Business Combination Reviewer PDF

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ADVANCE ACCOUNTINGBUSINESS COMBINATIONBusiness combination - a transaction or other event in which an acquirer obtains control of one or more business. Controls refers to financial and operation (PFRS 3) Ways to control a business unit 1. Acquisition of net assets- true merger or merger of equal 2. ...

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ADVANCE ACCOUNTING BUSINESS COMBINATION Business combination- a transaction or other event in which an acquirer obtains control of one or more business. Controls refers to financial and operation (PFRS 3) Ways to control a business unit 1. Acquisition of net assets- true merger or merger of equal 2. Acquisition of outstanding shares- business combination/ consolidation (there will be parent- subsidiary relationship) Terms used in business combination Acquiree- the business or business that the acquirer obtains control of a business combination. Acquirer- the entity that obtains control of the acquiree. Acquisition date – the date on which the acquirer obtains control of the acquire. Control – the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Equity interest- owner of investor-owned entities and owner, member or participant interests of mutual entities. Fair value- the amount of which an asset could be exchanged or liability settled, between knowledgeable, willing parties in an arm’s length transaction. Goodwill- an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Non-controlling interest- the equity in subsidiary not attributable, directly or indirectly, to a parent. Steps for business combination 1. Identify the acquirer 2. Determine the acquisition – the date where parent obtains control 3. Recognize and measure the identifiable asset acquired, the liabilities assumed and any non-controlling interest in the acquiree net assets are measured at fair value. Existing goodwill be replaced by a new goodwill. Thus, it is not included in the computation of net assets acquired. Non-controlling interest are measured at a. Fair value b. Proportionate share of the acquiree’s identifiable net assets. 4. Determination and computation of the consideration given (direct and indirect acquisition cost is charge to profit or loss statement) inclusive of contingent consideration a. Cash b. Non-cash consideration c. shares of sock d. Incurrence of a liability  Contingent consideration- is an agreement to issue additional consideration (asset or stock) at the later date if specified events occur. Measured at its acquisition date fair value. 5. Recognize and measure goodwill or a gain from a bargain purchase (negative goodwill) / gin on acquisition a. Difference between consideration given and non-controlling interest less fair value net assets acquired. Important difference in business combination for SMEs. 1. Goodwill will be amortized with estimated life. Assumed to be 10 years if it cannot be estimated reliably. Tested also for impairment if there are indications that the said goodwill is being impaired. 2. Any direct cost will be part of the consideration given. Straight Problem 1: Consideration Transferred and Goodwill Computation Balance sheet information for Amor Corporation at January 1, 2015 is summarized as follows: Current assets P920,000 Liabilities P 1,200,000 Plant asset 1,800,000 Capital stock P10 par 800,000 Retained earnings 720,000 Amor s assets and liabilities are fairly valued except for plant assets that are undervalued by P200.000. On January 2, 2015 Eduardo Corporation issues 80,000 shares of its P10 par value ordinary shares for all of Amor’s net assets and Amor is dissolved. Market Quotations for the two stocks on this date are: Eduardo ordinary: P28 Amor ordinary: P19 Edwardo pays the following fees and costs in connection with the combination: Finder s fee, P10,000 (Direct Cost) Costs of registering and issuing stock, P5,000 Legal and accounting fees, P6,000 (Indirect Cost) Required: 1. Calculate the amount of consideration transferred. Calculate any goodwill from the business combination

a. Assuming Full PFRS BUSINESS COMBINATION

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b. Assuming SMEs Straight Problem II: Journal Entries: Goodwill and Bargain Purchase Gain Duterte Corporation purchased the net assets of Aquino Corporation on January 2, 2015 for P560,000 and also paid P20,000 in direct acquisition costs. Aquino’s balance sheet on January 1, 2015 was as follows: Accounts Receivable, net P180.000 Inventory 360.000 Land 40.000 Buildings (net) 60.000 Equipment(net) 80,000 Current liabilities 70.000 Long-term debt 160.000 Common Stock, P1 par 20.000 Paid-in capital 430,000 Retained Earnings 40,000 Fair values agree with book values except for inventory, land, and equipment, which have fair values of P 400,000, P50.000 and P70.000 respectively. Aquino has patent rights valued at P20,000. Required: 1. Prepare Duterte’s journal entries for the acquisition of Aquino’s net assets. 2. Assume Duterte Corporation acquired the net assets of Aquino Corporation for P500,000 rather than P560,000, prepare Problem 3. Consideration Transferred: Cash plus Contingent Consideration Pham Company acquired the assets (except) and assumed the liabilities of Senn Company on January 1, 2012, paying P 720,000 cash. Senn Company’s December 1, 2012, balance sheet, reflecting both book values and fair values and fair values, showed: Book Value Fair Value Accounts receivable (net) P72,000 P65.000 Inventory 86,000 99,000 Land 110,000 162,000 Buildings (net) 369,000 450000 Equipment (net) 237,000 288000 Total P874,000 P1,064,000 Accounts payable P 83,000 P 83,000 Note payable 180,000 180,000 Common stock, P2par value 153,000 Other contributed capital 229,000 Retained earnings 229,000 Total 874,000 As part of the negotiations, Pham Company agreed to pay the former stockMang. Inasalers of Senn Company P135,000 cash if the post combination earnings of the combined company (Pham) reached certain levels during2013 and 2014. Required: 1. Record the journal entry on the books of Pham Company to record the acquisition on January 1, 2012.It is expected that the earnings target is likely to be met. 2. Assuming the earning’s contingent is met, prepare the journal entry on Pham Company’s books to settle the contingency on January 2, 2014. 3. Assuming the earnings contingency is not met , prepare the necessary journal entry on Pham Company’s books on January 2,2014. Straight Problem 4: Consideration Transferred: Cash and Stock Plus Contingent Consideration On January 1 ,2012, Platz Company acquired all the net assets of Sate Company by issuing 75,000 shares of its P10 par value common stock to the stockholders of Satz Company. During the negotiation Plate Company agreed to issue additional shares of common stock to the stockholders of Sate if the average post combination earnings over the next three years equaled or exceeded, P2 500,000. On January 1, 2012 the market value of Platz stock was P50 per share. Based on the information available at the acquisition date, the additional 10,000 shares are expected to be issued. Required: 1. Prepare the journal entry on Plate Company’s books on January 1,2012It is expected that the earnings target is likely to be met. Platz Company records goodwill on acquisition. 2. Prepare the journal for Platz Company’s books on January 1,2015, when the additional shares are issued. On this date the market value of Plate stock is valued at P60 per share. Direct cost and indirect cost

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1. Rivendell paid finder’s fees of P 40,000, legal fees of P13,000, audit fees related to stock issuance of P10,000, stock registration fees of P5,000, and stock listing application of P4,000. Based on the preceding information, under acquisition method, what amount relating to business combination would be expense? 2. Based on the preceding information, under the acquisition method, amount relating to the business combination would be charged to paid in Capital? Fair value of Net Assets 1. ABC Co. is acquiring XYZ Inc. XYZ has the following intangible asset: • Patent on a product that is deemed to have-up useful life P10,000 • Customer list with an observable fair value of P50, 000 • A 5-year operating lease with favorable terms with a discounted present value of P8,000 • Identifiable R & D of P100,000. ABC will record how much for acquired intangible Assets from the purchase of XYZ Inc.? 2. Plata Corporation paid P100,000 cash for the net assets of Oro Company, which consisted of the following Book Value Fair Value Current assets P20,000 P 28, 000 Property and equipment 80,000 110,000 Liabilities assumed 20,000 18,000 The property and equipment acquired in the business combination should be recorded at: Computation of Goodwill 1. Burrough Corporation concluded that die fair value of Helyar Company was P80, 000 and paid that amount to acquire all of its net assets. Helyar reported assets with a book value of P60.000 and fair value of P98.000 and liabilities with a book value and fair value of P23,000 on the date of combination. Burrough also paid P3,000 to a search firm for finder’s fees related to the acquisition. What amount Burrough Corporation will record as goodwill? Computation of Goodwill 1. On June 1, 2015, Clane Company paid P800,000 cash for the assets and liabilities of Renn Corp. The carrying values for Renn’s assets and liabilities on June 1, 2015 follow: Cash 150,000 Accounts receivable 180,000 Capitalized software costs 320,000 Goodwill 100,000 Liabilities (130,000) Net Assets 620,000 On June 1, 2015, Renn’s accounts receivable had a fair value of P140,000. Additionally, Renn’s in process and development costs was estimated to have a fair value of P200,000. All other items were stated at fair vaues. On Clane’s June 1 balance sheet. How much as reported for goodwill? Acquisition of Net Assets with Contingent Consideration On January 1, 2015, the fair values of Pink Conrad’s net assets were as follows: Current Asset 100,000 Equipment 150,000 Land 50,000 Buildings 300,000 Liabilities 80,000 On January 1, 2015, blue George Company purchased the net assets of the Pink Conrad by issuing 100,000 shares of its P1 par value stock when the fair value of the stock was P6.20. It was further agreed that Blue George would pay an additional amount on January 1, 2017, if the average income during the 2-year period of 2015-2016 exceeded P8000 per year. The expected value. of this consideration was calculated as P184.000; the measurement is one yea r. What amount will be recorded as goodwill on January 1, 2012?

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ADVANCED ACCOUNTING: CONSOLIDATED FS @ Date of Acquisition  If the method to obtain control is through acquisition of stocks, the transaction is between the acquirer (parent) and stockholders of the acquiree (subsidiary). Hence, two legal business entities still exist, but substance over form concept recognize only one entity, thus consolidated financial statement is deemed necessary. Acquisition of stocks could either be: 1. 100% (Wholly owned subsidiary-) • With option to dissolve the subsidiary- Same with acquisition of Net Assets • If not dissolve F/S of the combining entities should be consolidated Acquisition at Book Value More than Book Value Less than Book Value 2. Less than 100% (but generally not less than 50% to obtain control)  Non-Controlling Interest Exist valued at  Fair Value of NCI  Proportionate Share of Fair Value of Net Assets of Subsidiary  Acquisition at Book value More than Book Value Less than Book Value Straight Problems: Date of Acquisition- 100% owned Subsidiary 1. PLDT Company acquires all of Sun Company’s outstanding shares on January 1, 2015, by paying P408,000 cash, and immediately prepares a consolidated balance sheet. The separate balance sheets of taxi companies immediately before the consolidation with acquiree’s fair value were presented as follows: PLDT Co. Sun Co. Sun Co. Assets Book Value Book Value Fair Value Cash P420,000 P60,000 P60,000 Accounts Receivable 90,000 60,000 60,000 Inventory 120,000 72,000 90,000 Land 210,000 48,000 120,000 Buildings and equipment (net) 480,000 360,000 348,000 Total Assets P 1,320,000 P 1,600,000 P 1,678,000 Liabilities and Stockholders' Equity Accounts Payable P120,000 P 120,000 P120,000 Bonds Payable 240,000 120,000 162,000 Ordinary Stock,P10 par 600.000 240,000 Paid in capital in excess of par 60,000 24,000 Retained Earning 300,000 96,000 Stockholders’ Equity P 1,320,000 P 600,000 Required: 1. Prepare journal entry to record investment in books of the acquirer company. 2. Prepare the working paper eliminating entries for purposes of preparing consolidated balance sheet. 3. Prepare a consolidated working paper on January 1,2015. 4. Prepare the consolidated balance immediately after acquisition. 2. Assuming the same data in Problem 1, except that the consideration transferred consists of P288,000 cash plus 12,000 ordinary shares of PLDT Co. with a fair value of P12 per share. The following costs were incurred: Direct Costs P4 ,800 Indirect Costs 7,200 Costs to issue and register stocks 8,400 The separate balance sheets of Sun Co. immediately before the consolidation with fair values were presented as follows: Assets Cash Accounts Receivable Inventory Land Buildings and equipment (net) Goodwill Total Assets Liabilities and Stockholders’ Equity Accounts Payable Bonds Payable Ordinary Stock, PI0 par

Sun Co. Book Value Sun Co. Fair Value P 54,000 P54,000 60,000 60000 72,000 90,000 48,000 120,000 360,000 348,000 6,000 P 600,000 P 672,000 P 120,000 120,000 240,000

P120,000 162,000

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Paid in capital in excess of par Retained Earnings Stockholders’ Equity

24,000 96,000 P600,000

Required: 1. Prepare journal entry to record investment in books of the acquirer company. 2. Prepare the working paper eliminating entries for purposes of preparing consolidated balance sheet. 3. Prepare a consolidated work paper on January 1, 2015. 4. Prepare the consolidated balance immediately after acquisition. Date of Acquisition less than 100% 3. PLDT Company acquires 80% of Sun Company’s outstanding stock on January 1, 2015, by paying P360,000 cash, and immediately prepares a consolidated balance sheet. PLDT also pays P14,400 in accounting and legal fees to accomplish the purchase. The separate balance sheets of the two companies immediately before tire consolidation with acquiree’s fair value were presented as follows: Assets PLDT Co. Book Value Sun Co. Book Value Sun Co. Fair Value Cash P420,000 P60,000 P60,000 Accounts receivable 90,000 60,000 60,000 inventory 120,000 72,000 90,000 Land 210,000 48,000 120,000 Buildings and equipment 960,000 720,000 348,000 Accumulated depreciation (480,000) (360,000) Total Assets P1,320,000 P600,000 P678,000 Liabilities and Stockholders’ Equity Accounts payable P120,000 P120,000 P120,000 Bonds payable 240,000 120,000 162,000 Ordinary stock, P10 par 600,000 240,000 Paid in capital in excess of par 60,000 24,000 Retained earnings 300,000 96,000 Total Liabilities and Stockholders’ Equity P1,320,000 P600,000 Required: 1. Prepare journal entry to record investment in the books of the parent company. 2. Prepare the working paper eliminating entries for purposes of preparing consolidated balance sheet a. Partial Goodwill (Proportionate Basis) Approach b. Full-Goodwill (Fair Value Basis) Approach 3. Prepare a consolidated working paper on January 1, 2015 a. Partial Goodwill (Proportionate Basis) Approach b. Full-Goodwill (Fair Value Basis) Approach 4. Compute the Non-controlling interest on acquisition a. Partial Goodwill (Proportionate Basis) Approach b. Full-Goodwill (Fair Value Basis) Approach 5. Prepare the consolidated balance immediately after acquisition a. Partial Goodwill (Proportionate Basis) Approach b. Full-Goodwill (Fair Value Basis) Approach With Control Premium 4. On July 1, 2014, Giordano, Inc. acquired most of the outstanding ordinary shares of Esprit Company for cash. The incomplete working paper elimination entries on that date for the consolidated statement of financial position of Giordano, Inc. and its subsidiary are shown below: Stockholder s equity Esprit 2,437,500 Investment in Esprit 1,584,375

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