Business Combination.docx

CPA REVIEW SCHOOL OF THE PHILIPPINES MANILA PRACTICAL ACCOUNTING PROBLEMS II GUERRERO/GERMAN/DE JESUS/LIM

BUSINESS COMBINATION

ACQUISITION OF NET ASSETS I On January 2, 2011, the JK Company purchased the net assets of OP Company by paying P425,000 cash and issuing shares of stocks at P1,555,000 fair market value. Book value and fair value data on the Statement of Financial Position on January 1, 2011 are as follows:

Cash Accounts Receivable Inventory Building & Equipment, net Goodwill TOTAL ASSETS

JK Company Book Value Fair Value P 2, 300,000 P2,300,000 500,000 500,000 750,000 650,000 900,000 730,000 . . P 4,450,000 P4,180,000

OP Company Book Value Fair Value P 150,000 P 150,000 490,000 490,000 355,000 300,000 760,000 532,000 45,000 40,000 P 1,800,000 P1,512,000

Liabilities Capital Stock Additional paid in capital Retained Earnings TOTAL LIAB & SHE

P 500,000 800,000 450,000 2,700,000 P 4,450,000

P 285,000 P 285,000 300,000 480,000 735,000 P 1,800,000

P 500,000

JK incurred and paid legal and brokerage fees of P12,800 for business combination; stock issuance cost of P11,500 and P6,000 indirect acquisition costs. It is determinable that contingency fee of P5,900 would be paid within the year. 1.

Total Assets after the business combination A. P5,995,600

2.

B. P6,690,600

C. P6,265,600

D. P6,265,600

Stockholder’s equity after the business combination A. P3,950,000

B. P5,505,000

C. P5,468,800

D. P5,474,700

II AB Inc., CD inc. and EF Inc. are to combine. The stockholders’ equity on their respective Statement of Financial Position immediately prior to combination show: AB Inc. CD Inc. EF Inc. Ordinary Shares P 700,000 P 450,000 P 300,000 Additional paid in capital 370,000 200,000 Retained Earnings 240,000 160,000 105,000 As per appraisal, book values of CD’s assets and liabilities approximate their fair values except for the land and Non-current liabilities, which is undervalued by P88,000 and P36,000, respectively. All other EF’s assets and liabilities equal to their fair values. It was agreed that AB shall issue its own shares of stocks to CD and EF. Forty percent of the total stocks issued shall be received by CD and the remaining, will be given to EF. AB paid P45,000 and P78,000 sock issuance costs with CD’s and EF’s business; respectively. Immediately after the combination, AB has a common stock balance of P2,400,000. AB P80 par common stock has a market value of P96.

1. How much is the net increase in the stockholder’s equity to be reported in the combined Statement of Financial Position? A. P1,963,000 B. P2,786,000 C. P2,663,000 D. 2,086,000 III A condensed Statement of Financial Position at August 31, 2011 and related current fair value data for ABC Company are presented below: ABC Company Statement of Financial Position August 31, 2011 Carrying Amount Assets: Current assets Plant Assets Patent (net) Total Assets Liabilities and Stockholder’s Equity: Current Liabilities Long-term debt Capital stock, P20 par Retained Earnings Total Liabilities and Stockholders’ Equity

Fair Value

P 736,000 1,185,000 117,000 P 2,038,000

P 809,000 1,380,000 96,000

P 215,000 560,000 420,000 843,000 P2,038,000

P 215,000 595,000

On September 1, 2011, XYZ Corporation issued 21,400 shares of its P24 par value common stock (current fair value P33 per share) and P290,000 cash for the net assets of ABC Company. Of the P95,000 out-of-pocket costs paid by XYZ on September 1, 2011, P53,000 were indirect cost and the remainder were legal fees and finders’ fees related to the business combination. 1. How much is the net increase in the stockholders’ equity in the books of the surviving company as a result of the business combination? A. P1,185,000 B. P1,090,000 C. P1,037,000 D. P992,400 IV The following are the Statement of Financial Position of CD and RS Corporation as of December 31, 2010: CD RS Cash P300,000 P 20,000 Receivables 70,000 15,000 Inventories 80,000 25,000 Land 75,000 100,000 Building (net) 220,000 100,000 Equipment (net) 150,000 240,000 Total Assets P895,000 P 500,000 Accounts payable Ordinary Shares, P10 par Share Premium Retained Earnings Total Liabilities & Equity

P185,000 500,000 50,000 160,000 P895,000

P 60,000 200,000 140,000 100,000 P 500,000

CD decided to acquire the net assets of RS on January 1, 2011. CD issue 19,000 ordinary shares with market value of P17 per share and cash purchase price of P28,000, RS will be dissolved. The book values reflect fair values except for building of CD, which has net realizable value of P299,000 and inventories and land of RS which have a net realizable value of P42,000 and P128,000 respectively. CD also paid for the

cost of registering and issuing securities amounting to P15,000, direct costs of combination amounting to P22,000 and indirect cost amounting to P10,000. 1. How much is the total assets after the combination? A. P1,440,000 B. P1,412,000 C. P1,444,000

D. P1,365,000

2. How much is the total shareholders’ equity after the combination? A. P1,033,000 B. P1,018,000 C. P1,120,000 D. P986,000 V Statement of Financial Position reflecting uniform accounting procedures, as well as fair value, that are to be used as a basis for the combination are prepared on September 1, 2011 as follows: A B C Assets P5,250,000 P6,800,000 P900,000 Liabilities Capital Stock (all P10 par) Additional paid-in capital Retained Earnings (deficit) Total Liabilities and Shareholder’s Equity

P3,950,000 P2,650,000 1,700,000 1,200,000 500,000 (400,000) 2,450,000

P530,000 275,000 140,000 (45,000)

P5,250,000 P6,800,000

P900,000

A company shares have a market price of P16. A market price is not available for shares of B Company and C Company since stocks of these companies are closely held. A company acquires all of the assets and assumes all of the liabilities of B Company and C Company by issuing in exchange 265,000 shares of its stock to B Company and 17,000 shares of its stock to C Company. 1. How much is the total assets immediately after the business combination? A. P12,950,000 B. P13,040,000 C. P13,138,000 D. P13,048,000 2. How much is the retained earnings (deficit) immediately after the business combination? A. P(400,000) B. P445,000 C. P498,000 D. P(302,000) ACQUISITION OF STOCKS I On January 2, 2011, AB corporation purchased 80% of the outstanding ordinary shares of XY Company for P2,100,000 payable in cash. On that date, the assets and liabilities of XY Company had fair market values as indicated below. Statement of Financial Position of the companies on January 2, 2011 are also indicated below. The Noncontrolling interest is measured at fair value. AB Assets Cash Receivables Inventories Land Building – net Long-term investment in MS Investment in XY Co. Total

P 262,500 525,000 393,750 131,250 787,500 262,500 2,100,000 P4,462,500

XY Book Value Fair Value P 262,500 393,750 341,250 210,000 525,000 328,125 P2,060,625

P 262,500 393,750 367,500 315,000 472,500 367,500

Liabilities and Stockholder’s Equity Accounts payable Ordinary Shares – AB Company Ordinary Shares – XY Company Additional paid-in capital – AB Retained Earnings – AB Company Retained Earnings – XY Company Total

P1,136,625 1,050,000

P 301,875

301,875

525,000 525,000 1,750,875 P4,462,500

1,233,750 P 2,060,625

Required: Prepare journal entries on the books of AB Company. Prepare the determination and allocation of excess schedule to compute for goodwill/income from acquisition. Prepare working paper entries/ Assuming the following information: Price Paid Interest A. 1,890,000 90% B. 2,362,500 75% C. 1,312,500 80%

Liabilities of AB P 926,625 P1,399,125 P 349,125

FMV of NCI P236,250 P393,750 P315,000

II PG Corporation purchased a 10% interest in GDL Company on January 2, 2006, as an available for sale investment for a price of P200,000. On January 2, 2011, PG purchases 17,500 additional shares of GDL from existing shareholders for P1,575,000. The purchase raised PG’s interest to 80%. GDL Company had the following statement of financial position just prior to PG’s second purchase: Assets Current assets Land and building (net) Equipment (net) Total Assets

Liabilities and equity P 825,000 700,000 500,000 P2,025,000

Liabilities Common stock, P20 par Retained Earnings Total Liabilities & Equity

P325,000 500,000 1,200,000 P2,025,000

On the date of the second purchase, PG determines that GDL’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 attributed to goodwill. 1. What is the estimated fair value of the 20% non-controlling on January 2, 2011? A. P475,000 B. P221,875 C. P450,000 D. P170,000 2. What is the amount of goodwill to be reported in the consolidated Statement of Financial Position on January 2, 2011? A. P275,000 B. P150,000 C. P300,000 D. P134,375 III The following are the Statement of Financial Position of Pol and Sol Company as of December 31, 2010. Pol Sol Cash P 250,000 P 50,000 Receivables 175,000 37,500 Inventories 200,000 74,500 Land 187,500 295,000 Building (net) 800,000 250,000 Equipment (net) 625,000 600,000 Total Assets P 2,237,500 P1,250,000

Accounts Payable Ordinary Shares Share Premium Retained Earnings Total Liabilities and Equity

P 462,500 1,250,000 125,000 400,000 P2,237,500

P 150,000 500,000 350,000 250,000 P1,250,000

Pol decide to acquire 15,000 outstanding shares of Sol on January 1, 2011. Pol paid a purchase price of P60,000 and will issue 22,500 ordinary shares with market value of P28 per share in exchange for the 15,000 outstanding shares of Sol. Pol and Sol’s ordinary shares both have a par value of P20 per share. The book value reflect fair values except for building of Pol, which has a net realizable value of P975,000 and inventories and land of Sol which a net realizable value of P74,500 and P295,000, respectively. Pol also paid costs of registering and issuing securities amounting to P26,000 and direct costs of combination amounting to P58,500. 1. How much is the consolidated stockholders’ equity after the combination? A. P2,324,700 B. P2,787,500 C. P2,872,000 D. P2,877,500 2. How much is the consolidated asset after the combination? A. P3,400,000 B. P3,544,500 C. P3,460,000

D. P3,484,500

IV On January 2, 2011, the Statement of Financial Position of Pipa and Sisa Company prior to the combination are: Pipa Company Sisa Company Cash P 225,000 P 7,500 Inventories 150,000 15,000 Property and Equipment (net) 375,000 76,500 Total Assets P 750,000 P 75,000 Current Liabilities P 45,000 Common Stock, P100 par 75,000 Additional Paid in Capital 225,000 Retained Earnings 405,000 Total Liabilities and Stockholders’ Equity P 750,000 The fair value of Sisa Company’s equipment is P76,500.

P 7,500 7,500 15,000 45,000 P 75,000

Assume the following independent cases: 1. Assuming Pipa Company acquired all of the outstanding stock of Sisa Company resulting to a goodwill of P33,000, contingent consideration is P18,000, how much is the price paide to Sisa Company’s stock? A. P142,500 B. P157,500 C. P106,500 D. P142,500 2. Assuming Pipa Company acquired 70% of the outstanding common stock of Sisa Company for P52,500 and Non-controlling interest is measured at Non-controlling interest’s proportionate share of Sisa Company’s identifiable net assets, how much is the consolidated stockholders’ equity on the date of acquisition? A. P(8,500) B. P8,500 C. P11,550 D. P(11,550) 3. Assuming Pipa Company acquired 80% of the outstanding common stock of Sisa Company for P68,400 and Non-controlling interest is measured at Non-controlling interest’s proportionate share of Sisa Company’s identifiable net assets, how much is the consolidated stockholders’ equity on the date of acquisition? A. P705,000 B. P709,800 C. P723,300 D. P728,100

4. Assuming Pipa Company acquired 90% of the outstanding common stock of Sisa Company for P121,500 and Non-controlling interest is measured at fair value, how much is the total consolidated assets on the date of acquisition? A. P771,000 B. P892,500 C. P868,500 D. P747,000 V On December 31, 2010, the following figures were taken from the trial balances of Kenshin Company and Kaoru Company: . Kenshin Kaoru . Cash Receivables Inventory Property and equipment – net Current Liabilities Long-term Liabilities Common Stock Additional paid-in capital Retained Earnings

P 120,000 60,000 100,000 160,000 20,000 70,000 110,000 20,000 220,000

P 20,000 60,000 70,000 105,000 10,000 50,000 100,000 --120,000 .

On December 31, 2010, Kenshin issues 8,000 shares of its P10 par value stock for 70% of the outstanding shares of Kaoru. Kenshin’s stock had a P14 per share fair market value. Contingent consideration that is determinable amount to P12,000. Kenshin also paid the following: P19,000 for broker’s fee, P21,000 for pre-acquisition audit fee, P20,500 for legal fees, P17,000 for audit fee for SEC registration of stock issue and P16,500 for printing of stock certificates. Kaoru holds an equipment that is worth P25,000 less than its current book value. The retained earnings of kaoru on January 1, 2010 amounted to P60,000. The fair market value of the non-controlling interest is P50,000. 1. How much is the consolidated share premium (APIC) after the combination? A. P52,000 B. P20,000 C. P18,500 D. P 0 2. How much is the consolidated retained earnings after the combination? A. P340,000 B. P232,500 C. P172,000 D. P170,500 3. How much is the consolidated asset after the combination? A. P695,000 B. P589,000 C. P626,000

D. P601,000