INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

Alimannao Hills, Peñablanca, Cagayan 3502 Philippines

Telefax No: (+63) (078) 304-1010
Website: www.isap.edu.ph E-Mail Address: [email protected]

C OLLEGE OF B USINESS E DUCATION AND M ANAGEMENT

ACCOUNTANCY DEPARTMENT

Problem Sets in Accounting for Business Combinations (PRE7)

Online Learning Modality -2nd Sem SY 2020-2021
Adapted from: AFA book by Sir Antonio Dayag
Compiled and Prepared by: Rommel Royce V. Cadapan, LPT, CPA, MAT, MBA

Instructions: Kindly answer the following problems in handwritten format on your notebooks.
Submit a SCANNED PDF copy to this email ([email protected]) ON OR BEFORE
APRIL 10, 2021 9AM

PROBLEM 1 - Statutory Merger: Valuation of Assets and Liabilities,

Consideration Transferred, Goodwill and Bargain Purchase
Tony Inc. acquires all of Jaramillo Co.’s assets and liabilities on January 1, 20x5. Tony incurs the
following costs for the acquisition:
Consideration transferred:
Cash paid to former stockholders of Jaramillo: there
were 200,000 shares of Jaramillo outstanding, and
Tony agreed to pay P90 in cash for each share of
outstanding Jaramillo stock ………………………………… 18,000,000 Cash payment
50,000shares of new Tony common stock, par value
P2/share, market value P80/share, issued to the former Fair value of
stockholders of Jaramillo…………………………………….. P 4,000,000 stock issued
Acquisition-related costs:
Registration fees connected with issuing the new shares,
paid in cash…………………………………………………….. 300,000 Cash payment
Costs of issuing and printing shares/stock certificates……. 200,000 Cash payment
Consulting/professional fees paid to brokers………………. 1,000,000 Cash payment
Legal fees, audit fees, and finder’s fees for acquisition…. 100,000 Cash payment

The balance sheets of both companies immediately prior to the acquisition are as follows:
Tony, Inc. Jaramillo Co.
Assets Book Value Book Value Fair Value
Cash…………………………...................... P 25,000,000 P 90,000 P 90,000
Receivables…………………………………. 2,000,000 200,000 190,000
Inventories…………………………………… 20,000,000 8,110,000 7,000,000
Plant & equipment, net…………………... 99,500,000 50,000,000 40,000,000
Trademarks………………………………….. 5,000,000 1,000,000 4,000,000
Goodwill……………………………………... ____________ ____600,000
Total Assets……………………………………. P151,500,000 P 60,000,000
Liabilities &Equity Book Value Book Value Fair Value
Current liabilities……………………………. P 500,000 P 400,000 P 400,000
Long-term liabilities………………………… 70,000,000 45,000,000 47,000,000
Ordinary share/Common stock, par…… 2,000,000 1,000,000
Share premium/APIC……………………… 55,000,000 10,000,000

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 Accumulated P&L/Retained earnings… 25,000,000 6,600,000
Treasury shares……………………………… (1,000,000) ( 3,000,000)
3
Total Liabilities &Equity………………………. P151,500,000 P 60,000,000
In addition to the assets and liabilities already reported, Jaramillo has the following previously
unrecorded intangible assets at fair value that meet the requirements for capitalization:
Brand names…………………………………………………………….. P 5,000,000
Secret formulas…………………………………………………………. 7,000,000
Tony, Inc. will pay an additional cash consideration of P1,000,000 on January 1, 20x7 in the event
that average income for the two (2) year period of 20x7 and 20x8 will be equal or greater than
P5,000,000 per year. At acquisition, there is a high probability of reaching the target average
income and the fair value of the additional consideration was determined to be at an expected
value of the contingency at P400,000 based on a 40% probability of achieving the target average
income.

Required:
1. Goodwill. Prepare the journal entry or entries to record the acquisition on Tonys’ books (the
acquirer/acquiring company).
2. Bargain Purchase Gain/Gain on Acquisition. Assume the same information as above, but
Jaramillo has an additional previously unreported intangible that meets the requirements
for capitalization: a noncompetition agreement with a fair value of P10,000,000. All fair
value calculations have been double checked for accuracy and found to be correct.
Prepare the journal entry or entries to record the acquisition on Tonys’ books.
3. Prepare Tony’s balance sheet for (1) and (2) above immediately following the merger.
4. Determine the following amounts immediately following the merger for requirement (1) and
(2):
(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;

PROBLEM 2 - Assets and Liabilities Acquired, Goodwill and Bargain Purchase Gain,
Contingent Consideration, Changes in Contingent Consideration
Here are the pre-acquisition balance sheets of Pop Company and Sicle Company on December
31, 20x5:
Pop Co. Sicle Co.
Book value Book value Market value
Current assets P 5,000,000 P 2,000,000 P 1,500,000
Investments 1,000,000 500,000 500,000
Land 10,000,000 5,000,000 6,000,000
Buildings (net) 40,000,000 25,000,000 16,000,000
Equipment (net) 25,000,000 10,000,000 2,000,000
Total assets P81,000,000 P42,500,000
Current liabilities P 4,000,000 P 1,500,000 1,500,000
Long-term liabilities 20,000,000 10,000,000 12,000,000
Common stock, P10 par 5,000,000 1,000,000
Additional paid-in capital 40,000,000 20,000,000
Retained earnings 12,000,000 10,000,000
Total liabilities & equity P81,000,000 P42,500,000

In addition to the above, Sicle Co. has identifiable intangibles with a fair value of P5,000,000, not
recognized on its books but appropriately capitalized by Pop.
On January 1, 20x6, Pop issues 400,000 shares of its stock, with a par value of P10/share and a
market value of P100/share, to acquire Sicle Company’s assets and liabilities. SEC registration fees
are P1,100,000, paid in cash.

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Required:
1. Determine the following:
(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;

2. Assume Pop issued 90,000 shares of stock at a market value of P100 per share with
contingent cash consideration amounted to P500,000 that is present obligation and
reliably measureable, expected present value of earnout agreement of P200,000 and
probability present value of stock price contingency agreement of P300,000. The following
out-of-pocket costs in relation to acquisition are as follows:
Legal fees for the contract of business combination P 80,000
Broker’s fee 40,000
Accountant’s fee for pre-acquisition audit 100,000
Other direct cost of acquisition 70,000
Internal secretarial, general and allocated expenses 60,000
Documentary stamp tax on the new shares 20,000
SEC registration fee of issued shares 90,000
Printing costs of share certificates. 50,000
Stock exchange listing fee 30,000

Determine the following:

(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;
3. Now assume that Pop issues 100,000 shares for all of Sicle’s shares, as in requirement (1)
above, and Pop agrees to pay cash to Salt’s previous owners if the combined earnings of
Pop and Sicle exceed a certain threshold over the next two years. The expected present
value of the earnings contingency is P8,000,000. Determine the amount of goodwill
(bargain purchase gain or gain on acquisition).
4. Assume the same facts as in requirement (3). Before the contingency period is over, the
estimated value of the earnings contingency declines to P7,800,000. Prepare Pop’s entry
to reflect the change in value of the earnings contingency, if
(a) the value decline occurs within the measurement period, or
(b) the value decline is due to events occurring subsequent to acquisition.

PROBLEM 3 - 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)

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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.

PROBLEM 4- Comprehensive Problem: Goodwill Computation with Contingent Consideration

On December 31, 20x4, Pure Corporation enters into a business combination by acquiring the
assets and assumed the liabilities of Saint Corporation in which Saint Corporation will be dissolved.
Pure consideration transferred consists of the following:
a. 30,000 unissued shares of its P10 par common stock, with a market value of P25 per share.;
b. P180,000 in long-term 8% notes payable, and
c. A contingent payment of P120,000 cash on January 1, 20x7, if the average income of during
the 2-year period of 20x5 – 20x6 exceeds P300,000 per year. Pure estimates that there is a
30 percent chance or probability that the P120,000 payment will be required.
In addition, Pure pays the following at the time of the merger:
 Finders’ fee P12,000
 Accounting fees, P24,000
 Legal fees to arrange the business combination P42,000
 Cost of SEC registration, including accounting and legal fees P18,000
 Cost of printing and issuing stock certificates P14,400
 Indirect costs of combining, including allocated overhead and executive salaries P27,600
Balance sheet and fair value information for the two companies on December 31, 20x4,
immediately before the merger, is as follows:
Pure Saint
Book Value Fair Value Book Value Fair Value
Cash . . . . . . . . . . . . . . . . . . . . P 276,000 P 276,000 P 24,000 P 24,000
Receivables – net . . . . . . . . . . 96,000 96,000 48,000 48,000
Inventories . . . . . . . . . . . . . . . . 288,000 360,000 120,000 72,000
Land . . . . . . . . . . . . . . . . . . . . 108,000 240,000 72,000 240,000
Buildings – net (10-year life). . . . 480,000 720,000 240,000 360,000
Equipment – net (5-year life) . . . . 432,000 588,000 216,000 300,000
In-process research and
Development . . . . . . . . . . . . . . _________0 _________0 _________0 60,000
Total Assets . . . . . . . . . . . . . . P1,680,000 P2,280,000 P 720,000 P 1,104,000

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 Accounts payable . . . . . . . . . . P 216,000 P216,000 P 72,000 P 72,000
Other liabilities . . . . . . . . . . . . . . 240,000 216,000 144,000 168,000
Common stock, P10 par . . . . . . 720,000 240,000
Additional paid-in capital . . . . . . 240,000 192,000
Retained earnings . . . . . . . . . . 264,000 72,000
Total Liabilities and Equities . . P1,680,000 P 720,000

Required:
1. On December 31, 20x4:
a. Determine the amount of goodwill
b. Prepare the entries required in the books of the acquirer (Pure) in relation to the
acquisition of Saint Corporation.
c. Prepare balance sheet immediately after the business combination.
2. Provisional Amount on Asset Acquired. Assume that the value of the buildings was
provisionally determined on December 31, 20x4. On August 1, 20x5, Pure Corporation
received the final value from the independent appraisal, the fair value at acquisition date
being P384,000.
a. Determine the amount of goodwill.
b. Prepare the required entry to reflect the adjustment, if any.
3. Cash Contingency based on Future Earnings with Measurement Date Rule. Assume that
on August 31, 20x5 because of improved information about facts and circumstances that
existed at the acquisition date, the contingent consideration was revised to an expected
value of P60,000.
a. Determine the amount of goodwill.
b. Prepare the required entry to reflect the adjustment, if any.
c. On November 1, 20x5, the probability value of the contingent consideration amounted
to P P48,000:
c.1. Determine the amount of goodwill.
c.2. Prepare the required entry to reflect the adjustment, if any.
c.3. On December 15, 20x5, due to subsequent change not existing on the acquisition
date the expected value of the contingent consideration amounted was revised
to P78,000:
c.3.1. Determine the amount of goodwill.
c.3.2. Prepare the required entry to reflect the adjustment, if any.
c.3.3. On January 1, 20x7, Saint’s average income in 20x5 is P324,000 and 20x6 is
P312,000, which means that the target is met:
c.3.3.1. Determine the amount of goodwill
c.3.3.2. Prepare the required entry for settlement, if any.

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