Additional Problems on Merger PDF

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Warning: TT: undefined function: 32 Valuation of assets and liabilities acquired, goodwill and stock price contingencyBelow is the condensed Statement of Financial Position of Sons, Inc., along with estimates of fair values. Pop, Inc. is planning to acquire Sons by issuing 100, shares of its P1 par ...

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Valuation of assets and liabilities acquired, goodwill and stock price contingency Below is the condensed Statement of Financial Position of Sons, Inc., along with estimates of fair values. Pop, Inc. is planning to acquire Sons by issuing 100,000 shares of its P1 par value ordinary shares (market value P8/share) in exchange for all the assets and liabilities of Sons. Pop also guarantees the value of its shares issued. The expected present value of this stock price contingency is P200,000. Pre-Combination Condensed Statement of Financial Position of Sons, Inc.

Current assets Plant assets Total assets Liabilities Ordinary shares Share premium Retained earnings Total liabilities and equity

Book value P 380,000 ___740,000 P1,120,000 P 500,000 50,000 170,000 ___400,000 P1,120,000

Fair value P 350,000 810,000 450,000

Required: Prepare Pops’ (acquirer/acquiring) entry(ies) to record the acquisition.

Solution: Books of Acquirer/Acquiring Acquisition of Assets and Liabilities: Current assets Plant assets Goodwill Liabilities Ordinary shares P1 par (100,000 shares) Share premium (P8 – P1, par) x 100,000 Share premium – Stock Contingent Consideration

350,000 810,000 290,000 450,000 100,000 700,000 200,000

Consideration transferred: Ordinary shares (100,000 shares x P8) Expected/Probability PV of Stock Price Contingency Consideration transferred Less: FMV of Assets and Liabilities Acquired: Current Assets Plant Assets Liabilities Positive excess: Goodwill

P 800,000 ___200,000 P1,000,000 P350,000 810,000 ( 450,000

__710,000 P 290,000

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 Statement of Financial Position at January 2, 20x5 is as follows: Cash and receivables………………………………………………………….. Inventories………………………………………………………………………… Property, plant and equipment, net…………………………………………. Current liabilities………………………………………………………………….. Long-term debt…………………………………………………………………… Capital stock………………………………………………………………………. Retained earnings……………………………………………………………….. Accumulated other comprehensive income………………………………

Sandy-Dr(Cr) P200,000,000 600,000,000 7,500,000,000 (400,000,000) (7,200,000,000) (7,200,000) ( 25,000,000) (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 Statement of Financial Position: • • • • •

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.

Solution: (in millions) Cash and receivables Inventories Property, plant & equipment Customer contracts In-process R&D Goodwill Current liabilities Long-term debt Warranty liability Estimated liability for Contigent Cons. Ordinary shares

200 400 5,500 25 300 2,035 400 7,300 10 50 700

Note: “Skilled (assembled) workforce” are not identifiable at the date of acquisition and “Potential Contracts” 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

P 700,000,000 ___50,000,000 P 750,000,000 P 200,000,000 400,000,000 5,500,000,000 25,000,000 300,000,000 ( 400,000,000) (7,300,000,000) ( 10,000,000) (1,285,000,000) P2,035,000,000

Acquisition expenses Acquisition-related expenses/Retained earnings Cash

150

Costs to Issue and Register Stocks Share premium/APIC Cash

100

150

100

2. (in millions) Goodwill Property, plant & equipment

1,500 1,500

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