AFAR Handout Business Combination PDF

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AFAR – Business Combination Date of Acquisition:NET ASSET ACQUISITIONProblem 1: On October 1, 2033, FRED Corporation acquired all the assets and assumed all theliabilities of CHENG Company by issuing 20,000 shares with a fair value of P67 per share andan obligation to pay a contingent consideration ...

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AFAR – Business Combination Date of Acquisition: NET ASSET ACQUISITION Problem 1: On October 1, 2033, FRED Corporation acquired all the assets and assumed all the liabilities of CHENG Company by issuing 20,000 shares with a fair value of P67.5 per share and an obligation to pay a contingent consideration with a fair value of P750,000. In addition, FRED paid the following acquisition related costs: Legal fees Audit fee for SEC registration of stock issue Costs of stock certificates Broker’s fee Other direct cost of acquisition General and allocated expenses

P105,600 320,400 35,000 49,000 50,000 14,000

The Statement of Financial Position as of September 30, 2033 of FRED and CHENG, together with the fair market value of the assets and liabilities are presented below: FRED CHENG Book Value Fair Value Book Value Fair Value Cash P640,000 P640,000 P45,000 P45,000 Accounts Receivable 360,000 335,000 70,000 54,000 Inventories 475,000 390,000 87,000 78,000 Prepaid expenses 25,000 13,500 5,000 Land 2,000,000 2,900,000 900,000 1,550,000 Building 800,000 900,000 723,000 768,000 Equipment 700,000 585,000 361,500 360,000 Goodwill 300,000 Total assets 5,000,000 5,750,000 2,500,000 2,860,000 Accounts payable Notes payable Share capital, 50 par Share premium Retained earnings Total equities

312,500 937,500 2,000,000 1,000,000 750,000 5,000,000

312,500 980,000

200,000 700,000 c850,000 400,000 350,000 2,500,000

200,000 765,000

Compute for the balances that will be shown on the October 1, 2033 statement of financial position of the surviving company: 1. a. b. 2.

What is the total amount of goodwill to be reported by the surviving company – Fred? P0 c. P95,000 P205,000 d. P505,000 Using the information in number 1, what is the total amount of cash to be reported by the surviving company – Fred? a. P P685,000 c. P640,000 b. P66,000 d. P111,000 3. Using the information in number 1, what is the total amount of inventories to be reported by the surviving company? a. P468,000 c. P553,000 b. P477,000 d. P562,000 4. Using the information in number 1, what is the total amount of land and building to be

reported by the surviving company? a. P4,423,000 b. P5,423,000

c. P6,118,000 d. P5,118,000

5. Using the information in number 1, what is the total amount of equipment to be reported by the surviving company? a. P1,060,000 c. P1,523,000 b. P1,623,000

d. P1,668,000

6. Using the information in number 1, what is the total amount of notes payable to be reported by the surviving company? a. P1,702,000 c. P1,637,500 b. P1,680,000 d. P1,745,000 7. Using the information in number 1, what is the amount of liabilities to be reported by the surviving company? a. P2,215,000 c. P1,250,000 b. P2,965,000 d. P2,452,500 8. Using the information in number 1, what is the amount of share capital to be reported by the surviving company? a. P2,000,000 c. P2,850,000 d. P3,850,000 b. P3,000,000 9. Using the information in number 1, what is the total amount of share premium to be reported by the surviving company? a. P1,000,000 c. P1,750,000 b. P944,600 d. P1,400,000 10. Using the information in number 1, what is the total amount of retained earnings to be reported by the surviving company? a. P480,000 c. P526,000 b. P540,000 d. P531,400 11. Using the information in number 1, what is the total amount of assets to be reported by the surviving company? a. P7,015,000 c. P7,118,000 b. P6,980,000 d. P7,491,000 Problem 2: Condensed Statement of Financial Position of Marks Corp. and Spencer Corp. as of December 31, 2031 were as follows:

Current assets Noncurrent assets Total assets Liabilities Ordinary share, P23 par Share premium Retained earnings

Marks P275,000 625,000 900,000

Spencer P65,000 425,000 490,000

65,000

35,000

549,700 35,300 250,000

296,700 28,300 130,000

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On January 1, 2032, Marks Corp. issued 30,000 stocks with a market value of P25/share for the assets and liabilities of Spencer Corp. Marks Corp. also paid P125,000 cash.



The book value reflects the fair value of the assets and liabilities, except that the noncurrent assets of Spencer have fair value of P630,000 and the noncurrent assets of Marks are overstated by P30,000.

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Contingent consideration, which is determinable, is equal to P15,000.

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Marks paid for the stock issuance costs only amounting to P74,000 and incurred other acquisition costs amounting to P19,000.

1. As a result of acquiring the net assets of Spencer Corporation, compute for the following in the books of the surviving company: Retained earnings Liabilities a. P250,000 P100,000 b. P250,000 P115,000 c. P231,000 P134,000 d. P212,000 P115,000

Problem 3: ABC Company acquired all of the JKL Corporation’s assets and liabilities on October 2, 2031, in a business combination at that date. JKL reported assets with a book value of P998,000 and liabilities of P569,600.  ABC noted that JKL included the amount of P64,000 obsolete merchandise at the acquisition date that did not appear of any value.  ABC also determined that an old delivery van previously used by JKL had a fair value of P192,000, but had not been recorded by JKL.  Except for machinery and equipment, ABC determined the fair value of all other assets and liabilities reported by JKL approximated the recorded amounts.  In recording the transfer of assets and liabilities in its books, ABC recorded gain on acquisition of P148,000. ABC paid P327,200 to acquire JKL’s assets and liabilities. A. If the book value of JKL’s machinery and equipment was P345,600, what was their fair value? Using the information presented in problem 3 but assuming ABC recorded goodwill of P402,000. ABC paid P1,037,000 to acquire JKL’s assets and liabilities. B. If the book value of JKL’s machinery and equipment was P516,500, what was their fair value? a. P264,800 ; P438,300 b. P426,400 ; P438,300 c. P264,800 ; P594,700 d. P426,400 ; P594,700

Measurement Period Problem 4: CRIS Corporation acquired the net assets of BRIAN Company on January 1, 2024. Assets acquired from Brian Co. at fair value include Current assets, P1,150,000 ; Equipment, P1,700,000 ; Land, P600,000 ; Building, P3,600,000. Liabilities assumed from the acquired company amount to P640,000. Fair value of ordinary shares issued amount to P7,440,000. The agreement further provides that additional cash payments would be made on January 1, 2026, equal to 135% of the amount by which annual earnings of CRIS Company exceed P265,000 per year, prior to January 1, 2026. Net income was P367,500 in 2024 and P462,500 in 2025. Assume that the liabilities recorded in January 1, 2024 exclude an estimated contingent liability recorded at an estimated amount of P320,000. The amount of the estimated contingent liability was determined to be at P272,500 in

November 2, 2024. The estimated amount of the contingent liability was determined to increase by P85,000 in August 1, 2025 form the last date of the change in estimate.

1. What is the amount of goodwill is presented in the separate statement of financial position of the acquirer company on the date of acquisition? a. P0 c. P1,350,000 b. P1,670,000 d. none of the choices 2. Using the information in number 4, what amount of goodwill is presented in the separate statement of financial position of the acquirer company as of January 1, 2025? c. P1,387,500 a. P1,302,500 b. P1,350,000 d. P1,295,000 3. Using the information in number 4, what amount of goodwill is presented in the separate statement of financial position of the acquirer company as of January 1, 2026? c. P1,387,500 a. P1,302,500 b. P1,350,000 d. P1,295,000 4. Using the information in number 4, as a result of the additional cash payments made in 2026 (if any), how much will affect profit or loss in 2026? a. P47,500 loss c. P0 b. P85,000 loss d. P405,000

Problem 5: On July 31, 2031 the Marie Company acquired the net assets of Cupid Company for a consideration transferred of P16,000,000. At the acquisition date, the carrying amount of Cupid’s net assets was P10,000,000. At the acquisition date, a provisional fair value of P12,000,000 was attributed to the net assets. An additional valuation received on May 31, 2032 increased this provisional fair value to P13,000,000 and on July 31, 2032 this fair value was finalized at P14,000,000. What amount should Marie present for goodwill in its statement of financial position at December 31, 2032? a. P6,000,000 c. P4,000,000 b. P3,000,000 d. P2,000,000

Problem 6: On September 18, 2033, BOY Co. acquired all the BONG Inc.’s P2,150,000 identifiable assets and P530,000 liabilities. Book values of the BONG’s assets and liabilities equal to their fair values except for the overvalued furniture and fixtures.  As a consideration, BOY issued its own shares of stock with a market value of P1,715,000 and cash amounting to P375,000.  Contingent consideration that was probable and reasonably estimated on the date of acquisition amount to P148,000.  The merger resulted into P647,000 goodwill.  Assuming BOY Co. had P4,890,000 total assets and P2,731,000 total liabilities prior to the combination and no additional cash payments were made, but expenses were incurred for related cost amount to P28,000. (1) After the merger, how much is the combined total assets in the books of the acquirer? (2) After the merger, how much is the increase in liabilities in the books of the acquirer? a. P7,283,000 ; P706,000 c. P7,658,000 ; P3,437,000

b. P7,128,000 ; P678,000

d. P7,255,000 ; P678,000

Problem 7: Kobe Company acquired the net assets of Lakers Corporation on January 1, 2031. Since the parties cannot agree on the definite value of the company in terms of potential future earnings, they agreed to include in the purchase agreement provision for contingent consideration. Whereby the acquirer will pay an additional cash payments on January 1, 2033 equal to twice the amount by which average earnings of Lakers exceed P250,000 per year, prior to January 1, 2033. Net income was P500,000 in 2031 and P600,000 in 2032. Assume that the liabilities recorded on January 1, 2031, include an estimated contingent liability amounting to P400,000. What was the entry made by Kobe in January 1, 2033? a. Liability from contingent consideration 400,000 Cash 400,000 b. Goodwill 200,000 Liability from contingent consideration 400,000 Cash 600,000 400,000 c. Liability from contingent consideration Loss on contingent consideration 200,000 Cash 600,000 d. Goodwill 600,000 Cash 600,000

Problem 8: CRIS Co. merged into TOM Corp. on July 1, 2033. In exchange for the net assets at fair market value of CRIS Co. amounting to P696,450, TOM issued 68,000 Ordinary shares at P9 par value with a market price of P12 per share. Out of pocket costs of the combination were as follows: Legal fees for the contract of business combination Audit fee for SEC registration of stock issue Printing costs of stock certificates Broker's fee Accountant's fee for pre-acquisition audit Other direct cost of acquisition General and allocated expenses Listing fees in issuing new shares

P35,600 90,000 14,500 23,600 80,000 75,000 43,000 36,000

CRIS will pay an additional cash consideration of P455,000 in the vent that TOM’s net income will be equal or greater than P950,000 for the period ended December 31, 2033. At the acquisition date, there is a high probability of reaching the target net income and the fair value of the additional consideration was determined to be P195,000. Actual net income for the period ended December 31, 2033 amounted to P1,250,000. The additional cash consideration was paid. 1. Using the information in number 8, what is the amount of expense to be recognized in the statement of comprehensive income for the year ended December 31, 2033? a. P257,200 c. P307,000 b. P517,200 d. P553,200 2. What is the amount goodwill to be recognized in the statement of financial position as of December 31, 2033? c. P314,550 a. P295,450 b. P308,500 d. P326,550 3. Using the information in number 8, assuming the actual net income for the period ended December 31, 2033 amounted to P800,000. Which of the following statement is incorrect? a. The total goodwill will remain at P314,500. b. CRIS Co. will debit contingent consideration liability amounting to P195,000 on December

31, 2033. c. CRIS Co. will credit cash amounting to P195,000. d. CRIS Co. will credit gain on extinguishment of liability amounting to P195,000 .

Problem 9: On August 1, 2033, he HAJI Company acquired the net assets of ROWELL Company for a consideration transferred of P17,450,000 cash. o At the acquisition date, the carrying amount of ROWELL’s net assets was P11,925,000 and a temporary appraisal of P12,385,000 was attributed to the net assets. o In addition to the consideration transferred above is another P1,015,000 cash to be transferred nine months after the acquisition date id a specified profit target was met by the acquirer. o At the acquisition date there was only a low probability of the profit target being met, so the fair value of the additional consideration liability was determined to be P468,000. o On December 31, 2033, an update of the provisional fair value of P16,815,000 was attributed to the net assets. Also, at year end the estimated amount of the consideration liability is determined to decrease by P72,000 from the last date of the change in estimate. o On March 31, 2034 the estimated amount of the consideration liability is determined to be probable at P284,000. o On July 1, 2034 the temporary appraisal decreased by P940,000 from the last additional valuation date. o The provisional fair value was finalized on August 31, 2034 with an amount that is higher by P1,070,000 from the temporary appraisal as of July 1, 2034. o As a subsequent event, the profit target was met and the P1,015,000 cash was transferred. 1. What amount of goodwill is presented in the separate statement of financial position of the acquirer company as of December 31, 2034? c. P789,000 a. P1,859,000 b. P2,625,000 d. P1,555,000 2. Using the information in number 7, which of the following statement is incorrect? a. The total goodwill to be presented in the financial position of the acquirer is P5,533,000 on August 31, 2033. b. On December 31, 2033, the fair value of net identifiable assets of the acquiree should be adjusted by P4,430,000. c. On July 1, 2034, the goodwill account should be debited by P940,000 for the adjustment of the fair value of net identifiable assets of the acquiree. d. On December 31, 2033 the total goodwill to be presented by the acquirer should be adjusted by P1,031,000. Problem 10: Condensed statements of financial position of Shey Corp. and Apple Corp. as of December 31, 2032 are as follows:

Current assets Noncurrent assets Total assets Liabilities Ordinary stocks, P20 par Additional paid-in capital Retained earnings

Shey P43,750 181,250 225,000

Apple P16,250 106,250 122,500

P16,250 137,500 8,750 62,500

8,750 75,000 6,250 32,500

On January 1, 2033, Shey Corp. issued 8,750 stocks with a market value of P25/share for the assets and liabilities of Apple Corp. The book value reflects the fair value of the assets and liabilities, except that the noncurrent assets of Apple has a temporary appraisal of P157,500 and the noncurrent assets of Shey are overstated by P7,500. Contingent consideration, which is determinable, is equal to P3,750. Shey also paid for the stock issuance costs worth P8,500 and

other acquisition costs amounting to P4,750.

On March 1, 2033, the contingent consideration has a determinable amount of P5,000. On June 1, 2033, the provisional fair value of the noncurrent assets of Apple increased by P2,250. How much is the total assets to be reported by Shey at the end of 2033? a. P435,500 c. P442,000 d. P444,250 b. P443,000

Problem 11: On January 1, 2030, Hannah Inc. acquired all the assets and liabilities of Bishi Inc. by issuing 50,000 shares. On this date the fair value of Hannah’s shares is P50 per share and its par value is P10 per share. On January 1, 2030, the book value of Bishi’s total assets is P2,500,000 and its fair value is P3,000,000 while its total liabilities book value and fair value are P1,200,000 and P1,000,000, respectively. Hannah and Bishi agreed that Hannah shall issue additional 2,000 shares to the former owners of Bishi if the market price per share of Hannah’s shares increases to P55 per share as of December 31, 2030. On that date of acquisition, the contingent consideration that was probable and reasonably estimated amounted to P100,000. On December 31, 2030, the actual market price of Hannah’s share is P60. The contingent consideration is settled on March 1, 2031. 1. a. b. c. d.

Which of the following is incorrect? Hannah will credit ordinary share amounting to P500,000 on the date of acquisition. The goodwill from business combination is P600,000. On March 1, 2031, Hannah will credit ordinary share amounting to P100,000. On March 1, 2031, the total share premium will decrease by P20,000.

2 Using the information in number 11, assuming the actual market price of Hannah share on December 31, 2030 is P52. Which of the following statement is incorrect? a. The goodwill from business combination is P600,000. b. The total share premium to be recorded on the January 1, 2030 from acquiring Bishi is P2,100,000. c. The ordinary share to be credited on January 1, 2030 us P500,000. d. Hannah will credit gain on extinguishment of contingent consideration on March 1, 2031 amounting to P100,000.

Problem 12: On January 1, 2030, Silicon Inc. paid P2,000,000 cash as a consideration for the acquisition of the net assets of Titan Inc. As of the acquisition date the carrying and fair values of the assets and liabilities of Titan Inc. are as follows:

Cash Receivables Allowance for doubtful accounts Merchandise Inventories Property and Equipment - net Goodwill Total Assets Liabilities

Carrying Value 100,000 350,000 -20,000 400,000 2,500,000 200,000 3,530,000

Fair Value 100,000 270,000

Difference -60,000

250,000 3,000,000 100,000 3,720,000

-150,000 500,000

1,960,000

1,960,000

In applying the recognition measurement, Titan has unrecorded trademark with fair value of P150,000 and a contingent liability of P10,000.

All adjustment to the carrying amount of assets and liabilities result to a temporary differences, Silicon Inc. tax rate is 30%. 1. How much is the total goodwill or (gain from acquisition)? c. P200,000 a. P329,000 b. P106,000 d. P103,000 Problem 13: On January 1, 2030, Rex Corp. has an assets and liabilities with the following fair values: Current Assets 500,000 Non-current Assets 3,000,000 Liabilities 800,000 On January 1, 2030, Lares Inc. purchase the net assets of Rex Corp. for P4,000,000. It was agreed that one-half of the consideration shall be paid on January 1, 2030 and the balance on December 31, 2034. The prevailing market rate as of January 1, 2030 is 12%. Additional information: - Part of the non-current assets are a factory plant which Lares intends to sell. All of the held for sale criteria under PFRS 5 are met for these factory plant. On acquisition date, it has a fair value of P800,000 and a carrying amount of P600,000 in the books of Rex Corp. The cost to sell is P50,000. - After the business combination, Rex Corp. is dissolved and its activities shall be continued by Lares. Lares agrees to provide a patented technology for use in the activities of Rex. The patented technology has a carrying value of P250,000 and a fair value of P400,000. - In addition, Lares paid the acquisition related costs such as legal fees, general and allocated expenses of P60,000. 1. Compute the total amount of goodwill or gain on business com...