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ADVANCED ACCOUNTING

VOL. 2 PROBLEM 14-13


Business Combinations
Gomon
Palaganas

Required:
1. Prepare the entry on the books of Papa
Corporation to record the acquisition of Baby
Company.
2. Assume the net income of Baby Company is
P240,000 for 2014. As a result, the likelihood of
paying the contingent consideration is believed to
be 90%. What if any, adjusting entry is required
as of December 31, 2014.

PROBLEM 14-13

Papa Corporation is contemplating the acquisition of the net assets of Baby Company on
December 31, 2011. It is considering making an offer, which would include a cash payout of
P400,000 along with giving 15,000 shares of its P4 par value common stock that is currently
selling for P40 per share. Papa also agrees that it will pay an additional P100,000 on January 1,
2014, if the average net income of Babys business unit exceeds P160,000 for 2012 and 2013. The
likelihood of reaching that target is estimated to be 75%. The Statement of Financial Position of
Baby Company along with estimated fair values of net assets to be acquired is as follows.
Baby Company
Statement of Financial Position
Dec 31, 2013

Book Value

Fair Value

Current assets

P 274,000

P 256,000

Non-current assets

1,020,000

660,000

P 1,294,000

P 916,000

P 162,000

P 162,000

464,000

440,000

Total liabilities

P 626,000

P 602,000

Common stock

P 100,000

Total assets

Current liabilities
Non-current liabilities

Additional paid in capital

400,00

1.
Price Paid

400,000

Stock issued (15000 x 40)

600,000

Contingent liability (100000 x 75%)

75,000

Total Consideration

1,075,000

Less: FV of Net Assets


Current Assets

256,000

Non-current Assets

660,000

Current Liabilities

(162,000)

Non-current Liabilities

(440,000)

Goodwi
ll

314,000
761,000

To record the acquisition of net assets

Current Assets

256,000

Non-current Assets

660,000

Goodwi
ll

761,000
Current Liabilities

162,000

ADVANCED ACCOUNTING
VOL. 2 PROBLEM 14-14
Business Combinations
Palaganas

PROBLEM 14-14

Required:

1.

What amount of goodwill was recorded by Ace Company when it


acquired Heart Company?

2.

Using the information above, answer the following independent


questions:
a. On December 31, 2014, there were indications that goodwill
might have been impaired. At that time, the carrying value of the
Ace Companys net assets, including goodwill, was P500,000 and
the recoverable amount of the unit is P520,000. Is goodwill
impaired? If so, what adjustment is needed?
b. On December 31, 2015, there were indications that goodwill
might have been impaired. At that time, the carrying value of Aces
net assets, excluding goodwill was P340,000. The recoverable
amount of the unit was estimated to be P400,000. Is goodwill
impaired? If so, what adjustment is needed?

PROBLEM 14-14

Ace Company acquired the net assets of Heart


Company on January 1, 2013, for P500,000 cash.
The fair value of Aces net assets was 400,000.

1.
Price Paid

500,000

Less: FV of Net Assets

400,000

Goodwill

100,000

2.A
Recoverable Amount
Carrying Value including
Goodwill

520,000
500,000

No impairment because the recoverable


amount is greater than the carrying
value.
B

14-1
Man Inc. purchased all of net assets of Woman Company on January 2, 2013 by issuing 8,000
shares of its P10 par common stock. At the time, the stock was selling for P30 per share. Direct
costs associated with consummating the combination totaled P4,000. Under IFRS 3, what total
amount should the net assets acquired be recorded by Man Inc. Assuming that the contingent
consideration 5,000 is determined?

14-2
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 P50,000 to an investment house as finders fee. At what amount should
goodwill be recorded on Acquiring Companys books?

14-3
On June 30, 2013 White Corporation 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 Whites 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 the acquisition amount
to P120,000.
What amount should White capitalize as the cost of acquiring Blacks net assets.

14-4
On January 1, 2013, CJ Corporation acquired the net assets of Rex, Inc., by issuing 600,000
shares of its P10 par value common stock. Subsequently, Rex was liquidated and its assets and
liabilities merged into CJ Corporation. CJs stock was selling P50 per share on January 1, 2013.
The amount of goodwill recorded by CJ in connection with the combination was P6,120,000. CJ
incurred P300,000 of legal and brokers fees associated with the combination and P30,000 of stock
issuance costs.
What is the fair value of Rexs net assets and the amount of the increase in CJs stockholders
equity as a result of the combination, respectively?

14-5
Pool Company issued 120,000 shares of P10 par common stock with fair value of P2,550,000 for
the net assets of Spot Company. In addition, Pool incurred the following acquisition-related costs