CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA

PRACTICAL ACCOUNTING PROBLEMS II BUSINESS COMBINATION

GUERRERO/GERMAN/DE JESUS/LIM

ACQUISITION OF NET ASSETS

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

JK Company OP Company
Book Value Fair Value Book Value Fair Value
Cash P 2, 300,000 P2,300,000 P 150,000 P 150,000
Accounts Receivable 500,000 500,000 490,000 490,000
Inventory 750,000 650,000 355,000 300,000
Building & Equipment, net 900,000 730,000 760,000 532,000
Goodwill . . 45,000 40,000
TOTAL ASSETS P 4,450,000 P4,180,000 P 1,800,000 P1,512,000

Liabilities P 500,000 P 500,000 P 285,000 P 285,000

Capital Stock 800,000 300,000
Additional paid in capital 450,000 480,000
Retained Earnings 2,700,000 735,000
TOTAL LIAB & SHE P 4,450,000 P 1,800,000

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

1. Total Assets after the business combination

A. P5,995,600 B. P6,690,600 C. P6,265,600 D. P6,265,600

2. Stockholder’s equity after the business combination

A. P3,950,000 B. P5,505,000 C. P5,468,800 D. P5,474,700

II
AB Inc., CD inc. and EF Inc. are to combine. The stockholders’ equity on their
respective Statement of Financial Position immediately prior to combination show:
AB Inc. CD Inc. EF Inc.
Ordinary Shares P 700,000 P 450,000 P 300,000
Additional paid in capital 370,000 200,000 -
Retained Earnings 240,000 160,000 105,000

As per appraisal, book values of CD’s assets and liabilities approximate their fair values
except for the land and Non-current liabilities, which is undervalued by P88,000 and
P36,000, respectively. All other EF’s assets and liabilities equal to their fair values. It
was agreed that AB shall issue its own shares of stocks to CD and EF. Forty percent of
the total stocks issued shall be received by CD and the remaining, will be given to EF.
AB paid P45,000 and P78,000 sock issuance costs with CD’s and EF’s business;
respectively. Immediately after the combination, AB has a common stock balance of
P2,400,000. AB P80 par common stock has a market value of P96.
 1. How much is the net increase in the stockholder’s equity to be reported in the
combined Statement of Financial Position?
A. P1,963,000 B. P2,786,000 C. P2,663,000 D. 2,086,000

III
A condensed Statement of Financial Position at August 31, 2011 and related current fair
value data for ABC Company are presented below:

ABC Company
Statement of Financial Position
August 31, 2011
Carrying Amount Fair Value
Assets:
Current assets P 736,000 P 809,000
Plant Assets 1,185,000 1,380,000
Patent (net) 117,000 96,000
Total Assets P 2,038,000
Liabilities and Stockholder’s Equity:
Current Liabilities P 215,000 P 215,000
Long-term debt 560,000 595,000
Capital stock, P20 par 420,000
Retained Earnings 843,000
Total Liabilities and Stockholders’ Equity P2,038,000

On September 1, 2011, XYZ Corporation issued 21,400 shares of its P24 par value
common stock (current fair value P33 per share) and P290,000 cash for the net assets
of ABC Company. Of the P95,000 out-of-pocket costs paid by XYZ on September 1,
2011, P53,000 were indirect cost and the remainder were legal fees and finders’ fees
related to the business combination.

1. How much is the net increase in the stockholders’ equity in the books of the
surviving company as a result of the business combination?
A. P1,185,000 B. P1,090,000 C. P1,037,000 D. P992,400

IV
The following are the Statement of Financial Position of CD and RS Corporation as of
December 31, 2010:
CD RS
Cash P300,000 P 20,000
Receivables 70,000 15,000
Inventories 80,000 25,000
Land 75,000 100,000
Building (net) 220,000 100,000
Equipment (net) 150,000 240,000
Total Assets P895,000 P 500,000

Accounts payable P185,000 P 60,000

Ordinary Shares, P10 par 500,000 200,000
Share Premium 50,000 140,000
Retained Earnings 160,000 100,000
Total Liabilities & Equity P895,000 P 500,000

CD decided to acquire the net assets of RS on January 1, 2011. CD issue 19,000

ordinary shares with market value of P17 per share and cash purchase price of
P28,000, RS will be dissolved. The book values reflect fair values except for building of
CD, which has net realizable value of P299,000 and inventories and land of RS which
have a net realizable value of P42,000 and P128,000 respectively. CD also paid for the
cost of registering and issuing securities amounting to P15,000, direct costs of
combination amounting to P22,000 and indirect cost amounting to P10,000.

1. How much is the total assets after the combination?

A. P1,440,000 B. P1,412,000 C. P1,444,000 D. P1,365,000

2. How much is the total shareholders’ equity after the combination?

A. P1,033,000 B. P1,018,000 C. P1,120,000 D. P986,000

V
Statement of Financial Position reflecting uniform accounting procedures, as well as
fair value, that are to be used as a basis for the combination are prepared on
September 1, 2011 as follows:
A B C
Assets P5,250,000 P6,800,000 P900,000

Liabilities P3,950,000 P2,650,000 P530,000

Capital Stock (all P10 par) 1,700,000 1,200,000 275,000
Additional paid-in capital 500,000 140,000
Retained Earnings (deficit) (400,000) 2,450,000 (45,000)

Total Liabilities and Shareholder’s Equity P5,250,000 P6,800,000 P900,000

A company shares have a market price of P16. A market price is not available for
shares of B Company and C Company since stocks of these companies are closely
held. A company acquires all of the assets and assumes all of the liabilities of B
Company and C Company by issuing in exchange 265,000 shares of its stock to B
Company and 17,000 shares of its stock to C Company.
1. How much is the total assets immediately after the business combination?
A. P12,950,000 B. P13,040,000 C. P13,138,000 D. P13,048,000

2. How much is the retained earnings (deficit) immediately after the business
combination?
A. P(400,000) B. P445,000 C. P498,000 D. P(302,000)

ACQUISITION OF STOCKS

I
On January 2, 2011, AB corporation purchased 80% of the outstanding ordinary shares
of XY Company for P2,100,000 payable in cash. On that date, the assets and liabilities
of XY Company had fair market values as indicated below. Statement of Financial
Position of the companies on January 2, 2011 are also indicated below. The Non-
controlling interest is measured at fair value.

XY
AB Book Value Fair Value
Assets
Cash P 262,500 P 262,500 P 262,500
Receivables 525,000 393,750 393,750
Inventories 393,750 341,250 367,500
Land 131,250 210,000 315,000
Building – net 787,500 525,000 472,500
Long-term investment in MS 262,500 328,125 367,500
Investment in XY Co. 2,100,000
Total P4,462,500 P2,060,625
Liabilities and Stockholder’s Equity
Accounts payable P1,136,625 P 301,875 301,875
Ordinary Shares – AB Company 1,050,000
Ordinary Shares – XY Company 525,000
Additional paid-in capital – AB 525,000
Retained Earnings – AB Company 1,750,875
Retained Earnings – XY Company 1,233,750
Total P4,462,500 P 2,060,625

Required: Prepare journal entries on the books of AB Company. Prepare the

determination and allocation of excess schedule to compute for goodwill/income from
acquisition. Prepare working paper entries/

Assuming the following information:

Price Paid Interest Liabilities of AB FMV of NCI
A. 1,890,000 90% P 926,625 P236,250
B. 2,362,500 75% P1,399,125 P393,750
C. 1,312,500 80% P 349,125 P315,000

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

Assets Liabilities and equity

Current assets P 825,000 Liabilities P325,000

Land and building (net) 700,000 Common stock, P20 par 500,000
Equipment (net) 500,000 Retained Earnings 1,200,000
Total Assets P2,025,000 Total Liabilities & Equity P2,025,000

On the date of the second purchase, PG determines that GDL’s equipment was
undervalued by P250,000 and had a 5-year remaining life. All other book values
approximate fair values. Any remaining excess is attributed to goodwill.

1. What is the estimated fair value of the 20% non-controlling on January 2, 2011?
A. P475,000 B. P221,875 C. P450,000 D. P170,000

2. What is the amount of goodwill to be reported in the consolidated Statement of

Financial Position on January 2, 2011?
A. P275,000 B. P150,000 C. P300,000 D. P134,375

III
The following are the Statement of Financial Position of Pol and Sol Company as of
December 31, 2010.
Pol Sol
Cash P 250,000 P 50,000
Receivables 175,000 37,500
Inventories 200,000 74,500
Land 187,500 295,000
Building (net) 800,000 250,000
Equipment (net) 625,000 600,000
Total Assets P 2,237,500 P1,250,000
Accounts Payable P 462,500 P 150,000
Ordinary Shares 1,250,000 500,000
Share Premium 125,000 350,000
Retained Earnings 400,000 250,000
Total Liabilities and Equity P2,237,500 P1,250,000

Pol decide to acquire 15,000 outstanding shares of Sol on January 1, 2011. Pol paid a
purchase price of P60,000 and will issue 22,500 ordinary shares with market value of
P28 per share in exchange for the 15,000 outstanding shares of Sol. Pol and Sol’s
ordinary shares both have a par value of P20 per share. The book value reflect fair
values except for building of Pol, which has a net realizable value of P975,000 and
inventories and land of Sol which a net realizable value of P74,500 and P295,000,
respectively. Pol also paid costs of registering and issuing securities amounting to
P26,000 and direct costs of combination amounting to P58,500.

1. How much is the consolidated stockholders’ equity after the combination?

A. P2,324,700 B. P2,787,500 C. P2,872,000 D. P2,877,500

2. How much is the consolidated asset after the combination?

A. P3,400,000 B. P3,544,500 C. P3,460,000 D. P3,484,500

IV
On January 2, 2011, the Statement of Financial Position of Pipa and Sisa Company
prior to the combination are:
Pipa Company Sisa Company
Cash P 225,000 P 7,500
Inventories 150,000 15,000
Property and Equipment (net) 375,000 76,500
Total Assets P 750,000 P 75,000

Current Liabilities P 45,000 P 7,500

Common Stock, P100 par 75,000 7,500
Additional Paid in Capital 225,000 15,000
Retained Earnings 405,000 45,000
Total Liabilities and Stockholders’ Equity P 750,000 P 75,000
The fair value of Sisa Company’s equipment is P76,500.

Assume the following independent cases:

1. Assuming Pipa Company acquired all of the outstanding stock of Sisa Company
resulting to a goodwill of P33,000, contingent consideration is P18,000, how much is the
price paide to Sisa Company’s stock?
A. P142,500 B. P157,500 C. P106,500 D. P142,500

2. Assuming Pipa Company acquired 70% of the outstanding common stock of Sisa
Company for P52,500 and Non-controlling interest is measured at Non-controlling
interest’s proportionate share of Sisa Company’s identifiable net assets, how much is
the consolidated stockholders’ equity on the date of acquisition?
A. P(8,500) B. P8,500 C. P11,550 D. P(11,550)

3. Assuming Pipa Company acquired 80% of the outstanding common stock of Sisa
Company for P68,400 and Non-controlling interest is measured at Non-controlling
interest’s proportionate share of Sisa Company’s identifiable net assets, how much is
the consolidated stockholders’ equity on the date of acquisition?
A. P705,000 B. P709,800 C. P723,300 D. P728,100
4. Assuming Pipa Company acquired 90% of the outstanding common stock of Sisa
Company for P121,500 and Non-controlling interest is measured at fair value, how
much is the total consolidated assets on the date of acquisition?
A. P771,000 B. P892,500 C. P868,500 D. P747,000

V
On December 31, 2010, the following figures were taken from the trial balances of
Kenshin Company and Kaoru Company:
.
Kenshin Kaoru .

Cash P 120,000 P 20,000

Receivables 60,000 60,000
Inventory 100,000 70,000
Property and equipment – net 160,000 105,000
Current Liabilities 20,000 10,000
Long-term Liabilities 70,000 50,000
Common Stock 110,000 100,000
Additional paid-in capital 20,000 ---
Retained Earnings 220,000 120,000

On December 31, 2010, Kenshin issues 8,000 shares of its P10 par value stock for 70%
of the outstanding shares of Kaoru. Kenshin’s stock had a P14 per share fair market
value. Contingent consideration that is determinable amount to P12,000. Kenshin also
paid the following: P19,000 for broker’s fee, P21,000 for pre-acquisition audit fee,
P20,500 for legal fees, P17,000 for audit fee for SEC registration of stock issue and
P16,500 for printing of stock certificates. Kaoru holds an equipment that is worth
P25,000 less than its current book value. The retained earnings of kaoru on January 1,
2010 amounted to P60,000. The fair market value of the non-controlling interest is
P50,000.

1. How much is the consolidated share premium (APIC) after the combination?
A. P52,000 B. P20,000 C. P18,500 D. P 0

2. How much is the consolidated retained earnings after the combination?

A. P340,000 B. P232,500 C. P172,000 D. P170,500

3. How much is the consolidated asset after the combination?

A. P695,000 B. P589,000 C. P626,000 D. P601,000