.

 At the acquisition date, the carrying amount of Belle’s net assets was P11,925,000 and a
temporary appraisal of P12,385,000 was attributed to the net assets.
 In addition to the consideration transferred is another P1,015,000 cash to be transferred
nine months after the acquisition date if a specified profit target was met by the acquirer.
 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 determined to be P468,000.
 On December 31, 2023, an update of the provisional fair value of P16,815,000 was
attributed to the net assets. Also at year end, the estimated amount of the consideration
liability is determined to decrease by P72,000 from the last date of the change in estimate.
 On March 31, 2024, the estimated amount of the consideration liability is determined to be
probable at P284,000.
 On June 1, 2024, the temporary appraisal decreased by P940,000 from the last additional
valuation date.
 The provisional fair value was finalized on July 31, 2024 with an amount that is higher by
P1,070,000 from the temporary appraisal as of June 1, 2024.
 As a subsequent event, the profit target was met and the P1,015,000 cash was transferred.

Required:

1. What amount of goodwill is presented in the separate statement of financial position of the
acquirer company as of December 31, 2024.

Problem 5

On January 2, 2023, Spencer Corp. paid cash of P5,000,000 in exchange for all the net assets
of Bryan, Inc. The carrying value of Bryan’s assets and liabilities on January 2, 2023 follow:

Cash P600,000
Accounts receivable 800,000
Computer Software 1,200,000
Patent 500,000
Goodwill 200,000
Liabilities 750,000

On January 2, 2023, Bryan’s accounts receivable had a fair value of P750,000. Bryan’s in
process and development cost has estimated fair value of P420,000. In applying the
recognition measurement, Spencer Corp. Has identified the following unrecorded intangible
assets:

Customer list P50,000

Customer contract 15,000
Trademarks 100,000

 Bryan recognized the research and development costs as expense when incurred.
 The customer contract refers to a contract to sell to Victory for a period of 8 years. On the
date of acquisition, there is a remaining two years in the contract. Spencer and Bryan
believe that Victory will renew the contract at the end of the term. The agreement is not
separable.

Required: Compute the amount of goodwill or (gain on bargain purchase).

Problem 6

On January 1, 2023, Giordano Inc. acquired all the net assets of Esprit Corp. In exchange for
9,000 newly issued common shares of of Giordano with a fair value P100 and market price of
P250. Immediately prior to the combination, on January 1, 2023, the book values and fair
values of Esprit’s financial position is as follows:

Book Value Fair Value

Cash P100,000 P100,000
Inventory 300,000 300,000
Property, plant and equipment (net) 1,650,000 2,000,000
Total P2,050,000 P2,400,000

Accounts payable P200,000 P200,000

Ordinary share 1,000,000
Share premium 250,000
Retained earnings 600,000
Total P2,050,000

As part of the agreement, Giordano agreed to give additional consideration if certain future
events occur.

Required: Assume that Giordano agreed to issue additional 1,000 ordinary share to the former
owners of the Esprit Corp. if total net income for the next two years exceeds a specified amount.
Giordano estimated that tha the fair value of contingent consideration on January 1, 2023 is
P150,000. Assume the contingency is met. What entry is to be recorded by Giordano to record
the settlement of contingent consideration?

Problem 7

On January 2, 2023, Lenovo Corp. acquired all the net assets of Acer Corp. Lenovo Corp. paid
P6,000,000 for the net assets of Acer. On this date, the following accounts of Acer are as
follows:

Cash P150,000
Accounts receivable 1,600,000
Inventories 600,000
Property, plant and equipment 2,600,000
Accounts payable 1,400,000

On the date of acquisition it was determined that the fair values of inventories and property,
plant and equipment were P660,000 and P3,400,000, respectively.

Lenovo Corp. has estimated a restructuring provisions of P500,000, representing costs of

exiting the activity of Acer, cost of terminating the employees of Acer.
Required: Compute for the goodwill or gain on bargain purchase.

Problem 8

On January 2, 2023, the Statement of Financial Position of Flor and Luna Company prior to the
combination are:

Flor Company Luna Company

Cash P450,000 P15,000
Inventories 300,000 30,000
Property and equipment (net) 750,000 105,000
Total assets P1,500,000 P150,000

Current liabilities P90,000 P15,000

Ordinary share, P100 par 150,000 15,000
Share premium 450,000 30,000
Retained earnings 810,000 90,000
Total Liabilities and Shareholders’ Equity P1,500,000 P150,000

The fair values of Luna’s equipment is P153,000.

Required:
1. Assuming Flor Company acquired 70% of the outstanding ordinary stock of Luna Company
for P105,000 and non-controlling interest is measured at fair value of P61,000, how much is
the goodwill (gain on bargain purchase)?
2. Assuming Flor Company acquired 80% of the outstanding ordinary stock of Luna Company
for P136,800 and non-controlling interest is measured at NCI’s proportionate share of Luna
Company’s identifiable assets, how much is the consolidated shareholders’ equity on the
date of acquisition?
3. Assuming Flor Company acquired 90% of the outstanding ordinary stock of Luna Company
for P243,000 and non-controlling interest is measured at fair value, how much is the
consolidated assets on the date of acquisition?

Problem 9

Spring Company’s shareholders’ equity as of December 31, 2022 is P2,030,000. On January 1,

2023, Spring acquires 25% of Summer Company’s commons tock for P150,000 cash and by
issuing its own shares with a fair value of P200,000. Spriong acquired significant influence over
Summer as a result of the stock acquisition. After three months, Spring purchases another 55%
of the Summer’s common stock for a cash payment of P1,100,000. On this date, Summer
reports identifiable assets with carrying amount of P1,800,000 and fair value of P3,200,000 and
it has liabilities with a book value and a fair value of P900,000. At the acquisition date, net
income reported by Summer for the three-month ended amounted to P500,000. The fair value
of the 20% non-controlling interest is P360,000. Non-controlling interest is valued using
proportionate basis. Spring also paid the following: P25,000 for broker’s fee, P20,000 for pre-
acquisition audit fee, P21,500 for legal fees, P18,000 for audit fee for pre-acquisition of stock
issue and P5,500 for printing of stock certificates, immediately after the business combinations.

Required: What is the consolidated total equity of Spring Company and subsidiary after the
business combination?