BUSINESS COMBI - ACQUISITION.docx

BUSINESS COMBINATION – DATE OF ACQUISITION #0012 ACQUISITION OF NET ASSETS AND ACQUISITION OF STOCKS PROBLEM 1. STAR Corporation is a company involved in manufacturing cars. On January 1, 2013, the board of directors of the said company has decided to acquire the net assets of NOVA Corporation and RISE Corporation, suppliers of materials they use in production. The merger is expected to result in producing higher quality cars with lower total cost. The deal was closed on February 29, 2013 and the following information was gathered from the books of the entities: Current Assets Noncurrent Assets Total Assets

STAR P1,375,000 3,125,000 P4,500,000

NOVA P390,000 2,550,000 P2,940,000

RISE P260,000 1,700,000 P1,960,000

Liabilities Common stock, P100 par Additional Paid-in capital Retained earnings Total equity & liability

P325,000 2,748,500 176,500 1,250,000 P4,500,000

P210,000 1,780,200 169,800 780,000 P2,940,000

P140,000 1,186,800 113,200 520,000 P1,960,000

Star will issue 22,500 of its common stock in exchange for the net assets of Nova and 11,200 of its common stock in exchange for the net assets of Rise. The fair value of Star’s shares is P150. In addition, the following adjustments should be made:  

Current assets of Nova and Rise have a fair value of P450,000 and P230,000 respectively. Noncurrent assets have a fair value of P2,150,000 and P1,975,000 for Nova and Rise, respectively.

Compute for the following balances of Star Company on the date of acquisition: Stockholders’ equity A. P6,118,500 B. P7,980,000 C. P3,496,500 D. P9,615,000 Assets A. P10,290,000 B. P9,240,000 C. P10,500,000 D. P9,840,000 PROBLEM 2. Denim Co. merged into Kraft Corp. on July 1, 2013. In exchange for the net assets at fair market value of Denim Co. amounting to P696,450, Kraft issued 68,000 common 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 BUSINESS COMBINATION – DATE OF ACQUISITION #0012

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

BUSINESS COMBINATION – DATE OF ACQUISITION #0012 Denim will pay an additional cash consideration of P455,000 in the event that Kraft’s net income will be equal or greater than P950,000 for the period ended December 31, 2013. At 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, 2013 amounted to P1,250,000. The additional cash consideration was paid. What is the amount of goodwill to be recognized in the statement of financial position as of December 31, 2013? A. P295,450 B. P308,500 C. P314,550 D. P326,550 What is the amount of expense to be recognized in the statement of comprehensive income for the year ended December 31, 2013? A. P257,200 B. P517,200 C. P307,400 D. P412,500 PROBLEM 3. On October 1, 2013, Winner Corporation acquired all the assets and assumed all the liabilities of Getter 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, Winner 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

P 105,600 320,400 35,000 49,000 50,000 14,000

The Statement of Financial Position as of September 30, 2013 of Winner and Getter, together with the fair market value of the assets and liabilities are presented below: Winner Book value Fair value Cash Accounts Receivable Inventories Prepaid expenses Land Building Equipment Goodwill Total Assets

P640,000 360,000 475,000 25,000 2,000,000 800,000 700,000 5,000,000

P640,000 335,000 390,000 2,900,000 900,000 585,000 5,750,000

Accounts Payable Notes payable Capital stock, P50 par Additional paid in capital Retained earnings

312,500 937,500 2,000,000 1,000,000

312,500 980,000

750,000

BUSINESS COMBINATION – DATE OF ACQUISITION #0012

Getter Book Fair value value P45,000 P45,000 70,000 54,000 87,000 78,000 13,500 5,000 900,000 1,550,000 723,000 768,000 361,500 360,000 300,000 2,500,000 2,860,000 200,000 700,000 850,000 400,000 350,000

200,000 765,000

BUSINESS COMBINATION – DATE OF ACQUISITION #0012 Total Liability & Equity

5,000,000

2,500,000

Compute for the balances that will be shown on the October 1, 2013 statement of financial position of the surviving company: Retained earnings A. P480,000 B. P540,000 C. P526,000 D. P475,000 Total Assets A. P7,015,000 B. P6,980,000 C. P7,118,000 D. P7,491,000 PROBLEM 4. The Statement of Financial Position of Luster Corporation on June 30, 2013 is presented below: Current assets P32,500 Land 220,000 Building 110,000 Equipment 87,500 Total Assets P450,000 Liabilities Capital stock, P5 par Additional paid in capital Retained earnings Total equities

87,500 150,000 137,500 75,000 P450,000

All the assets and liabilities of Luster assumed to approximate their fair values except for land and building. It is estimated that the land have a fair value of P350,000 and the fair value of the building increased by P80,000. Kernel Corporation acquired 80% of Luster’s capital stock for P500,000. Assuming the consideration paid includes control premium of P142,000, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? A. P60,000 B. P48,000 C. P42,000 D. P50,000 Assuming the consideration paid excludes control premium of P23,000, and the fair value of the noncontrolling interest is P122,750, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? A. P78,250 B. P73,250 C. P69,500 D. P74,750 Assuming the consideration paid includes control premium of P37,000, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? A. P43,250 B. P73,250 C. P56,750 D. P68,350

BUSINESS COMBINATION – DATE OF ACQUISITION #0012

BUSINESS COMBINATION – DATE OF ACQUISITION #0012 PROBLEM 5. Better Company has gained control over the operations of Calm Corporation by acquiring 85% of its outstanding capital stock for P2,580,000. This amount includes a control premium of P30,000. Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000 respectively. Better Calm Book Value Book Value Fair Value Cash P3,541,500 P128,000 Accounts receivable 300,000 325,000 Inventories 550,000 360,000 Prepaid expenses 148,500 125,000 Land 2,350,000 879,000 Building 1,560,000 558,000 Equipment 300,000 185,000 Goodwill 0 300,000 Total Assets P8,750,000 P2,860,000 Accounts Payable Notes payable Capital stock, 50 par Additional paid in capital Retained earnings Total equities

675,000 1,400,000 3,400,000 1,575,000 1,700,000 P8,750,000

253,000 730,000 800,000 600,000 477,000 P2,860,000

The following was ascertained on the date of acquisition for Calm Corporation:   

The value of receivables and equipment has decreased by P25,000 and P14,000 respectively. The fair value of inventories is now P436,000 whereas the value of land and building has increased by P471,000 and P107,000 respectively. There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes is P738,000.

Compute for the following balances to be presented in the consolidated statement of financial position at the date of business combination: Total Assets A. P9,875,000 B. P10,093,000 C. P10,112,000 D. P9,215,000 Total Shareholders’ Equity A. P7,000,000 B. P7,500,000 C. P8,200,000 D. P8,000,000 PROBLEM 6. On January 2, 2013, the Statement of Financial Position of Pepper and Steak Company prior to the combination are: Pepper Co. Steak Co. Cash P450,000 P 15,000 Inventories 300,000 30,000 PPE, net 750,000 105,000 Total Assets P1,500,000 P150,000 Current Liabilities Common stock, P100 par Additional Paid in capital BUSINESS COMBINATION – DATE OF ACQUISITION #0012

P 90,000 150,000 450,000

P 15,000 15,000 30,000

BUSINESS COMBINATION – DATE OF ACQUISITION #0012 Retained earnings Total Liabilities and Stockholders’ equity

810,000 P1,500,000

90,000 P150,000

The fair value of Steak Company’s equipment is P153,000. Assume the following independent cases: 1. Assuming Pepper Company acquired 70% of the outstanding common stock of Steak Company for P105,000 and Non-controlling interest is measured at fair value of P61,000, how much is the goodwill (gain on acquisition)? A. P(17,000) B. P17,000 C. P23,100 D. P(23,100) 2. Assuming Pepper Company acquired 80% of the outstanding common stock of Steak Company for P136,800 and non-controlling interest is measured at noncontrolling interest’s proportionate share of Steak Company’s identifiable net assets, how much is the consolidated stockholders’ equity on the date of acquisition? A. P1,410,000 B. P1,419,600 C. P1,446,600 D. P1,456,200 3. Assuming Pepper Company acquired 90% of the outstanding common stock of Steak Company for P243,000 and Non-controlling interest is measured at fair value, how much is the total consolidated assets on the date of acquisition? A. P1,542,000 B. P1,785,000 C. P1,737,000 D. P1,494,000 PROBLEM 7. Acquirer Company acquires 25% of Acquired Company’s common stock for P190,000 cash and carries the investment using the cost method. After three months, Parent purchases another 60% of Subsidiary’s common stock for P540,000. On this date, acquired company reports identifiable net assets with carrying value of P720,000 and fair value of P920,000. The liabilities of the acquired company has a book value and a fair value of P280,000. The fair value of the 15% non-controlling interest is P125,000. How much is the goodwill or (gain on acquisition)? A. P(17,000) B. P250,000 C. P(30,000) D. P263,000 PROBLEM 8. Condensed statements of financial position of Care Corp. and Charm Corp. as of December 31, 2012 are as follows: Current Assets Noncurrent assets Total assets Liabilities Common stocks, P20 par Additional paid in capital Retained earnings

Care P 43,750 181,250 P225,000

Charm P 16,250 106,250 P122,500

P 16,250 137,500 8,750 62,500

P8,750 75,000 6,250 32,500

BUSINESS COMBINATION – DATE OF ACQUISITION #0012

BUSINESS COMBINATION – DATE OF ACQUISITION #0012 On January 1, 2013, Care Corp. issued 8,750 stocks with a market value of P25/share for the assets and liabilities of Charm Corp. The book value reflects the fair value of the assets and liabilities, except that the noncurrent assets of Charm has a temporary appraisal of P157,500 and the noncurrent assets of Care are overstated by P7,500. Contingent consideration, which is determinable, is equal to P3,750. Care also paid for the stock issuance costs worth P8,500 and other acquisition costs amounting to P4,750. On March 1, 2013, the contingent consideration has a determinable amount of P5,000. On June 1, 2013, the provisional fair value of the noncurrent assets of Charm increased by P2,250. How much is the combined total assets at the end of 2013? A. B. C. D.

P435,500 P443,000 P442,000 P444,250 *** END ***

BUSINESS COMBINATION – DATE OF ACQUISITION #0012