Solution Chapter 14

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Chapter 14

Problem I

1. Consideration transferred : FMV of shares issued by Robin (80,000 sh × P28) = P2,240,000

2. Consideration trasnferred P2,240,000

Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000

Goodwill P 520,000 Problem II 1.. Accounts Receivable 180,000 Inventory 400,000 Land 50,000 Building 60,000 Equipment 70,000 Patent 20,000 Goodwill 10,000 Acquisition Expense 20,000 Current Liabilities 70,000 Long-term Debt 160,000 Cash 580,000

Consideration trasnsferred : Cash P560,000 Less : Fair value of West’s net assets

(P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000 – P70,000 - P160,000) 550,000 Goodwill P 10,000 2. Acquisition Expense 20,000 Accounts Receivable 180,000 Inventory 400,000 Land 50,000 Building 60,000 Equipment 70,000 Patent 20,000 Current Liabilities 70,000 Long-term Debt 160,000 Cash 520,000 Gain on Acquisition 50,000

Consideration trasnsferred : Cash P500,000 Less : Fair value of West’s net assets

(P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000

– P70,000 - P160,000) 550,000 Bargain Purchase Gain (P 50,000) Problem III

Accounts Receivable 231,000

Inventory 330,000

Land 550,000

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Goodwill 848,000

Allowance for Uncollectible Accounts (P231,000 - P198,000) 33,000

Current Liabilities 275,000

Bonds Payable 450,000

Premium on Bonds Payable (P495,000 - P450,000) 45,000

Preferred Stock (15,000 x P100) 1,500,000 Common Stock (30,000 x P10) 300,000 PIC - par (P25 - P10) x 30,000 450,000 Cash 50,000 Consideration transferred: (P1,500,000 + P750,000 + P50,000) P2,300,000

Less: Fair value of net assets (198,000 + 330,000 +

550,000 + 1,144,000 – 275,000 – 495,000) = 1,452,000

Goodwill P 848,000

Problem IV

Current Assets 960,000

Plant and Equipment 1,440,000

Goodwill 336,000

Liabilities 216,000

Cash 2,160,000

Estimated Liability for Contingent Consideration 360,000

Problem V

The amount of the contingency is P500,000 (10,000 shares at P50 per share)

1. Goodwill 500,000

Paid-in-Capital for Contingent Consideration - Issuable 500,000 2. Paid-in-Capital for Contingent Consideration – Issuable 500,000

Common Stock (P10 par) 100,000

Paid-In-Capital in Excess of Par 400,000

Platz Company does not adjust the original amount recorded as equity. Problem VI 1. January 1, 20x4 Accounts Receivable 72,000 Inventory 99,000 Land 162,000 Buildings 450,000 Equipment 288,000 Goodwill 54,000

Allowance for Uncollectible Accounts 7,000

Accounts Payable 83,000

Note Payable 180,000

Cash 720,000

Estimated Liability for Contingent Consideration 135,000 Consideration transferred (P720,000 + P135,000) P855,000

Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000

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2. January 2, 20x6

Cash 135,000

3. January 2, 20x6

Gain on Contingent Consideration 135,000

Problem VII 1. Accounts Receivable 240,000 Inventory 320,000 Land 1,508,000 Buildings 1,392,000 Goodwill 30,000

Note Payable 600,000

Cash 2,600,000

Goodwill 200,000

Estimated Liability for Contingent Consideration 200,000 Consideration transferred P2,600,000

Fair value of net assets acquired

(P3,440,000 – P870,000) 2,570,000

Goodwill P 30,000

2. Estimated Liability for Contingent Consideration 200,000

Gain on Contingent Consideration 200,000

Problem VIII Current Assets 362,000 Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000 Goodwill * 395,000 Liabilities 119,000 Long-term Debt 491,000 Common Stock (144,000  P5) 720,000 PIC - par (144,000 x P15 - P5)) 1,440,000 * (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000 Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000

Fair value of stock issued (144,000P15) = P2,160,000 Problem IX

Case A

Consideration transferred P130,000

Less: Fair Value of Net Assets 120,000

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Case B

Goodwill P 20,000

Case C

Gain (P 5,000)

Assets Liabilities Retained

Earnings (Gain) Goodwill Current Assets Long-Lived Assets

Case A P10,000 P20,000 P130,000 P30,000 0

Case B 20,000 30,000 80,000 20,000 0

Case C 0 20,000 40,000 40,000 5,000

Problem X

1. Fair Value of Identifiable Net Assets

Book values P500,000 – P100,000 = P400,000

Write up of Inventory and Equipment:

(P20,000 + P30,000) = 50,000

Consideration transferred above which goodwill would result P450,000 2. Equipment would not be written down, regardless of the purchase price, unless it was

reviewed and determined to be overvalued originally.

3. A gain would be shown if the purchase price was below P450,000. 4. Anything below P450,000 is technically considered a bargain.

5. Goodwill would be P50,000 at a purchase price of P500,000 or (P450,000 + P50,000). Problem XI

Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = P187,080 Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = 344,098

Total Present value 531,178

Par value 600,000

Discount on bonds payable P68,822

Cash 114,000 Accounts Receivable 135,000 Inventory 310,000 Land 315,000 Buildings 54,900 Equipment 39,450 Bond Discount (P40,000 + P68,822) 108,822 Current Liabilities 95,300 Bonds Payable (P300,000 + P600,000) 900,000

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Computation of Excess of Net Assets Received Over Cost

Consideration transferred (P531,178 plus liabilities assumed of P95,300

and P260,000) P886,478

Less: Total fair value of assets received P968,350

Excess of fair value of net assets over cost (P 81,872) Problem XII

In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated to each identifiable asset and liability acquired with any remaining excess attributed to goodwill.

Consideration transferred (shares issued) P750,000 Fair value of net assets acquired:

Cash P29,000

Receivables 63,000

Trademarks 225,000

Record music catalog 180,000

In-process R&D 200,000

Equipment 105,000

Accounts payable (34,000)

Notes payable (45,000) 723,000

Goodwill P27,000

Entry by NT to record combination with OTG:

Cash 29,000

Receivables 63,000

Trademarks 225,000

Record Music Catalog 180,000

Capitalized R&D 200,000

Equipment 105,000

Goodwill 27,000

Notes Payable 45,000

Common Stock (NewTune par value) 60,000

PIC - par 690,000

(To record merger with OTG at fair value)

PIC - par 25,000

Cash 25,000

(Stock issue costs incurred) Post-Combination Balance Sheet:

Assets Liabilities and Owners’ Equity

Cash P 64,000 Accounts payable P 144,000

Receivables 213,000 Notes payable 415,000

Trademarks 625,000

Record music catalog 1,020,000

Capitalized R&D 200,000 Common stock 460,000

Equipment 425,000 Paid-in capital - par 695,000

Goodwill 27,000 Retained earnings 860,000

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Problem XIII

Stockholders’ Equity:

Common Stock, P1 par P1,100,000

Other Contributed Capital 4,090,000 [P2,800,000 + (100,000 x P13) – P10,000]

Retained Earnings 600,000

Total stockholders’ Equity P 5,790,000 Problem XIV

Entry to record the acquisition on Pacifica’s records:

Cash 85,000

Receivables and inventory 180,000

PPE 600,000 Trademarks 200,000 IPRD 100,000 Goodwill 77,500 Liabilities 180,000 Common Stock (50,000 x P5) 250,000

Paid-In Capital in excess of par (50,000 x P15) 750,000

Contingent performance obligation 62,500

The goodwill is computed as:

Consideration transferred: 50,000 shares x P20 P1,000,000 Contingent consideration:

P130,000 payment x 50% probability x 0.961538 62,500

Total P1,062,500

Less: Fair value of net assets acquired

(P85,000 + P180,000 + P600,000 + P200,000 + P100,000 - P180,000) 985,000 Goodwill P 77,500 Acquisition expenses 15,000 Cash 15,000 PIC - par 9,000 Cash 9,000

Note: The following amounts will appear in the income statement and statement of retained earnings after business combination:

PP Inc. Revenues (1,200,000) Expenses (P875,000 + P15,000) 890,000 Net income (310,000) Retained earnings, 1/1 (950,000) Net income (310,000) Dividends paid 90,000 Retained earnings, 12/31 *(1,170,000) * or, P1,185,000 – P15,000 = P1,170,000

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Problem XV

Acquisition Method—Entry to record acquisition of Sampras

Contingent performance obligation 15,000

Consideration transferred (fair value) 315,000

Fair value of net identifiable assets 282,000

Goodwill P33,000 Receivables 80,000 Inventory 70,000 Buildings 115,000 Equipment 25,000 Customer list 22,000 IPRD 30,000 Goodwill 33,000 Current liabilities 10,000 Long-term liabilities 50,000

Contingent performance liability 15,000

Cash 300,000

Acquisition expenses 10,000

Cash 10,000

Problem XVI 1.

a. The computation of goodwill is as follows: Consideration transferred;

Common shares: 30,000 shares x P25 P 750,000

Notes payable 180,000

Contingent consideration (cash contingency):

P120,000 x 30% probability 36,000

Total P 966,000

Less: Fair value of identifiable assets acquired and liabilities assumed: Cash P 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000

In-process research and development 60,000

Accounts payable ( 72,000)

Other liabilities ( 168,000) 864,000

Positive Excess – Goodwill P 102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows:

Cash 24,000

Receivables – net 48,000

Inventories 72,000

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Buildings – net 360,000

Equipment – net 300,000

Goodwill 102,000

Accounts payable 62,000

Other liabilities 168,000

Common stock (P10 par x 30,000 shares) 300,000

Paid-in capital in excess of par

[(P25 – P10) x 30,000 shares] 450,000

Acquisition of Saul Company.

Acquisition-related expenses 78,000

Cash 78,000

Acquisition related costs – direct costs.

Paid-in capital in excess of par 32,400

Cash 32,400

Acquisition related costs – costs to issue and register stocks.

Acquisition-related expenses 27,600

Cash 27,600

Acquisition related costs – indirect costs.

c. The balance sheet of Pure Corporation immediately after the acquisition is as follows: Pure Corporation Balance Sheet December 31, 20x4 Assets Cash P 162,000 Receivables – net 144,000 Inventories 360,000 Land 348,000 Buildings – net 840,000 Equipment – net 732,000

Goodwill 102,000

Total Assets P2,748,000

Liabilities and Stockholders’ Equity Liabilities

Accounts payable P 288,000

Estimated liability for contingent consideration 36,000

Total Liabilities P 912,000

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Common stock, P10 par P 1,020,000

Paid-in capital in excess of par1 _657,600

Retained earnings2 _158,400

Total Stockholders’ Equity P1,836,000

Total Liabilities and Stockholders’ Equity P2,748,000 1 _{P240,000 + P446,400 – P32,400}

2 _{P264,000 - P78,000 – P27,600}

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the acquisition date. This requirement does not extend to R&D in contexts other than business combinations.

2.

a. Assets that have been provisionally recorded as of the acquisition date are retrospectively adjusted in value during the measurement period for new information that clarifies the acquisition-date value. The adjustments affect goodwill since the measurement period is still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill to be reported then on the acquisition should be P78,000 (P102,000 – P24,000).

b.

Buildings 24,000

Goodwill 24,000

Adjustment to goodwill due to measurement date.

3.

a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 + P24,000).

b. The adjustment is still within the measurement period, the entry to adjust the liability would be:

Goodwill 24,000

Estimated liability for contingent consideration 24,000 Adjustment to goodwill due to measurement date.

c.

c.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to P48,000, the entry to adjust the liability would be:

Gain on estimated contingent consideration 12,000 Adjustment after measurement date.

In this case, the measurement period ends at the earlier of:  one year from the acquisition date, or

 the date when the acquirer receives needed information about facts and circumstances (or learns that the information is unobtainable) to consummate the acquisition.

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c.3.

c.3.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5).

c.3.2. On December 15, 20x5, the entry would be: Loss on estimated liability contingent

consideration 30,000

Adjustment after measurement date.

c.3.3.

c.3.3.1. P126,000.

c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000, which means that the target is met, Peter Corporation will make the following entry:

Estimated liability for contingent consideration 78,000 Loss on estimated contingent consideration 42,000

Cash 120,000

Settlement of contingent consideration.

4 .

a. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred;

P120,000 x 35% probability x (1/[1 + .04]*) 40,385

Total P 970,385

Less: Fair value of identifiable assets acquired and

liabilities assumed (refer to 1a above) 864,000

Goodwill P 106,385

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000

Goodwill 106,386

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c.

c.1. Goodwill remains at P106,385.

c.2. The entry for Pure Corporation on December 31, 20x5 to record such occurrence would be:

Gain on estimated contingent consideration 40,385

Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the conditions that prevent the target from being met occurred in a subsequent period and that Peter had the information to measure the liability at the acquisition date based on circumstances that existed at that time. Thus the adjustment will flow through income statement in the subsequent period.

d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent consideration would be:

Estimated liability for contingent consideration 36,000 Loss on estimated contingent consideration 66,000

Cash [(P78,000 + P84,000)/2 – P30,000] x 2 102,000 Settlement of contingent consideration.

5.

a. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred;

P120,000 x 30% probability 36,000

Contingent consideration (stock contingency) 18,000

Total P 984,000

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Goodwill 120,000

Estimated Liability for Contingent Consideration 36,000 Paid-in capital for Contingent Consideration

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Common stock (P10 par x 30,000 shares) 300,000 Additional paid-in capital [(P25 – P10) x 30,000

shares] 450,000

Acquisition of Saul Company.

c. Pure Corporation will make the following entry for the issuance of 1,200 additional shares: Paid-in capital for Contingent Consideration 18,000

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to contingency) would be:

7. On January 1, 20x7, the contingent event happens since the fair value per share fall below P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be:

* Deficiency: (P25 – P20) x 25,000 shares issued to acquire..P150,000 Divide by fair value per share on January 1, 20x7………….P 20 Added number of shares to issue………. 7,500 8. The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred;

Contingent consideration (stock contingency): [(P750,000 – P510,000) x 40% probability

x (1/[1 + .04]*) 92,308

Total P1,022,308

* present value of P1 @ 4% for one period.

The journal entries by Pure Corporation to record the acquisition is as follows:

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Goodwill 158,308

Paid-in capital for Contingent Consideration 92,308

[(P25 – P10) x 30,000 shares] 450,000

On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul Corporation. The entry for Peter Corporation on December 31, 20x5 to record such occurrence such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be:

Paid-in capital for Contingent Consideration 92,308

Common stock, P10 par 75,000

* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000 Divide by fair value per share on December 31, 20x5……P 20 Added number of shares to issue……… 7,500 Problem XVII

1. The computation of bargain purchase gain is as follows: Consideration transferred;

Cash P 1,800,000

Common shares: 120,000 shares x P12 1,440,000

Costs of liquidation 12,000

Patent 240,000

Contingent consideration (P12,000 guarantee

+ P14,400 to vendors) 26,400

Total P3,518,400

Less: Fair value of identifiable assets acquired and liabilities assumed: Merchandise inventory P1,440,000 Accounts receivable 900,000 Copyrights 240,000 Equipment 1.380,000 Accounts payable ( 300,000) Loan payable ( 120,000) 3,540,000

Negative Excess – Bargain Purchase Gain P ( 21,600)

2. The journal entries by Ponder Corporation to record the acquisition is as follows:

Merchandise inventory 1,440,000 Accounts receivable 900,000 Patent 240,000 Equipment 1,380,000 Accounts payable 300,000 Loan payable 120,000

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Cash 1,812,000

Common stock (P10 par x 120,000 shares) 1,200,000

[(P12 – P10) x 120,000 shares] 240,000

Gain on sale of Patent 240,000

Bargain purchase gain 21,600

Problem XVIII 1. Consideration transferred: Shares: 2/3 x 60,000 x P3.20 128,000 Cash Accounts payable 45,100

Mortgage and interest 44,000

Debentures and premium 52,500

Liquidation expenses 2,400

144,000

Cash held (12,000) 132,000

260,000 Less: Fair value of assets and liabilities acquired:

Accounts receivable P34,700

Inventory 39,000

Freehold land 130,000

Buildings 40,000

Plant and equipment 46,000 289,700

Bargain Purchase Gain 29,700

Homer Ltd

Accounts Receivable 34,700

Inventory 39,000

Freehold Land 130,000

Buildings 40,000

Plant and Equipment 46,000

Payable to Tan Ltd 132,000

Common stock, P1 par x 40,000 shares 40,000

Additional paid-in capital 88,000

Gain on acquisition 29,700

(Acquisition of net assets of Tan Ltd and shares issued)

Payable to Tan Ltd 132,000

Cash 132,000

(Being payment of cash consideration)

Cash 1,200

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2.

Tan LTD General Ledger

Liquidation

P P

Accounts Receivable 34,700 Additional paid in capital 26,800

Inventory 27,600 Retained earnings 32,000

Freehold Land 100,000 Receivable from Homer Ltd 260,000

Buildings 30,000

Plant and Equipment 46,000

Goodwill 2,000 Interest Payable 4,000 Liquidation Expenses 2,400 Premium on Debentures 2,500 Accounts Payable 1,600 Shareholders’ Distribution 68,000 318,800 318,800 Liquidator’s Cash P P

Opening Balance 12,000 Liquidation Expenses 2,400

Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000 Debentures and Premium 52,500

144,000 144,000

Shareholders’ Distribution

P P

Shares in Homer Ltd 128,000 Common stock 60,000

Liquidation 68,0000 128,000 128,000 Problem XIX Cash 20,000 Accounts Receivable 112,000 Inventory 134,000 Land 55,000 Plant Assets 463,000

Discount on Bonds Payable 20,000

Goodwill* 127,200

Bonds Payable 200,000

Deferred Income Tax Liability 67,200

Cash 600,000

(P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800

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* Increase in net assets

Increase inventory, land, and plant assets to fair value

P52,000 + P25,000 + P71,000) P148,000

Decrease bonds payable to fair value ( 20,000)

Increase in net assets P168,000

Establish deferred income tax liability (P168,000 x 40%) P 67,200

Multiple Choice Problems

1. c

Finder’s fees……….P 40,000 Legal fees………. 13,000 Total expenses………. P53,000

Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect

a business combination. Those costs include finder’s fee; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is required to recognize acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception, i.e. the costs to

issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and

PAS 39 (for debt).

2. b – refer to No. 1 for further discussion.

Audit fees related to stock issuance………P 10,000 Stock registration fees………... 5,000 Stock listing fees………... 4,000 P 19,000 3. c

4. a – at fair value

5. c – (P50,000 + P8,000 + P100,000 = P158,000)

The acquirer should recognize, separately from goodwill, the identifiable assets acquired in a business combination. [PFRS 3 (2008).B31]

A patent that have no useful life is not considered an asset.

An intangible is separable if it capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually together with a related contract…[PFRS 3(2008).B33]

The amount by which the lease terms are favorable compared with the terms of current market transactions for the same or similar items is an intangible assets that meets the contractual-legal criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease contract. [PFRS 3 (2008).B32 (a)]

Customer and subscriber lists are frequently licensed and thus meet the separability criterion. [PFRS 3(2008).B33].

It may seem that the terms “research” and “development”, which may be associated with such assets as patent and software development, are not applicable to all internally intangibles, such as brand names. However, it needs to be remembered that all intangible assets must meet the identifiability criterion, one part of which is separability.

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6. a

PFRS 3 (2008 requires that, at the acquisition date, the identifiable assets acquired and liabilities assumed should be designated as necessary to apply other PFRSs subsequently. The acquirer makes those classifications or designations on the basis of contractual terms, ... as they exist at the acquisition date [PFRS 3 (2008).15]

Since, the patent was not recorded separately as identifiable intangible asset on the date of acquisition, and then no amount of patent should be subsequently recognized.

7. b

Consideration transferred (fair value)……….. P80,000 Less: Fair value of net identifiable assets acquired:

Fair value of assets……… P 98,000

Less: Present value/ Fair Value of liabilities………… 23,000 75,000

Goodwill……… P 5,000

 A net identifiable asset means net assets excluding goodwill (unidentifiable asset).  An acquisition-related costs are considered outright expenses.

8. d – [P1,600,000 – P1,210,000] = P390,000 9. a – [(P1,600,000 – PP390,000) - P1,210,000] = P0 10. b

PFRS No. 3 par. 62 states that: “If the initial accounting for business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities, or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer

shall recognize any adjustments to those provisional values as a result of completing the initial accounting:

(a) within twelve months of the acquisition date; and …” 11. b

The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par 32. When provisional fair values have been identified at the first reporting date after the acquisition, adjustments arising within the measurement period (a maximum of 12 months from the acquisition date) should be related back to the acquisition date. Subsequent adjustments are recognized in profit or loss, unless they can be classified as errors under PAS8 Accounting policies, changes in accounting estimates and errors. See PFRS 3 pars. 45 and 50. The final amount of goodwill is P160 million consideration transferred less P135 million fair values on May 31, 20x5 = P25 million.

12. c

Fair value of Subsidiary - Homer

Consideration transferred………P 200 million Add: Fair value of contingent consideration……… 10 million Fair value of subsidiary……… P 210 million Less: Fair value of identifiable assets and liabilities of Homer...… 116 million Goodwill……… P 94 million

Note: The consideration transferred should be compared with the fair value of the net

assets acquired, per PFRS3 par. 32. The contingent consideration should be measured at its fair value at the acquisition date; any subsequent change in this cash liability comes under PAS 39 Financial instruments: recognition and measurement and should

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be recognized in profit or loss, even if it arises within the measurement period. See PFRS 3 pars. 39, 40 and 58. 13. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000) = P104,000 14. d APIC: P20,000 + [(P42 – P5) x12,000 = P464,000 Retained earnings: P160,000, parent only 15. b

Inventory: PP230,000 + P210,000 = P440,000 Land: P280,000 + P240,000 = P520,000

16. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000 17. a

Cost of Investment (100,000 shares x P1.90) P 190,000 Less: Market value of net assets acquired:

Cash P 50,000

Furniture and fittings 20,000

Accounts receivable 5,000

Plant 125,000

Accounts payable (15,000)

Current tax liability ( 8,000)

Liabilities ( 2,000) 175,000

Goodwill P 15,000

18. b

Cost of Investment [P20,000 + (16,000 shares x P2.50)

+ P500, incidental costs) P 60,500

Less: Market value of net assets acquired:

Plant P 30,000 Inventory 28,000 Accounts receivable 5,000 Plant 20,000 Accounts payable ( 20,000) 58,000 Goodwill P 2,500

When it liquidates, costs of liquidation paid by the acquiree should be for the liquidation account of the acquiree and will eventually be transferred to shareholders’ equity account. Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of the combination.

Any direct costs of acquisition should be capitalizable under the cost model reiterated in PFRS No. 3 Phase I. This model in PFRS No. 3 will be amended under Phase II (pending implementation possibly until early 2008), wherein all direct costs will be outright expense. Costs of issuing shares will be debited to share premium or APIC account.

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Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of the combination.

The fair values of liabilities undertaken are best measured by the present values of future cash outflows.

Intangible assets are recognized when its fair value can be measured reliably.

Assets other than intangible assets must be recognized if it is probable that the future economic benefits will flow to the acquirer and its fair value can be measured reliably. 19. c AA records new shares at fair value

Value of shares issued (51,000 × P3)... P153,000 Par value of shares issued (51,000 × P1) ... 51,000 Additional paid-in capital (new shares) ... P102,000 Additional paid-in capital (existing shares) ... 90,000 Consolidated additional paid-in capital ... P192,000 At the date of acquisition, the parent makes no change to retained earnings.

20. a – at fair value 21. c

Depreciation expense:

Building, at book value (P200,000 – P100,000) / 10 years P 10,000 Building, undervaluation (P130,000, fair value

– P100,000, book value) / 10 years 3,000

Equipment, at book value (P100,000 – P50,000) / 5 years 10,000 Equipment, undervaluation (P75,000, fair value

- P50,000, book value) / 5 years 5,000

Total depreciation expense P 28,000

22. c - [(24,000 shares x P30) – P686,400] = P33,600

23. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain 24. b

Consideration transferred (fair value) P400,000

(P60,000 + P175,000 + P200,000 + P225,000 + P75,000 – P100,000) 385,000

Goodwill P 15,000

25. a - only the subsidiary’s post-acquisition income is included in consolidated totals. 26. c

A bargain purchase is a business combination in which the net fair value of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred.

It should be noted that bargain purchase gain would arise only in exceptional circumstances. Therefore, before determining that gain has arisen, the acquirer has to:

1. Reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed. The acquirer should recognize any additional assets or liabilities that are identified in that review.

(20)

2. Any balance should be recognized immediately in profit or loss. 27. d

Cost P180,000

Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs) 18,000

Net book value P162,000

28. c

Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] P312,000 Less: Shares issued at par (15,000 shares x P10 par) 150,000

APIC P162,000

29. c

The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and should be recognized in profit or loss, per PFRS3 par. 34.

30. c

Consideration transferred:

Shares: 2/3 x 60,000 x P3.20 128,000

Cash

Mortgage and interest 44,000

Debentures and premium 52,500

Liquidation expenses 2,400

144,000

Cash held (12,000) 132,000

260,000 Less: Fair value of assets and liabilities acquired:

Accounts receivable P34,700

Inventory 39,000

Freehold land 130,000

Buildings 40,000

Plant and equipment 46,000 289,700

Bargain Purchase Gain 29,700

31. d

PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their acquisition-date fair values.

32. c

Selling price P 110,000

Less: Book value of Comb (P50,000 + P80,000 + P40,000

- P30,000) 140,000

Loss on sale of business by the acquiree (Comb) P( 30,000) 33. d P215,000 = P130,000 + P85,000

34. b P23,000 = P198,000 – (P405,000 - P265,000 + P15,000 + P20,000)

35. c P1,109,000 = Total Assets of TT Corp. P 844,000

(21)

Book value of assets of TT Corp. P 646,000 Book value of assets of SS Corp. 405,000

Total book value P1,051,000

Payment in excess of book value

(P198,000 - P140,000) 58,000

Total assets reported P1,109,000

36. c P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000 +P200,000)

37. d P257,500 = The amount reported by TT Corporation 38. a P407,500 = The amount reported by TT Corporation 39. d

Consideration transferred:

Shares: (100,000 shares x P6.20)……… P620,000 Contingent consideration………. 184,000

Total………. P804,000

Less: Fair value of net identifiable assets acquired:

Current assets……… P100,000 Equipment……… 150,000 Land ……… 50,000 Buildings ……….……… 300,000 Liabilities………. ( 80,000) 520,000 Goodwill………. P284,000

The P184,000 is one classical example of contingencies is where the future income of the acquirer is regarded as uncertain; the agreement contains a clause that requires the acquirer to provide additional consideration to the acquiree if the income of the acquirer is not equal to or exceeds a specified amount over some specified period.

40. d

Goodwill, 1/1/20x4………... P 284,000 Less: Adjustment on contingent consideration (P184,000 – P170,000) 14,000 Goodwill, 8/1/20x4………... P 270,000

Changes that are the result of the acquirer obtaining additional information about facts and circumstances that existed at the acquisition date, and that occur within the measurement period (which may be a maximum of one year from the acquisition date) are recognized as adjustments against the original accounting for the acquisition (and so may impact goodwill) – see Section 11.3.[PFRS 3 (2008) par. 58]

Incidentally, the entry to record the revision of goodwill should be: Estimated liability for contingent consideration…. 14,000

Goodwill……… 14,000 41. a – refer to No. 39 and 40 for further discussion.

42. c

Deficiency: (P16 – P10) x 100,000 shares issued to acquire………P 600,000 Divided by: Fair value of share………... P 10

(22)

Added number of shares to issue………... 60,000 43. (b) – (P520,000 – P60,000 = P460,000)

Changes resulting from events after (post-combination changes) the acquisition date (e.g. meeting an earnings target, reaching a specified chare or reaching a milestone on research and development project) are not measurement period adjustments. Such changes are therefore accounted for separately from the business combination. The acquirer accounts for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:

1. contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity; and

2. contingent consideration classified as an asset or liability…

The problem on hand falls within No. 1, so no adjustment would be required to goodwill but accounted for within the equity section.

Incidentally, the entry would be:

Paid-in capital in excess of par……….. 60,000 Common stock, P1 par……….. 60,000 44. b

45. c 46. c 47. b 48. c

Par value of shares outstanding before issuance P200,000 Par value of shares outstanding after issuance 250,000

Par value of additional shares issued P 50,000

Divided by: No. of shares issued* __12,500

Par value of common stock P 4

*Paid-in capital before issuance (P200,000 + P350,000) P 550,000 Paid-in capital after issuance (P250,000 + P550,00) 800,000 Paid-in capital of share issued at the time of exchange P 250,000

Divided by: Fair value per share of stock P 20

Shares issued 12,500

49. a

Consideration transferred: Shares – 12,500 shares P250,000

Less: Goodwill 56,000

Fair value of identifiable net assets acquired P194,000 50. a –

Blue Town:

Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000

Issued shares: 34,000 shares x P35 1,190,000

Consolidated SHE/Net Assets P2,870,000

51. d 52. c

Common stock – combined………P 160,000 Common – Acquirer Zyxel……….. ……….… 100,000 Common stock issued………...P 60,000

(23)

Divided by: Par value of common stock……….P 2 Number of Zyxel shares to acquire Globe Tattoo………...… 30,000 53. d

Paid-in capital books of Zyxel (P100,000 + P65,000)………...P 165,000 Paid-in capital in the combined balance sheet

(P160,000 + P245,000)……….… 405,000 Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000 Divided by: No. of shares issued (No. 31)………... 30,000 Fair value per share when stock was issued……….... P 8 Or,

Par value of common stock of Zyxel……… P 2 Add: Share premium/APIC per share from the additional

issuance of shares (P245,000 – P65,000)/30,000…………... 6 Fair value per share when stock was issued………... P 8 54. b

Net identifiable assets of Zyxel before acquisition: (P65,000 + P72,000 + P33,000 + P400,000 – P50,000

- P250,000)………. P270,000 Net identifiable assets in the combined balance sheet:

(P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)…... 497,000 Fair value of the net identifiable assets held by Globe Tattoo

at the date of acquisition..……….. P227,000 55. a

Consideration transferred (30,000 shares x P8)……… P240,000 Less: Fair value of net identifiable assets acquired (No. 49)……….... 227,000 Goodwill……….. P 13,000 56. c

Retained earnings:

Acquirer – Zyxel (at book value)……….... P105,000 Acquiree – Globe Tattoo (not acquired)……… __ 0 P105,000 It should be noted that, there was no bargain purchase gain and acquisition-related costs which may affect retained earnings on the acquisition date.

57. a

II ____ _____JJ _ ____Total____ Average annual earnings P 46,080 P 69,120 P 115,200

Divided by: Capitalized at _ 10%

Total stock to be issued P1,152,000

Less: Net Assets (for P/S) 864,000

Goodwill (for Common Stock) P 288,000

Preferred stock (same with Net Assets):

864,000/P100 par 8,640 shares

Quiz - XIV

1. P90,000 = P65,000 + P25,000 2. P280,000 = P210,000 + P70,000 3. P180,000 4. P475,000

(24)

5. P100,000 = P600,000 - (P25,000 + P180,000 + P475,000 - P60,000 - P120,000) 6. [P500,000 – (P200,000 + P220,000 – P110,000)]= P190,000 7. Gain of P45,000 8. [(12,000 shares x P30) – P343,200 = P16,800 9. (P863,000 + P363,000) = P1,226,000 10. [P400 + (40 shares x P10)] = P800 11. [P1,080 + (P280 + P10) = P1,370 12. [P1,260 + (P440 + P60) = P1,760 13. [P600 + (P360 + P40)] = P1,000 14. [P480 + P100] = P580 15. [P330 + (40 shares x P1)] = P370

16. [P1,080 + 40 shares x (P10 - P1)] – P15, stock issuance costs = P1,425 17. [P180 + P40 – P20 – P15} =P185 18. [(50,000 shares x P 35) + P5,000] = P1,755,000 19. [P1,230,000 + P580,000] = P1,810,000 20. [P1,800,000 + P250,000] = P2,050,000 21. (P1,800,000 + P650,000]= P2,450,000 22. [P1,755,000 – (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000 - P240,000 – P60,000 – P1,120,000)] = P455,000 23. [P660,000 + P400,000} = P1,060,000 24. P1,280,000

Retained earnings – Atwood, January 1, 20x4 P1,170,000

Add: Net income – 20-x4

Revenues P2,880,000

Less: Expenses 2,760,000

Direct costs 10,000 110,000

Retained earnings – Atwood, December 31, 20x4 P1,280,000 25. P2,880,000, parent only on the date of combination

26. (P2,760,000 + P10,000) = P2,770,000

27. [(P870,000 – P15,000 – P10,000) + P240,000] = P1,085,000 28. P46,000 = (P60,000 + P26,000, fair value) – P40,000, cash paid 29. P154,000 = (P100,000 + P54,000, fair value)

30. P7,000 = [P40,000 – (P26,000 + P54,000 – P35,000 – P12,000)]

31. P98,000 = (P90,000 + P8,000), only the stockholders’ equity of acquirer 32. CC, 26%; DD, 50%; EE, 24%

CC_____ DD_______ EE Total______

Assets, appraised value P375,000 P750,000 P375,000 P1,500,000 Add: Goodwill:

Annual earnings P41,250 P75,000 P33,750 P150,000 Less: Normal earnings

6% x Assets 22,500 45,000 22,500 90,000

Excess earnings P18,750 P30,000 P11,250 P60,000

/ capitalized at 20% 20% _ 20%__ 20%__

Goodwill P93,750 P150,000 P56,250 P300,000

Total stock to be issued P468,750 P900,000 P431,250 P1,800,000

P468,750 P900,000 P431,250

1,800,000 1,800,000 431,250

(25)

Theories

1. True 21. False 41. True 61. c 81. b 101. c 121 a

2. False 22. True 42. False 62. b 82. a 102. d 122. b

3. True 23. False 43. a 63. c 83. d 103. d 123. b 4. True 24. True 44. c 64. d 84. a 104. d 124. c 5. False 25, True 45, b 65, d 85. c 105. c 125. b 6. True 26. False 46. b 66. a 86. d 106. d 126. c 7. False 27. True 47. d 67. a 87. c 107. d 127. c 8. True 28. False 48. c 68. d 88. a 108. d 9. True 29. True 49. c 69. a 89. c 109. b 10. True 30, True 50, b 70, b 90, d 110, c 11. True 31. False 51. a 71. c 91. b 111. c 12. True 32. True 52. b 72. A 92. a 112. c 13. False 33. True 53. c 73. c 93. C 113. a 14. False 34. False 54. a 74. c 94. B 114. d 15. False 35. True 55. c 75. a 95. D 115. d 16. True 36. True 56. b 76. d 96. A 116. c 17. False 37. False 57. a 77. a 97. A 117. b 18. True 38. True 58. c 78. d 98. c 118. b 19. True 39. False 59. a 79. b 99. d 119. b 20. False 40, False 60, c 80, c 100, d 120. a

Note for the following numbers:

2. A horizontal combination occurs when management attempts to dominate an industry.

5. A vertical combination exists when an entity purchases another entity that could have a

buyer-seller relationship with the acquirer. The combination described here is a horizontal combination.

7. A conglomerate combination is one where an unrelated or tangentially related business

is acquired. A vertical combination occurs when a supplier is acquired.

13. Greenmail is the payment of a price above market value to acquire stock back from a potential acquirer.

15. The sale of the crown jewels results when a target sells assets that would be particularly valuable to the potential acquirer. The scorched earth defense results when a target generally sells large amounts of assets without regard to the specific desirability to the potential acquirer.

17. Golden parachutes are generally given only to top executives of the acquiree.

20. Control over the net assets of an entity can be accomplished by purchasing the net assets or by purchasing the acquiree voting common stock that represents ownership of the assets.

21. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the acquirer book value will not change due to an acquisition.

23. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in ownership structure of either entity.

26. The acquiree corporation becomes an acquirer stockholder, not the acquiree

stockholders.

28. A combination that results in one of the original entities in existence after the combination is a statutory merger.

31. The combination results in the stockholders of one entity controlling the other entity. The Retained Earnings of the entity acquiring control is carried forward to the newly formed corporation.

34. The stock of the acquiree company must be purchased by the acquirer, but the value

transferred to the acquiree stockholders does not have to be in stock. Payment may be in another asset or the issuance of debt.

(26)

37. The consideration to be given by the acquirer is sometimes not completely known because the consideration is based partially on acquiree future earnings or the market value of acquirer debt or stock.

39. Any change in the number of shares of acquirer stock given returns the purchase price to the agreed level. The adjustment is to stock and additional paid-in capital. The investment account is unchanged.

40. The acquiree stockholders must continue to have an indirect ownership interest in the acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect ownership as well as voting common stock.

42. A net operating loss carryforward cannot be acquired. They are only available to the acquirer if the combination qualifies as a nontaxable exchange.