Certs

(1)

BUSINESS COMBINATION (PA2.M-1413)

STRAIGHT PROBLEMS

Problem 1 Problem 1

Agdao corporation paid P5,000,000 to purchase NCR corporation on January 2, 2013, and NCR

was dissolved. The purchase price consisted of 10

was dissolved. The purchase price consisted of 10 0,000 shares of agdao’s

0,000 shares of agdao’s common stock with a

common stock with a

market value of P4,000,000 plus P1,000,000 cash. In addition, Agdao paid 100,000 for

registering and issuing the 100,000 shares and P

registering and issuing the 100,000 shares and P 200,000 for other costs in consummating the

200,000 for other costs in consummating the

combination. The statement of Financial Position for the companies immediately before

combination is summarized as follows;

Agdao NCR Agdao NCR Book Book Value Value Fair Fair value value Book Book Value Value Fair Fair Value Value Cash Cash 6,000,000 6,000,000 6,000,000 6,000,000 480,000 480,000 480,000480,000 Accounts

Accounts Receivable Receivable (net) (net) 2,600,000 2,600,000 2,450,000 2,450,000 720,000 720,000 720,000720,000 Notes

Notes Receivable,(net) Receivable,(net) 3,000,000 3,000,000 2,900,000 2,900,000 600,000 600,000 600,000600,000 Inventories

Inventories 5,000,000 5,000,000 6,000,000 6,000,000 840,000 840,000 1,000,0001,000,000 Other

Other current current assets assets 1,400,000 1,400,000 1,500,000 1,500,000 360,000 360,000 400,000400,000 Land

Land 4,000,000 4,000,000 6,000,000 6,000,000 200,000 200,000 400,000400,000 Buildings,

Buildings, (net) (net) 18,000,000 18,000,000 17,000,000 17,000,000 1,200,000 1,200,000 2,400,0002,400,000 Equipment,(net)

Equipment,(net) 20,000,000 20,000,000 18,550,000 18,550,000 1,600,000 1,600,000 1,200,0001,200,000 Total

Total Assets Assets 60,000,000 60,000,000 60,350,000 60,350,000 6,000,000 6,000,000 7,200,0007,200,000 Accounts

Accounts payable payable 2,000,000 2,000,000 2,000,000 2,000,000 600,000 600,000 600,000600,000 Mortgage

Mortgage payable, payable, 10% 10% 10,000,000 10,000,000 10,500,000 10,500,000 1,400,000 1,400,000 1,200,0001,200,000 Capital

Capital stock, stock, P10 P10 par par 20,000,000 20,000,000 2,000,0002,000,000 Additional

Additional Paid-in Paid-in capital capital 16,000,000 16,000,000 1,200,0001,200,000 Retained

Retained Earnings Earnings 12,000,000 12,000,000 800,000800,000 Total

Total Liabilities Liabilities and and Shareholder's Shareholder's Equity Equity 60,000,000 60,000,000 6,000,0006,000,000

a.

a. Prepare the journal entries to record A

Prepare the journal entries to record Agdao’s acquisition of NCR Corporation if it was a

gdao’s acquisition of NCR Corporation if it was a

purchase of assets and liabilities; and if it wa

purchase of assets and liabilities; and if it was a purchase of voting shares.

s a purchase of voting shares.

b.

b. Prepare a statement of financial position for Agdao Corporation on

Prepare a statement of financial position for Agdao Corporation on January 2, 2013,

January 2, 2013,

immediately after the combination.

Problem 2 Problem 2

Dencio Co. merged into Kit Co

Dencio Co. merged into Kit Corp. on July 1, 2013.

rp. on July 1, 2013. In exchange for the net asset at fair market

In exchange for the net asset at fair market

value of Dencio Co. amounting to P696, 450, Kit issued 68,000 common shares at P9 par value

with a market price of P12 per share.

(2)

Out of pocket costs of the combination were as follows:

Legal fees for the contract of business combination

P35,600

Audit fee for SEC registration of stock issue

90,000

Printing costs of stock certificates

14,500

Broker’s fee

23,600

Accountant’s fee for pre-acquisition audit

80,000

Other direct cost of acquisition

75,000

General and allocated expenses

43,000

Listing fees in issuing new shares

36,000

Dencio will pay an additional cash consideration of P455,000 in the event that kit,s net income

will be equal or greater than P950,000 for the period ended December 31, 2013. At acquisition

date, there is a high probability of reaching the target net income and the fair value of the

additional consideration was determined to be P195,000.

Actual net income for the period ended December 31, 2013 amounted toP1,250,000. The

additional cash consideration was paid.

1. What is the amount of goodwill to be recognized in the statement of financial position as

of December 31, 2013?

2. What is the amount of expense to be recognized in the statemenet of financial position as

of the year ended December 31, 2013?

Problem 3

Summary information is given for DUBAI, Inc. and DAVAO Company at July 1, 2013. The

quoted market price of DUBAI and DAVAO shares are P36 and P40, respectively.

DUBAI Inc. DAVAO Company Book

Value

Book

Value Fair value Current Assets 8,000,000 24,000,000 24,000,000 Plant Assets 22,000,000 26,000,000 25,000,000 Goodwill 1,500,000 Totals 31,500,000 50,000,000 Liabilities 5,000,000 15,000,000 15,500,000 Common Stocks, P10 10,000,000 20,000,000 APIC 2,000,000 3,000,000

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Retained Earnings 14,500,000 12,000,000 Totals 31,500,000 50,000,000

The book values of DUBAI reflects their fair values ex cept for inventory items whose realizable

value is 650000 more than its carrying amount, unreported cash on hand of 350000 and a

building costing 8000000 that is 20% depreciated and is appraised at 10400000

DAVAO Company acquires all the net assets of DUBAI by issuing 700000 of its own shares and

fifthy P100,000 10% bonds. DAVAO company incurred the following out of pocket costs

relating to the acquisition:

Legal fees to arrange the business combination

P 25,000

Cost of SEC registration

12,000

Cost of printing and issuing new stock certificates

3,000

Indirect cost of combination

20,000

Finder’s fee

35,000

Bond issuance transaction cost

15,000

Calculate the following assuming the entities adopt the full IFRS and IFRS for SMEs

a. Net assets required

b. Consideration transferred

c. Goodwill/ gain arising from business combination

d. Total assets immediately after combination

e. Total retained earnings after combination

Problem 4

Condensed statements of financial position of Cure Corp. and Class Corp. as of December 31,

2012 are as follows:

CURE

CLASS

Current Asset

P 43,750

P 16,250

Noncurrent Asset

181,250

10,6250

Total Asset

P225,000

P122,500

Liabilities

P18,750

P8,750

Common Stocks, P20 Par

137,500

75,000

Additional Paid in Capital

8750

6,250

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On January 1, 2013, Cure corp. issued 8750 stocks with a m,arket value on P25/share for the

assets and liabilities of Class corp. the book value reflects the fair value of the assets and

liabilities except that the noncurrent assets of classhas a temporary appraisal of 15 7500 and the

noncurrent assets of Cure are overstated by P7500 . Contingent consideration, which is

determinable, is equal to P3750. Cure also paid for the stock issuance costs worth P8500 and the

other acquisitioncosts amounting to P4750.

On march 1, 2013 the contingent consideration has a determinable amount of P5000. On june 1,

2013, the provisional fair value of the noncurrent assets of class increased by P2250.

How much is the combined total assets at the end of 2013?

Problem 5

On September 1, 2013, SLU acquires 75%(750,000 ordinary shares) of UB company for

P7,500,000. When UB,s shares are trading at P8 per share at the stock market .An independent

appraiser estimated that the fair of UB is P9,7000,000. Assuming that the net identifiable assets

with a carrying value of P6,000,000 has a fair value of P8,000,000, determine the following:

a) Non-Controlling Interest and Goodwill/gain if the non-controlling interest is to be valued

at the proportionate allocation of acquires net assets.

b) Non-controlling interest and Goodwil/Gain if the non-controlling interest is to be valued

at the fair value of shares held by NCI.

Problem 6

The statemet of financial Position of Lancer Corporation on June 30, 2013 is presented below:

Curremt Assets

32,500

Land

220,000

Building

110,000

Equipment

87,500

Total Assets

450,000

Liabilities

87,500

Capital stock, P5 par

150,000

Additional paid in capital

137,500

Retained earnings

75,000

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All the assets and liabilities of Lancer assumed to approximate their fair values except for land

and building. It is estimated that the land have a fair value of P350,000 and the fair value of the

building increased by P80,000.

Krista Corporation acquired 80% of Lancer’s capital stock for P500, 000.

Required

1. Assuming the consideration paid includes control premium of P14 2,00, how much is the

goodwill/(gain on acquisition) on the consolidated financial statement?

2. Assuming the consideration paid excludes control premium goodwill/(gain on

acquisition) on the consolidated financial statement?

3. Assuming the consideration paid includes control premium of P37,000, how much is the

goodwill/(gain on acquisition) on the consolidated financial statement?

Problem 7

Baguio Company acquires 15% of San Fernando company’s ordinary shares for P5,000,000 cash

and carries the investment using the cost the cost method. A few months later, Baguio purchases

another 60% of San Fernando’s ordinary shares for P2,160,000. At that date, San Fernando

company reports identifiable assets with a book value of P3,900,000 a fair value of P5,100,00

and it has liabilities with a book value of and fair value of P1,900,000. The fair value of the 25%

non-controlling interest in San Fernando company is P0900,000.

Determine the:

a. Non-Controlling Interest and Goodwill/ Gain arising from the business combination if

NCI is to be valued using the proportionate basis.

b. Non-Controlling Interest and Goodwill/Gain arising from the business combination if

NCI is to be valued at the NCI shares Fair Value.

Problem 8

FMM Corporation purchased 30% interest in STO Corporation for P90,000 on January 1, 2013

when STO had ordinary shares of P240,000 and retained earnings of P40,000. Any difference

between the cost of investment and book value acquired is due to undervalued equipment with

remaining useful life of 3 years. For the years 2013 to 2015 STO Corporation r

eported the following :

Net Income Dividend Declaired

2013 30,000 20,000

2014 50,000 40,000

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FMM Corporation purchased additional 40% of STO Corporation on January 1, 2013 for P140,000 Assuming that the 30% investment acquired in 2013 is now with a fair value of P90,000 (representing 30% of net assets fair value on that date-difference attributable to land.)

Required:

1.) Journal entire to record the above transaction. 2.) The cost of acquisition on January 1, 2013. 3.) The resulting goodwill/gain from acquisition. 4.) The non-controlling interest on January 1, 2013. Problem 9

Entity A issued equity instrument to Entity B on 30 September 20X1. Their price combination balance sheets are: A B _______________ ________________ Current Assets P 500 P 700 Non-current Assets 1,300 3,000 _______________ ________________ P 1,800 P 3,700 Current Liabilities P 300 P 600 Non-Current Liabilities 400 1,100 _______________ _______________ P 700 P 1,700 Owner’s Equity 800 1,400 Retained Earnings Issued Equity 100 ordinary shares 300 60 ordinary shares 600 _______________ _________________ P 1,800 P 3,700 Additional information:

a. On 30 September 20X1, A issues 2 ½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their share in B. A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.

b. The fair value of each ordinary share of B at 30 September 20X1 is P40. The quoted market price of A’s ordinary shares at that date is P12.

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c. The fair value of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exc emption of non-current assets.The fair value of A’s non -current assets at 30 September 20X1 is P1,500.

Required:

1. What is the consideration effectively transferred to effect the combination?_____________ 2. How much is goodwill?________________

3. Prepare theconsolidation financial statement after the combination.

4. What is the number and type of equity interest issued to be disclosed in the equity structure of the consolidated financial statements?________________

5. Assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. a. How much is the minority interests?_______________

b. How much is the cost of business combination?___________________ c. How much is goodwill?________________

MULTIPLE CHOICE QUESTION

1. TBB issued 120,000 shares of it’s P25par ordinary shares for all the net assets of HAF Company on July 1, 2013. TBB’s ordinary shares were selling at P30 per share at the acquisition date. In addition a cash payment of P200,000 was made plus an agreement deferred cash payment of P990,000 payable on July 1, 2013. The market rate ofinterest at the time is 10%.

TBB also agreed to pay additional cash consideration of P250,000 in the event TBB’s net income falls below the current levelwithin the next 2 years. TBB’s financial officers were 99% sure the current level of income at least be sustained during the prescibed period.

The following out-of-pocket costs were paid in cash by TBB.

Legal and accounting fees paid to advisers P 8,000

Broker’s fees 4,000

Indirect acquisition costs 3,000

Costs to issue and register the shares 10,400

Total P 25,400

Determine the cost of the investments for TBB A. 4,700,000

B. 3,800,000 C. 5,040,000 D. 4,950,000

Questions 2 – 3 are based on the following

On October 1, 2013, Water Corporation acquired all the assets and assumed all the liabilities of Gulaman Company by issuing 20,000 shares with a fair value of P 67.5 per share and an obligation to pay a

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In addition, Water paid the following acquisition related costs:

Legal fees P 105,600

Audit fee for SEC registration of stock issue 320,400

Costs of stock certificates 35,000

Broker’s fee 49,000

Other direct cost of acquisition 50,000

General and Allocated expenses 14,000

The Statement of Financial Position as of Se ptember 30, 2013 of Water and Gulaman, together with the fair market value of the assets and liabilities are presented below:

Water Gulaman

Book Value Fair Value Book Value Fair Value

Cash P 640,000 P 640,000 P 45,000 P 45,000 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 P 5,000,000 P 5,750,000 P 2,500,000 P 2,860,000 Accounts Payable 312,500 312,500 200,000 200,000 Notes Payable 937,500 980,000 700,000 765,000

Capital stock,50 par 2,000,000 850,000

Additional paid in cap.1,000,000 400,000

Retained Earnings 750,000 350,000

Total Equities P 5,000,000 P 2,500,000

Compute for the balances that will be shown on October 1,2013 statement of financial position of the surviving company: 2. Reatained earnings a. P480,000 b. P540,000 c. P526,000 d. P475,000 3. Total assets

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a. P7,015,000 b. P6,980,000 c. P7,118,000 d. P7,491,000

Question 4-5 are based on the following

Best Company has gained control over the operations of Cure Corporations by acquiring 85% of its outstanding capital stock for P 2,580,000. This amounts includes a control premium of P30,000. Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000 respectively.

The following was ascertained on the date of acquisition for Cure Corporation:

 The value of receivables and equipment has decreased by P25,000 and P14,000

respectively.

 The fair value of inventories is now P436,000 w hereas the value of land anfair value of

and building has increased by P471,000 and P107,000 respectively.

There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes is P738,000.

Compute for the following balances to be prese nted in the consolidated statement of financial position at the date of business combination:

4. Total assets A. P9,875,000 B. P10,093,000 C. P10,112,000 D. P9,215,000 Best

Book Value Book Value Fair Value

Cash P3,541,500 P128,000 Accounts Receivable 300,000 325,000 Inventories 550,000 360,000 Prepaid Expense 148,500 125,000 Land 2,350,000 879,000 Building 1,560,000 558,000 Equipment 300,000 185,000 Goodwill 300,000 Total Assets P8,750,000 P2,860,000 Accounts Payable 675,000 253,000 Notes Payable 1,400,000 730,000 Capital Stock,50 Par 3,400,000 800,000 Additional Pain in Capital 1,575,000 600,000 Retained Earnings 1,700,000 477,000 Total Equities P8,750,000 P2,860,000

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5. Shareholder’s equity A. P7,000,000 B. P7,500,000 C. P8,200,000 D. P8,000,000

6. AIG Company acquired a 70% interest in EASTWEST Company for P1,960,000 when the fair value of EASTWEST’s identifiable assets and liabilities was P700,000 and elected to measure the non -controlling interests at its share of the identifiable net assets. Annual impairment reviews of goodwill have not resulted in any impairment losses being recognized.

EASTWEST’s current statement of financial position shows share capital of P100,000, a revaluation reverse of P300,000 and ret ained earnings of P1,400,000.

Under IFRS3Business combinations_{, the figure in respect of goodwill should now be carried in} AIG’s consolidated statement of financial position?

A. P1,470,000 B. P 160,000 C. P1,260,000 D. P700,000

7. Patrick Company acquired the assets (except for cash) and assumed the liabilities of Steve

Company on January 2,2013 and Steve Company is dissoved. As compensation, Patrick Company gave 24,000 shares its common stock, 12,000 shares of its 8% preferred stock, and cash of P240,000 to the stockholders of Steve Company. On the date of acquisition, Patrick Company had the following characteristics:

Common,par value P5; fair value,P25 Preferred,par value P100; fair value, P100

Immediately prior to acquisition, Steve Company’s balance sheet was as follows:

An appraisal of Steve Company showed that the fair values of its assets and liabilities were equal to their book values except for the following, which had fair values as indicated:

Accounts Receivable P158,000 Land P540,000

Cash 132,000 Current Liabilities 228,000

Accounts Receivable(net of 170,000 Bonds Payable, 10% 400,000 P4,000 allowance)

Inventory-LIFO Cost 200,000 Common Stock,P5 par value 600,000 Land 384,000 Additional Paid-in Capital 380,000 Buildings and Equipment(net) 1,032,000 Retained Earnings 310,000

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Inventory 412,000 Bonds Payable 448,000 How much must be the goodwill recognized as a result of this business combination? A. P322,000

B. P454,000 C. P 94,000 D. P 0

8. On October 2013 BDO Company acquired 100% of PCI Company when the fair value of PCI’s net assets was P116 million and their carrying amount was P120, 000 million. The consideratrion transferred comprised P200 million in cash transferred at the acquisition date, plus another P60 million in cash be transferred 11 months after the acquisition date if a specified profit target was met by PCI. 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 P10 million. In the event, the profit target was met and the P60 million cash was transferred. What amount should BDO present for goodwill in its statement of consolidated financial position at 31 December 2 014, according to IFRS3Business combinations?

A. P94 Million B. P80 Million C. P84Million D. P144 Million

Question 9 and 10 are based on the following :

Giordano Company purchased the net assets of Hanes Company on January 1, 2013, and made the following entry to record the purchase:

Current assets 100,000 Equipment 150,000 Land 50,000 Buildings 300,000 Goodwill 100,000 Liabilities 80,000

Common stock,P1 par 100,000

Paid-in Capital in excess of par 520,000

9. A contingent consideration agreement was made on Jan. 1, 2013, wherein an additional cash payment would be on Jan. 1, 2015, e qual to twice the amount by which average annual earnings of the Hanes Division exceed P25,000 per year, prior to January 1, 2015. Net income was

P50,000 in 2013 and P60,000, in 2014. How much goodwill will still be recorded on the books on January 1, 2015?

A. P60,000 B. P120,000 C. P85,000

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D. None

10. A contigent consideration agreement was made on January 1, 2013, wherein additional shares would be issued on January 1,2015, to compensate for any fall in the value of Giordano common stock below P6 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on Jan. 1,2015. The market price of the shares on Jan. 1,2015, was P4. How many shares will Giordano still issue on January 1,2015?

A. 50,000 B. 100,000 C. 20,000 D. 51,667