III –Valuation of Assets acquired and Liabilities assumed, Measurement of Consideration

Transferred, Change in value of Assets acquired, Pre-acquisition Contingency, In-process

R&D

Sandy Corporation’s balance sheet at January 2, 20x5 is as follows:

Sandy-Dr(Cr)
Cash and receivables………………………………………………………….. P200,000,000
Inventories………………………………………………………………………… 600,000,000
Property, plant and equipment, net…………………………………………. 7,500,000,000
Current liabilities………………………………………………………………….. (400,000,000)
Long-term debt…………………………………………………………………… (7,200,000,000)
Capital stock………………………………………………………………………. (7,200,000)
Retained earnings……………………………………………………………….. ( 25,000,000)
Accumulated other comprehensive income……………………………… (5,000,000)

An analysis of Sandy’s assets and liabilities reveals that book values of some reported items do not
reflect their market values at the date of acquisition:
● Inventories are overvalued by P200,000,000
● Property, plant and equipment is overvalued by P2,000,000,000
● Long-term debt is undervalued by P100,000,000
In addition, the following items are not currently reported on Sandy’s balance sheet:
● Customer contracts, valued at P25,000,000
● Skilled work force, valued at P45,000,000
● In-process research and development, valued at P300,000,000
● Potential contracts with prospective customers, valued at P15,000,000
● Sandy has not recorded expected future warranty liabilities with a present value
of P10,000,000

On January 2, 20x5, Velasco issues new stock with a market value of P700,000,000 to
acquire the assets and liabilities of Sandy. Stock registration fees are P100,000,000, paid in cash.
Consulting, accounting, and legal fees connected with the merger are P150,000,000, paid in cash. In
addition, Velasco enters into an earnings contingency agreement, whereby Velasco will pay the
former shareholders of Sandy an additional amount if Sandy’s performance meets certain minimum
levels. The present value of the contingency is estimated at P50,000,000.

Required:
1. Determine the amount of goodwill.
2. Assume that during March, 20x5, new information comes in regarding the value of Sandy’s
property, plant and equipment at the date of acquisition. It is determined that the property
was actually worth P1,500,000 less than previously estimated. Make the entry to record this
new information.

Requirement 1
Journal Entry:

Requirement 2