Chapter 14
Problem I 1.(in millions) Acquisition of assets and liabilities: Cash Receivables Inventories Plant & equipment Trademarks Brand names Secret formulas Goodwill Current liabilities Long-term liabilities Cash Common stock, P2 par APIC (P4,000 – P100) Consideration transferred: Cash
90 190 7,000 40,000 4,000 5,000 7,000 6,120 400 47,000 18,000 100 3,900 18,000,00 0 4,000,000 22,000,00 0
Common stock Consideration transferred Less: MV of Assets and Liabilities Acquired: Cash Receivables Inventories Plant & equipment, net Trademarks Brand names Secret formulas Current liabilities Long-term liabilities Positive excess: Goodwill Acquisition expenses Acquisition/merger expenses
90,000 190,000 7,000,000 40,000,000 4,000,000 5,000,000 7,000,000 ( 400,00 0) (47,000,00 0)
15,880,00 0 6,120,000 1,100
Cash Costs to Issue and Register Stocks APIC
1,100 500
Cash
500
2.(in millions) Cash Receivables Inventories Plant & equipment Trademarks Brand names Secret formulas Noncompetition agreements
90 190 7,000 40,000 4,000 5,000 7,000 10,000 Current liabilities Long-term liabilities Cash Common stock, P2 par APIC (P4,000 – P100) Gain on acquisition
Consideration transferred: Cash
400 47,000 18,000 100 3,900 3,880 18,000,00 0 4,000,000 22,000,00 0
Common stock Consideration transferred Less: MV of Assets and Liabilities Acquired: Cash Receivables Inventories Plant & equipment, net Trademarks Brand names Secret formulas Noncompetition agreement Current liabilities Long-term liabilities Negative excess: Gain on Acquisition Acquisition expenses Acquisition/merger expenses
90,000 190,000 7,000,000 40,000,000 4,000,000 5,000,000 7,000,000 10,000,000 ( 400,00 0) (47,000,00 0)
25,880,00 0 ( 3,880,00 0) 1,100
Cash Costs to Issue and Register Stocks APIC/Share Issue Costs
1,100 500
Cash
500
3. Post-Combination Balance Sheet: (requirement 1) Assets Liabilities and Stockholders’ Equity Cash Receivables Inventories Plant and equipment Trademarks Brand names Paid-in capital – par Secret formulas 23,900,000 Goodwill Total
P 5,490,000 Current liabilities P 900,000 2,190,000 Long-term liabilities 117,000,000 27,000,000 139,500,000 9,000,000 Common stock 2,100,000 5,000,000 58,400,000 7,000,000
Retained earnings*
__6,120,,000 Treasury stock ( 1,000,000) P201,300,000 Total P 201,300,000
*25,000,000 – 1,100,000, merger expenses = 23,900,000. Post-Combination Balance Sheet: (requirement 2) Assets Liabilities and Stockholders’ Equity Cash Receivables Inventories Plant and equipment Trademarks Brand names Paid-in capital – par Secret formulas 27,780,000
P 5,490,000 Current liabilities P 900,000 2,190,000 Long-term liabilities 117,000,000 27,000,000 139,500,000 9,000,000 Common stock 2,100,000 5,000,000 58,400,000 7,000,000
Retained earnings*
Noncompetition agreement _10,000,,000 Treasury stock __( 1,000,000) Total
P205,180,000 Total P 205,180,000
*25,000,000 – 1,100,000 + 3,880,000 = 27,780,000 Problem II 1. (in millions) Cash and receivables Inventories Property, plant & equipment Customer contracts In-process R&D Goodwill
200 400 5,500 25 300 2,035 Current liabilities Long-term debt Warranty liability Estimated liability for Contigent Cons. Capital stock
400 7,300 10 50 700
Note: Read the topic “Items included in Goodwill” in Chapter 14 about “Skilled (assembled) workforce” (they are not identifiable at the date of acquisition) and “Potential Contracts” (they are not qualified as assets at the acquisition date). Consideration transferred: Shares Estimated liability for Contigent Cons. Consideration transferred Less: MV of Assets and Liabilities Acquired: Cash and receivables Inventories Property, plant & equipment Customer contracts In-process R&D Current liabilities Long-term debt Warranty liability Positive excess: Goodwill Acquisition expenses Acquisition/merger expenses
700,000,000 _50,000,000 750,000,000 200,000,000 400,000,000 5,500,000,00 0 25,000,000 300,000,000 ( 400,000,00 0) (7,300,000,00 0) ( 10,000,00 0)
(1,285,000,00 0) 2,035,000,00 0 150
Cash
150
Costs to Issue and Register Stocks Share Issue Costs
100 Cash
100
2. (in millions) Goodwill
1,500 Property, plant & equipment
Problem III 1. Current assets Investments Land Buildings Equipment Identifiable intangibles Goodwill
1,500
1,500,000 500,000 6,000,000 16,000,000 2,000,000 5,000,000 22,500,000 Current liabilities Long-term liabilities Common stock Additional paid-in capital Cash
Consideration transferred: Shares (400,000 x P100) Less: MV of Assets and Liabilities Acquired: Current assets Investments Land Buildings Equipment Identifiable intangibles Current liabilities Long-term liabilities Positive excess: Goodwill
1,500,000 12,000,000 4,000,000 36,000,000 1,100,000
40,000,000 1,500,000 500,000 6,000,000 16,000,000 2,000,000 5,000,000 ( 1,500,000) (12, 000,000)
Costs to Issue and Register Stocks Share Issue Costs/APIC Cash
(17,500,000) 22,500,000
1,100 1,100
2. Current assets Investments Land Buildings Equipment Identifiable intangibles
1,500,000 500,000 6,000,000 16,000,000 2,000,000 5,000,000 Current liabilities Long-term liabilities Common stock Additional paid-in capital Gain on acquisition
1,500,000 12,000,000 1,000,000 9,000,000 7,500,000
Consideration transferred: Shares (100,000 x P100) Less: MV of Assets and Liabilities Acquired: Current assets Investments Land Buildings Equipment Identifiable intangibles Current liabilities Long-term liabilities Negative excess: Gain on acquisition
10,000,000 1,500,000 500,000 6,000,000 16,000,000 2,000,000 5,000,000 ( 1,500,000) (12, 000,000)
Costs to Issue and Register Stocks Share Issue Costs/APIC Cash
(17,500,000) ( 7,500,000) 800 800
3. Current assets Investments Land Buildings
1,500,000 500,000 6,000,000 16,000,00 0 2,000,000 5,000,000 500,000
Equipment Identifiable intangibles Goodwill Current liabilities Long-term liabilities
1,500,000 12,000,00 0 8,000,000
Estimated liability for Contigent Cons. Common stock Additional paid-in capital Consideration transferred: Shares (100,000 x P100) Estimated liability for Contigent Cons. Consideration transferred Less: MV of Assets and Liabilities Acquired: Current assets Investments Land Buildings Equipment Identifiable intangibles Current liabilities Long-term liabilities Positive excess: Goodwill Costs to Issue and Register Stocks Share Issue Costs/APIC Cash
1,000,000 9,000,000
10,000,000 _8,000,000 18,000,000 1,500,000 500,000 6,000,000 16,000,000 2,000,000 5,000,000 ( 1,500,000) (12, 000,000)
(17,500,000) 500,000 800 800
4. (a) Estimated liability for Contigent Cons.
3,000,000 Goodwill Gain on acquisition
500,000 2,500,000
(b) Estimated liability for Contigent Cons.
3,000,000 Gain on reduction in liability
Problem IV 1. January 1, 20x4 Accounts Receivable (net) Inventory Land Buildings Equipment Goodwill Accounts Payable Note Payable
3,000,000
65,000 99,000 162,000 450,000 288,000 54,000
Cash Estimated Liability for Contingent Consideration
83,000 180,00 0 720,00 0 135,00 0
Consideration transferred (P720,000 + P135,000) P855,000 Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000 Goodwill P 54,000 2. January 2, 20x6 Estimated Liability for Contingent Consideration Cash
135,000
3. January 2, 20x6 Estimated Liability for Contingent Consideration Gain on Contingent Consideration
135,000
135,000
135,000
Problem V Current Assets Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) Goodwill * Liabilities Long-term Debt Common Stock (144,000 P5) PIC - par (144,000 x P15 - P5))
362,000 2,013,000 395,000 119,000 491,000 720,000 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 (144,000P15) = P2,160,000 Problem VI Case A Consideration transferred Less: Fair Value of Net Assets Goodwill
P130,000 120,000 P 10,000
Case B Consideration transferred Less: Fair Value of Net Assets Goodwill
P110,000 90,000 P 20,000
Case C Consideration transferred Less: Fair Value of Net Assets Gain
Goodwill Case A Case B Case C
P10,000 20,000 0
P15,000 20,000 (P 5,000)
Assets Current Assets
Liabilities Long-Lived Assets
P20,000 30,000 20,000
Problem VII Present value of maturity value, 20 periods @ 6%:
P130,000 80,000 40,000
P187,080 Present value of interest annuity, 20 periods @ 6%: 344,098 Total Present value Par value Discount on bonds payable Cash Accounts Receivable Inventory Land Buildings Equipment Bond Discount (P40,000 + P68,822) Current Liabilities Bonds Payable (P300,000 + P600,000) Gain on Acquisition of Stalton (ordinary)
P30,000 20,000 40,000
Retained Earnings (Gain) 0 0 5,000
0.3118 x P600,000 = 11.46992 x 30,000 = P531,178 600,000 P 68,822 114,000 135,000 310,000 315,000 54,900 39,450 108,822
95,300 900,000 81,872
Computation of Excess of Net Assets Received Over Cost Consideration transferred (P531,178 plus liabilities assumed of P95,300 andP260,000) P886,478 Less: Total fair value of assets received _968,350 Excess of fair value of net assets over cost (P 81,872)
Problem VIII Acquisition Method—Entry to record acquisition of Sampras Consideration transferred Estimated Liability for contingent Consideration Consideration transferred (fair value) Fair value of net identifiable assets Goodwill
P300,000 15,000 315,000 282,000 P33,000
Receivables Inventory Buildings 115,000 Equipment Customer list IPRD Goodwill Current liabilities Long-term liabilities Estimated liability for contingent consideration Cash
80,000 70,000
Acquisition related-expenses Cash
10,000
10,000 50,000 15,000 300,000 10,000
Problem IX 1. a. The computation of goodwill is as follows: Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 30% probability Total Less: Fair value of identifiable assets acquired and liabilities assumed: Cash Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Accounts payable Other liabilities Positive Excess – Goodwill
25,000 22,000 30,000 33,000
P 750,000 180,000 36,00 0 P 966,000
P
24,000 48,000 72,000 240,000 360,000 300,000 60,000 ( 72,000) ( 168,000)
864,000 P 102,000
b. The journal entries by Peter Corporation to record the acquisition is as follows: Cash
24,000
Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Goodwill Accounts payable Other liabilities Notes payable Estimated Liability for Contingent Consideration Common stock (P10 par x 30,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares] Acquisition of Saul Company.
48,000 72,000 240,000 360,000 300,000 60,000 102,000 62,000 168,000 180,000 36,000 300,000 450,000
Acquisition-related expenses Cash Acquisition related costs – direct costs.
78,000
Paid-in capital in excess of par Cash Acquisition related costs – costs to issue and register stocks.
32,400
Acquisition-related expenses Cash Acquisition related costs – indirect costs.
27,600
78,000
32,400
27,600
c. The balance sheet of Pure Corporation immediately after the acquisition is as follows: Pure Corporation Balance Sheet December 31, 20x4 Assets Cash Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Goodwill
P
Total Assets
162,000 144,000 360,000 348,000 840,000 732,000 60,000 102,00 0 P2,748,000
Liabilities and Stockholders’ Equity Liabilities Accounts payable
P 288,000
Other liabilities Notes payable Estimated liability for contingent consideration Total Liabilities Stockholders’ Equity Common stock, P10 par
2
408,000 180,000 36,000 P 912,000 P 1,020,000 657,600 158,400 P1,836,000 P2,748,000
Paid-in capital in excess of par1 Retained earnings2 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 1 P240,000 + P446,400 – P32,400 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 Goodwill
24,000 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 24,000 consideration 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: Estimated liability for contingent consideration Gain on estimated contingent consideration Adjustment after measurement date. In this case, the measurement period ends at the earlier of: one year from the acquisition date, or
12,000 12,000
c.3.
the date when the acquirer receives needed information about facts and circumstances (or learns that the information is unobtainable) to consummate the acquisition.
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 Estimated liability for contingent consideration
30,000 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 Loss on estimated contingent consideration Cash
78,000 42,000 120,000
Settlement of contingent consideration.
4. a.The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 35% probability x (1/[1 + .04]*) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Goodwill
P 750,000 180,000 40,385 P 970,385 864,000 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 In-process research and development 60,000 Goodwill 106,386 Accounts payable 62,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 40,385 Consideration 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 c. c.1. Goodwill remains at P106,385.
c.2. Theentry for Pure Corporation on December 31, 20x5 to record such occurrence would be: Estimated liability for contingent consideration 40,385 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 Loss on estimated contingent consideration Cash [(P78,000 + P84,000)/2 – P30,000] x 2
36,000 66,000 102,000
Settlement of contingent consideration.
5. a. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 30% probability Contingent consideration (stock contingency) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Positive Excess – Goodwill
P 750,000 180,000 36,000 18,000
P 984,000 864,000 P 120,000
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 In-process research and development 60,000 Goodwill 120,000 Accounts payable 72,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 36,000 Consideration Paid-in capital for Contingent Consideration 18,0 00 Common stock (P10 par x 30,000 shares) 300,000 Additional paid-in capital [(P25 – P10) x 30,000 450,000 shares]
Acquisition of Saul Company. c. PureCorporation will make the following entry for the issuance of 1,200 additional shares: Paid-in capital for Contingent Consideration 18,000 Common stock (P10 par x 1,200 shares) 12,000 Paid-in capital in excess of par 6,000 Settlement of contingent consideration.
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: Paid-in capital in excess of par Common stock (P10 par x 6,000 shares)
60,000 60,000
Settlement of contingent consideration.
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: Paid-in capital in excess of par 75,000 Common stock (P10 par x 7,500 shares) 75,000 Settlement of contingent consideration.
* 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; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (stock contingency): [(P750,000 – P510,000) x 40% probability x (1/[1 + .04]*) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Positive Excess – Goodwill * present value of P1 @ 4% for one period.
P 750,000 180,000 92,308 P1,022,308
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 In-process research and development 60,000 Goodwill 158,308 Accounts payable Other liabilities Notes payable Paid-in capital for Contingent Consideration Common stock (P10 par x 25,000 shares) Paid-in capital in excess of par[(P25 – P10) x 30,000 shares]
864,000 P 158,308
62,000 168,000 180,000 92,308 300,000 450,000
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 Common stock, P10 par Paid-in capital in excess of par
92,308 75,000 17,308
Settlement of contingent consideration.
* 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 X 1. Consideration transferred: Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain Homer Ltd Accounts Receivable Inventory Freehold Land Buildings Plant and Equipment Payable to Tan Ltd Common stock, P1 par x 40,000 shares Additional paid-in capital Gain on acquisition (Acquisition of net assets of Tan Ltd and shares issued) Payable to Tan Ltd Cash (Being payment of cash consideration) Paid-in capital in excess of par Cash (Being costs of issuing shares)
128,000 45,100 44,000 52,500 2,400 144,000 (12,000)
132,000 260,000
P34,700 39,000 130,000 40,000 46,000 289,700 29,700 34,700 39,000 130,000 40,000 46,000 132,000 40,000 88,000 29,700
132,000 132,000 1,200 1,200
2. Tan LTD General Ledger Liquidation P 34,700 Additional paid in capital 27,600 Retained earnings 100,000 Receivable from Homer Ltd 30,000 46,000 2,000 4,000 2,400 2,500 1,600 68,000 318,800
Accounts Receivable Inventory Freehold Land Buildings Plant and Equipment Goodwill Interest Payable Liquidation Expenses Premium on Debentures Accounts Payable Shareholders’ Distribution
Opening Balance Receivable from Homer Ltd
Shares in Homer Ltd
P 26,800 32,000 260,000
318,800
Liquidator’s Cash P 12,000 Liquidation Expenses 132,000 Mortgage and Interest Debentures and Premium Accounts Payable 144,000
P 2,400 44,000 52,500 45,100 144,000
Shareholders’ Distribution P 128,000 Common stock Liquidation 128,000
Problem XI Cash Accounts Receivable Inventory Land Plant Assets Discount on Bonds Payable Goodwill* Allowance for Uncollectible Accounts Accounts Payable Bonds Payable Deferred Income Tax Liability Cash Consideration transferred Less: Fair value of net assets acquired (P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) Goodwill
P 60,000 68,0000 128,000 20,000 112,000 134,000 55,000 463,000 20,000 127,200
10,000 54,000 200,000 67,200 600,000
P600,000 472,800 P127,200
* Increase in net assets Increase inventory, land, and plantassets to fair value P52,000 + P25,000 + P71,000) Decrease bonds payable to fair value(20,000) Increase in net assets Establish deferred income tax liability(P168,000 x 40%)P67,200
P148,000 P168,000
Multiple Choice Problems 1. c 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. P2,240,000, No answer available Consideration transferred : FMV of shares issued by Robin (80,000 sh ×P28) = P2,240,000 3. P520,000, no answer available Considerationtrasnferred 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 4. c
Acquisition related-expenses Accounts Receivable Inventory Land Building Equipment Patent CurrentLiabilities Long-termDebt Cash Gain on Acquisition
20,000 180,000 400,000 50,000 60,000 70,000 20,000 70,000 160,000 520,000 50,000
Considerationtrasnsferred : 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 BargainPurchase Gain (P50,000) 5.d
Accounts Receivable (net of P33,000 allowance) Inventory Land Buildings and Equipment Goodwill Current Liabilities Bonds Payable Premium on Bonds Payable (P495,000 - P450,000) Preferred Stock (15,000 x P100) Common Stock (30,000 x P10) PIC - par (P25 - P10) x 30,000 Cash
198,000 330,000 550,000 1,144,00 0 848,000
275,000 450,000 45,000 1,500,000 300,000 450,000 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 6.d Current Assets Plant and Equipment Goodwill Liabilities Cash
960,000 1,440,000 336,000 216,000 2,160,00 0 360,000
Estimated Liability for Contingent Consideration 7.c Cash Receivables Investments Maintenance supplies Flight equipment International routes Leases Goodwill
1,400 650 1,000 400 12,000 500 800 450 Current liabilities Long-term debt Cash
8. c The amount of the contingency is P500,000 (10,000 shares at P50 per share)
3,200 6,000 8,000
Goodwill Paid-in-Capital for Contingent Consideration Issuable
500,000
Paid-in-Capital for Contingent Consideration – Issuable Common Stock (P10 par) Paid-In-Capital in Excess of Par
500,000
500,000
9. c
Platz Company does not adjust the original amount recorded as equity .
100,000 400,000
10.c Accounts Receivable (net) Inventory Land Buildings Goodwill Accounts Payable Note Payable Cash Estimated Liability for Contingent Consideration
220,000 320,000 1,508,000 1,392,000 230,000
270,000 600,000 2,600,000 200,000
Consideration transferred (2,600,000 + 200,000)………………..P2,800,000 Fair value of net assets acquired(P3,440,000 – P870,000)……. 2,570,000 Goodwill………………………………………………………………...P230,000 Or, alternatively: Accounts Receivable Inventory Land Buildings Goodwill Allowance for Uncollectible Accounts Accounts Payable Note Payable Cash Consideration transferred Fair value of net assets acquired (P3,440,000 – P870,000) Goodwill
240,000 320,000 1,508,000 1,392,000 30,000 20,000 270,000 600,000 2,600,000
P2,600,000 2,570,000 P 30,000
Goodwill
200,000 Estimated Liability for Contingent Consideration
200,000 1/1/20x6: Estimated Liability for Contingent Consideration Gain on Contingent Consideration 11. c
200,000 200,000
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)
Goodwill
723,000 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
Accounts Payable
34,000
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 Cash
Liabilities and Owners’ Equity P
64,000 Accounts payable
P 144,000
Receivables
213,000 Notes payable
___415,000
Trademarks
625,000 Total liabilities
P 559,000
Record music catalog
1,020,000
Capitalized R&D
200,000 Common stock
460,000
Equipment
425,000 Paid-in capital - par
695,000
27,000 Retained earnings
860,000
Goodwill Total
P2,574,000 Total P2,574,000
12. P559,000, no answer available – refer to No. 11 13. d – refer to No. 11 14.c – refer to No. 11 15.c – refer to No. 11 16. d
Correction: …completion goals by December 31, 20x5 not 20x4. Entry to record the acquisition on Pacifica’s records: Cash Receivables and inventory PPE Trademarks IPRD Goodwill Liabilities Common Stock (50,000 xP5) Paid-In Capital in excess of par (50,000 xP15) Contingent performance obligation
85,000 180,000 600,000 200,000 100,000 77,500
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
180,000 250,000 750,000 62,500
+ P100,000 - P180,000) Goodwill Acquisition related-expenses Cash PIC - par Cash
P
985,000 77,500 15,000
15,000
9,000 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 17. c – refer to No. 16 (P400,000 + P750,000 – P9,000 = P1,141,000) 18. d – refer to No. 16 19. b – refer to No. 16 20. b – refer to No. 16 21. d – refer to No. 16 [P77,500 + (P75,000 – P62,500)] = P90,000 22.b – refer to No. 16. It should be noted that goodwill can only be revised once, so, the goodwill remains at P90,000, but the liability will be adjusted to P80,000, the entry would be Loss on contingent consideration…………………………………. 5,000 Contingent performance obligation………………………. 5,000 23. a 10,000,000 x P5 x 0.20 15,000,000 x P5 x 0.10 17,500,000/(1.12)4
P 10,000,000 ___7,500,000 P 17,500,000 P 11,121,566
24. a – at fair value 25. a 26.a – (P100,000 x ½ = P50,000 x 1/1.05) or P50,000 x 0.909091 = P45,454 27. c Fair value of Subsidiary 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 be recognized in profit or loss, even if it arises within the measurement period. See PFRS3 pars. 39, 40 and 58.
28. b 29. b 30. d 31. b
P77,500,000 = P100,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000 + P4,000,000 - P30,000,000). P(12,500,000) = P10,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000 + P4,000,000 - P30,000,000).
32. c
33. a
The correcting entry, within the measurement period, is: Goodwill Patents
2,000,000
The correcting entry, within the measurement period, is: Gain on acquisition Liabilities
2,000,000
2,000,000
2,000,000
34. c Goodwill
400,000 Estimated lawsuit liability
400,000
35.b Loss on lawsuit
400,000 Estimated lawsuit liability
400,000
36.b Assets
570,000,000 Liabilities
100,000,0 00 400,000,0 00 50,000,00 0 20,000,00 0
Capital stock Cash PIC-stock contingency
37. b - P350,000,000 – (P12 x 25,000,000) = P50,000,000/P12 = 4,166,667 additional shares 38. c The contingency was originally recorded in equity at the amount of P20,000,000. However, changes in the value of stock price contingencies do not affect the acquisition price or income. Any changes in value are adjustments in equity. PIC- stock contingency PIC-other
20,000,000 30,000,000 Common stock
39. b 40. c 41. c
50,000,000
42. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000) = P104,000 43. d APIC: P20,000 + [(P42 – P5) x12,000 = P464,000 Retained earnings: P160,000, parent only 44. b Inventory: PP230,000 + P210,000 = P440,000 Land: P280,000 + P240,000 = P520,000 45. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000 46. 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.
47. a – at fair value 48. 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 years3,000 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
49. c - [(24,000 shares x P30) – P686,400] = P33,600 50. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain 51. 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. 2. Any balance should be recognized immediately in profit or loss. 52. b – no valuation to be recorded in the books of the acquirer
Cost P180,000 Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs 18,000 Net book value P162,000 53. 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
Or: since, there is no excess, the P312,000 represents the amount of consideration transferred, therefore the APIC should be P162,000 [P312,000 / 15,000 shares = P20,80 – P15 = P10.80 x 15,000 shares)
54. 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. 55. c Consideration transferred: Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain
128,000 45,100 44,000 52,500 2,400 144,000 (12,000)
132,000 260,000
P34,700 39,000 130,000 40,000 46,000289,700 29,700
56. d PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their acquisition-date fair values. 57.c
58 .
Selling price Less: Book value of Comb (P50,000 + P80,000 + P40,000 - P30,000) Loss on sale of business by the acquiree (Comb) d
P215,000
= P130,000 + P85,000
P 110,000 140,000 P( 30,000)
59 .
b
P23,000
60.
c
P1,109,000
61 .
c
P701,500
= P198,000 – (P405,000 - P265,000 + P15,000 + P20,000) = Total Assets of TT Corp. P 844,000 Less: Investment in SS Corp. (198,000) 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 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000 +P200,000)
62 .
d
P257,500
= The amount reported by TT Corporation
63 .
a
P407,500
= The amount reported by TT Corporation
64. c
Par value of shares outstanding before issuance Par value of shares outstanding after issuance Par value of additional shares issued Divided by: No. of shares issued* Par value of common stock
P200,000 250,000 P 50,000 __12,500 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 exchangeP250,000 Divided by: Fair value per share of stockP 20 Shares issued 12,500 65. a Consideration transferred: Shares – 12,500 shares P250,000 Less: Goodwill 56,000 Fair value of identifiable net assets acquiredP194,000 66. 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 67. d 68. c Common stock – combined…………………………………………………………P 160,000 Common – Acquirer Zyxel………………………………….. …………………….… 100,000 Common stock issued………………………………………………………………...P 60,000 Divided by: Par value of common stock………………………………………….P 2
Number of Zyxel shares to acquire Globe Tattoo………………………….....… 69. d
30,000
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 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
2 8
70.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 71. a
72. c
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 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.
73. a
II ____ Average annual earnings P 46,080 Divided by: Capitalized at Total stock to be issued Less: Net Assets (for P/S) Goodwill (for Common Stock) Preferred stock (same with Net Assets): 864,000/P100 par
_____JJ _ ____Total____ P 69,120 P 115,200 _10% P1,152,000 864,000 P 288,000 8,640 shares
Theories 1.
True
2.
False
3.
True
21 . 22 . 23 .
False True False
41 . 42 . 43 .
True False a
61 . 62 . 63 .
c
81.
b
b
82.
a
c
83.
d
101 . 102 . 103 .
c
121
a
d
122 . 123 .
b
d
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. 28. 31. 34. 37. 39. 40. 42.
The acquiree corporation becomes an acquirer stockholder, not the acquiree stockholders. A combination that results in one of the original entities in existence after the combination is a statutory merger. 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. 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. 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. 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. 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. A net operating loss carryforward cannot be acquired. They are only available to the acquirer if the combination qualifies as a nontaxable exchange.
