Third Examination

Review (ACP 312/8B)

Business Combination
Business Combination could be a merger, consolidation, asset
acquisition, or stock acquisition. And when two companies enter into a
merger, there will only be one surviving entity. Merger can be noted in
terms of this equation, A+B = A/B, while consolidation can be
described as A+B = C. Consolidation can be illustrated by the title, SM
Group of Companies (also known as SM Investments), by which it is
composed of its parent company and its subsidiaries.

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 Business Combination (cont)
Let’s talk about ASSET ACQUISITION first. When A Co. acquires the assets of B
Co., it’s journal entries, initially, will be:

Assets xx Assets xx
Goodwill xx OR Liab. xx
Liabilities xx Cash xx
Cash xx Gain on Acq. xx

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When talking about business combination, we already know how to compute
for the Goodwill or Gain on Acquisition. We just have to compute it this way:

Consideration Given xx
FV of Net Assets xx
Goodwill/Gain on Acquisition xx

If the Consideration Given > FV of Net Assets = Goodwill.

If the Consideration Given < FV of Net Assets = Gain on Acquisition

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(Cont – Goodwill vs Gain on Acquisition)

Scenario 1. If A Co. acquired B Co’s assets and liabilities

worth 200,000 for a consideration of 300,000, this will
result to a goodwill of 100,000 since the consideration is
greater than A-L.

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(Cont – Goodwill vs Gain on Acquisition)

Scenario 2. If A Co. acquired 80% B Co’s assets and

liabilities for a consideration of 300,000, when its assets
and liabilities are valued at 400,000 this will result to a
gain on acquisition of 20,000 (400,000x80% - 300,000)
since the consideration is lesser than A-L.

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IMPORTANT NOTE
There’s no Elimination Entries when talking about Asset
Acquisition, since the goal of Elimination Entries is to
remove/eliminate the Subsidiary’s equity and the
Investment in Subsidiary recognized by the Acquirer.
These things cannot be seen in the Asset Acquisition for
business combination.

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Stock
Acquisition
Including subsequent
transactions.

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STOCK ACQUISITION
Stock Acquisition in business combination is almost the same in the Assets acquisition
(esp in the computation of Goodwill), but the difference lies on the initial entry, the
elimination entries, and the recognition of the NCI in the consolidated financial
statements. Initial entry will be:

Investment in Subsidiary xx
Cash xx

And the amount to reflect will be the amount of consideration given.

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STOCK ACQUISITION (cont)
As previously mentioned, stock acquisition will involve ELIMINATION ENTRIES of which it aims to ZERO OUT the amount of
Investment in Subsidiary and Equity of the Subsidiary, to recognize any goodwill, and the NCI, by providing these:

Common Stock - Subsidiary xx

Share Premium - Subsidiary xx
Goodwill xx
Investment in Subsidiary xx
NCI xx

The only equity than can be seen in the Consolidated FS is the equity of the Parent (investor), and Parent’s share of the Retained
Earnings of Subsidiary.

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STOCK ACQUISITION (cont)
If there’s any undervaluation of the assets of the subsidiary, it will be eliminated as well just like this
elimination entry:

Inventory xx
PPE xx
Investment in Subsidiary xx
NCI xx

And the other way around (entry) if overvaluation. NCI in the first elimination entry plus the NCI in
this slide will be the total value of NCI (at Fair Value – top priority).
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Noncontrolling Interest (NCI)
Noncontrolling interest the portion of a subsidiary corporation's stock that is not
owned by the parent corporation. The magnitude of the minority interest in the
subsidiary company is generally less than 50% of outstanding shares, or the
corporation would generally cease to be a subsidiary of the parent. For example,
if A Co. entered into business combination by 70% stock acquisition to B Co.
30% of B Co. will be considered as the NCI. And as per PFRS/IFRS 10, for
subsequent transaction, the control can be manifested by the investor’s power
execution over the direct relevant activities of over the investee to yield its
purpose – returns.

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SANA ALL #1

Intermission Number

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SANA ALL #2
Intermission napod

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LET’S GO AN PRACTICE
SOME PROBLEMS

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A Co. owns 80% of B Co.’s outstanding common stock. A’s liabilities
total P 200,000, and B’s liabilities total P 100,000. Included in B’s
financial statements is a P 30,000 note payable to A. What amount of
total liabilities should be reported in the consolidated financial
statements? 

JUST ADD SIMILAR ITEMS when consolidating, but exclude

intercompany liability. Therefore, the answer is 270,000 [200T +
(100T-30T)] for the total liabilities in Conso FS.
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SAMPLE 2
Kagura Corp. has a 85% interest in Esmeralda Co., while the latter has an 75%
interest in Khufra Corp. At the endo December 31, 2020, the net income from
own operations of these three companies were: Kagura Corp., P 2,500,000;
Esmeralda Co., P 1,000,000, Khufra Corp., P 750,000. What is the amount
NCI in net income? 

We need to compute for the NCI Income. Kagura owns 85% of Esme and Esme owns 75% of
Khufra. Therefore, Esme will get 562,500 from net income of Khufra, resulting to Esme’s total
income of 1,562,500. Of 1,562,500, 85% is the share of Kagura and NCI is 15%. Therefore, NCI’s
share in net income is 234,375 (1,562,500 x 15%).

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SAMPLE 3
Bren E-Sports Co. acquired an 90% interest in the BSB Co. when BSB’s equity comprised share
capital of P 50,000 and Retained Earnings of P 250,000. BSB’s current statement of financial
position shows share capital of P 50,000, a Revaluation Reserve of P 200,000 and Retained
Earnings of P 700,000. What figure in respect of BSB’s retained earnings should be included in
the consolidated statement of financial position? 

Share of Bren E-Sports in the Retained Earnings of BSB is 90%. Therefore, that will be
700,000 x 90% = 630,000. Any appropriations, just like Revaluation Reserve of the
Subsidiary shall be removed and eliminated. The answer will be 430,000 (630,000 –
200,000).

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 Look at the Financial Statement of Hanabi (Parent- 80%
ownership) and Silvana (Subsidiary) as of June 30, 2020.
COMPUTE FOR THE CONSOLIDATED NET INCOME

Items Hanabi Co. Silvana Co.

Net Income 20,000 40,000

Intercompany interest on
1,500
Notes Payable
Dividend declared and paid 6,200

Please note that it’s still midyear, therefore income earned should be 50% only. With this, the income
to be recognized as share from Silvana’s net income is 20,000 (40Tx50%). Furthermore, the dividend
income shall also be 50%, and so it will be 3,100. This gives us a total of 43,100 (20T+20T+3,100).

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Thanks!
Manirado sa ang tindahan
starting 12AM. I will be
busy sa Masteral nako over
the weekend. Ill be back on
Monday. <3

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