Business Combination and Consolidation on Acquisition Date (Summary) Part 1: Business Combination 1. Journal entries related to acquisition. 2. Computation of Goodwill or Gain on acquisition. 3. Computation of Total Assets, Total Liabilities and Total SHE after combination. a. To record the business combination on Acquirer’s books: Acquiree’s assets at FV Goodwill (if applicable) Acquiree’s Liabilities at FV Contingent Consideration (if applicable) Cash paid by acquirer (if applicable) Common stock (if applicable) APIC (if applicable)
xx xx xx xx xx xx xx
b. To record acquisition-related costs: Expense (Direct or indirect costs) APIC (stock-issue costs) Cash
xx xx xx
c. To compute for Goodwill/Gain: Price paid (if in cash, record at face value; if shares, use Fair value) Contingent consideration/ Contingent fee (Fair value) Total consideration xx Less:: Fair value of net asset of acquiree Goodwill (Gain) d. Computation of total assets, total liabilities, and total SHE after combination: BV of Assets of Acquirer FV of Assets of Acquiree Goodwill Acquisition related costs Cash paid Total assets
xx xx xx (xx) (xx) xx
BV of liabilities, Acquirer FV of liabilities of Acquiree Contingent consideration Total liabilities
xx xx xx xx
Total Assets Total Liabilities Total SHE
xx (xx) xx
Or SHE of Acquirer before combination Shares issued (Fair Value) Acquisition-related costs Gain on acquisition Total SHE
xx xx (xx) xx xx
xx xx (xx) xx
Part 2: Consolidation on Acquisition Date 1. Journal entries related to stock acquisition. 2. Computation of Excess, Goodwill/Gain, Total Assets, Total Liabilities and Total SHE. 3. Allocation of Goodwill 4. Determination and Allocation of excess schedule 5. Working paper entries a. To record the acquisition of stock: Investment in Subsidiary Cash Common Stock APIC
xx xx xx xx
b. To record acquisition-related costs: Acquisition Expense (R.E) APIC Cash
xx xx xx
c. To compute for Goodwill: Price paid NCI Previously-held interest Total Fair value of Net assets Goodwill/Gain
xx xx xx xx (xx) xx
d. Allocation of Goodwill to Parent and NCI and floor test: Fair Value FV of Net assets
Parent Xx (xx)
Non-controlling interest (1)Xx (2)(xx)
Goodwill
Xx
Xx
Floor test: Fair value of NCI (1) should be greater than or equal to NCI share in FV of Net Assets (2). If FV of NCI (1) is less than NCI in FV of Net Assets (2), use NCI in FV as the Fair Value of NCI. e. Determination and Allocation of Excess Schedule: Total Parent NCI Fair Value of Subsidiary Xx Xx Xx (1)Less: BV of acquire Xx Xx Xx (2)Excess Xx Xx Xx Adjustment of accounts Assets (FV>BV) (xx) Assets(FVBV) Xx Liabilities (FV
(2) To allocate the excess: Goodwill Assets (FV>BV) Liabilities (FVBV)
xx xx xx xx xx xx xx
g. Computation of Total Assets, Liabilities, SHE, and NCI on Consolidated FS. BV of assets of acquirer FV of assets of acquiree Goodwill Cash paid Acquisition-related costs Total Assets
xx xx xx (xx) (xx) xx
BV of Liabilities of acquirer FV of Liabilities of acquiree Total Liabilities
xx xx xx
Total Assets: Total Liabilities Total SHE
xx (xx) xx
Or SHE of Acquirer before consolidation Stock issued at FV NCI at FV Acquisition-related costs Total SHE
xx xx xx (xx) xx
Problems Part 1: Net Asset Acquisition 1. On January 1, 2011, Polo Company pays P270, 000 cash and also issue 18, 000 shares of P10 par common stock with a market value of P330, 000 for the net asset of Sure Company. In addition, Polo pays P30, 000 for registering and issuing the 18, 000 shares and P70, 000 for professional fees to effect the combination. Summary balances immediately before the combination is as follows:
Cash Inventories Other current assets Plant assets – net Total assets
Polo Book Value P350, 000 120, 000 30, 000 260, 000 P760, 000
Sure Book Value P40, 000 80, 000 20, 000 180, 000 P320, 000
Sure Fair Value P40, 000 100, 000 20, 000 180, 000 P340, 000
Current Liabilities P160, 000 P30, 000 P30, 000 Other liabilities P80, 000 50, 000 40, 000 Common stock, 10 par 420, 000 200, 000 Retained earnings 100, 000 40, 000 Total liabilities and equity P760, 000 P320, 000 • Prepare journal entries, compute for goodwill/gain, total assets, total liabilities and total SHE after the acquisition.
2. Condensed Statement of Financial Position for Pablo and Siso Corporations at December 31, 2010, are as follows (in thousands): Pablo Siso Current Assets P130 P60 Non-current Assets 570 440 Total Assets
P700
P500
Current Liabilities Capital Stock, P10 par Additional paid-in capital Retained earnings
P50 500 50 100
P60 200 140 100
Total Liabilities and shareholders’ equity P700
P500
On January 2, 2011, Pablo issues 30, 000 shares of its stock with a market value of P20 per share for the assets and liabilities of Siso Corporation. Siso is dissolved. The book values reflect their fair values, except a non-current asset of Pablo, which have a fair value of P400, 000, and the current assets of Siso which have a net realizable value of P100, 000. Pablo pays the following expenses in connection with the business combination: Cost of registering and issuing securities issued Other acquisition costs of combination
P15,
000 25,
000 Contract for contingent consideration to be paid to Siso, P75, 000. This is determined on the date of acquisition. •
Prepare journal entries, compute for the goodwill/gain, total assets, total liabilities, and total SHE after acquisition.
Part 2: Stock Acquisition 1. The June 1, 2011 statement of financial position of Straw Company at book value and fair market values are as follows: Current assets Land Building and equipment (net) Patents
Book Value P240, 000 20, 000 400, 000 10, 000
Fair Value P280, 000 100, 000 270, 000 30, 000
Total Assets
670, 000
P680, 000
Liabilities Common stock Retained earnings
P250, 000 100, 000 320, 000
P250, 000
Total liabilities and shareholder’s equity P670, 000
P680, 000
430, 000
On June 1, 2011 Pepsi Inc. purchased all of Straw Company’s stock for P600, 000. Required: Prepare journal entries, schedule of D & A of excess, and working paper entries.
2. The January 1, 2011 statement of financial position of Sotto Company at book and market values are as follows: Current assets Property, Plant and Equipment (net)
Book Value Fair Value P800, 000 P750, 000 900, 000 1, 000,000
Total Assets
P1,700,00
P1,750, 000
Current liabilities Long-term liabilities Common stock, Par P1 Additional paid-in capital Retained earnings
P300, 000 500, 000 100, 000 200, 000 600, 000
P300, 000 460, 000
Total liabilities and shareholders’ equity P1,700, 000 Pedro Company paid P950, 000 in cash for 80% of Sotto Company’s common stock. Pedro Company also pays P80, 000 of professional fees to effect the combination. The fair value of the NCI is assessed to be P230, 000. Required: Journal entries, D & A of excess schedule, working paper entries. 3. Statement of financial position for Puro Corporation and Sato Company on December 31, 2010 are given below.
`
Cash and cash equivalents Inventory Property, plant and equipment (net)
Puro Corporation P330, 000 100, 000 500, 000
Sato Company P90, 000 60, 000 250, 000
Total Assets
P930, 000
P400, 000
Current Liabilities Long-term liabilities Common stock Retained earnings Total Liabilities and shareholders’ equity
P180, 000 200, 000 300, 000 250, 000 P930, 000
P60, 000 90, 000 100, 000 150, 000 P400, 000
Puro Corporation purchased 80% ownership of Sato Company on December 31, 2011, for P260, 000. On that date, Sato Company’s property and equipment had a fair value of P50, 000 more than the book value shown. All other book values approximated fair value. Required: Working paper entries, D & A excess schedule, goodwill or gain, total assets, liabilities and SHE.
Challenge Problem: Primo Corporation acquired majority of the stock of Sonia Company on January 2, 2011, and a consolidated statement of financial position was prepared. Partial statement of financial position for Primo, Sonia, and the consolidated entity follow: Primo Corporation and Sonia Company Partial Statement of Financial Position January 2, 2009 Accounts
Primo Corporation
Sonia Company
Consolidated Entity
Cash and Cash Equivalents Accounts Receivable Inventory Equipment Investment in Sonia Company Goodwill
P100, 000 80, 000 200, 000 500, 000
P40, 000 20, 000 100, 000 200, 000
P140, 000 100, 000 340, 000 800, 000
? ________
_________
10, 000 10, 000
Total
P ?______
P360, 000
P1,390, 000
Accounts payable Bonds payable Common stock Retained earnings Non-controlling interest
P70, 000 300, 000 ? 567 ,000 ________
P40, 000 150, 000 170, 000 ________
P110, 000 300, 000 250 ,000 ? 163, 000
Total
P ?_____
P360, 000
P1,390, 000
Required: 1. Consolidated retained earnings 2. FV of inventory of Sonia on Janauary 2, 2011 3. FV of Sonia’s Net Assets 4. Amount Primo paid to acquire the stock in 2011 5. Allocation of Goodwill to Controlling and NCI
