Certs

BUSINESS COMBINATION (PA2.M-1413) STRAIGHT PROBLEMS

Problem 1

Agdao corporation paid P5,000,000 to purchase NCR corporation on January 2, 2013, and NCR was dissolved. The purchase price consisted of 10 0,000 shares of agdao’s common agdao’s common stock with a market value of P4,000,000 plus P1,000,000 cash. In addition, Agdao paid 100,000 for registering and issuing the 100,000 shares and P 200,000 for other costs in consummating the combination. The statement of Financial Position for the companies immediately before combination is summarized as follows; Book Value

Agdao Fair value

Book Value

NCR Fair Value

Cash

6,000,000

6,000,000

480,000

480,000

Accounts Receivable (net)

2,600,000

2,450,000

720,000

720,000

Notes Receivable,(net)

3,000,000

2,900,000

600,000

600,000

Inventories

5,000,000

6,000,000

840,000

1,000,000

Other current assets

1,400,000

1,500,000

360,000

400,000

Land

4,000,000

6,000,000

200,000

400,000

Buildings, (net)

18,000,000

17,000,000

1,200,000

2,400,000

Equipment,(net)

20,000,000

18,550,000

1,600,000

1,200,000

Total Assets

60,000,000

60,350,000

6,000,000

7,200,000

2,000,000

2,000,000

600,000

600,000

Mortgage payable, 10%

10,000,000

10,500,000

1,400,000

1,200,000

Capital stock, P10 par

20,000,000

2,000,000

Additional Paid-in capital

16,000,000

1,200,000

Retained Earnings

12,000,000

800,000

Total Liabilities and Shareholder's Equity

60,000,000

6,000,000

Accounts payable

a. Prepare the journal entries to record Agdao’s Agdao’s acquisition of NCR Corporation if it was a  purchase of assets and liabilities; and if it was was a purchase of voting shares.  b. Prepare a statement of financial position for Agdao Corporation on January 2, 2013, immediately after the combination.

Problem 2

Dencio Co. merged into Kit Corp. Co rp. on July 1, 2013. In exchange for the net asset at fair market value of Dencio Co. amounting to P696, 450, Kit 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

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

Dencio will pay an additional cash consideration of P455,000 in the event that kit,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 toP1,250,000. The additional cash consideration was paid. 1. What is the amount of goodwill to be recognized in the statement of financial position as of December 31, 2013? 2. What is the amount of expense to be recognized in the statemenet of financial position as of the year ended December 31, 2013?

Problem 3

Summary information is given for DUBAI, Inc. and DAVAO Company at July 1, 2013. The quoted market price of DUBAI and DAVAO shares are P36 and P40, respectively. DUBAI Inc. Book Value Current Assets Plant Assets Goodwill Totals Liabilities Common Stocks, P10 APIC

DAVAO Company Book Value Fair value

8,000,000

24,000,000

24,000,000

22,000,000

26,000,000

25,000,000

1,500,000 31,500,000

50,000,000

5,000,000

15,000,000

10,000,000

20,000,000

2,000,000

3,000,000

15,500,000

Retained Earnings

14,500,000

12,000,000

Totals

31,500,000

50,000,000

The book values of DUBAI reflects their fair values ex cept for inventory items whose realizable value is 650000 more than its carrying amount, unreported cash on hand of 350000 and a  building costing 8000000 that is 20% depreciated and is appraised at 10400000 DAVAO Company acquires all the net assets of DUBAI by issuing 700000 of its own shares and fifthy P100,000 10% bonds. DAVAO company incurred the following out of pocket costs relating to the acquisition: Legal fees to arrange the business combination Cost of SEC registration Cost of printing and issuing new stock certificates Indirect cost of combination Finder’s fee  Bond issuance transaction cost

P 25,000 12,000 3,000 20,000 35,000 15,000

Calculate the following assuming the entities adopt the full IFRS and IFRS for SMEs a.  b. c. d. e.

 Net assets required Consideration transferred Goodwill/ gain arising from business combination Total assets immediately after combination Total retained earnings after combination

Problem 4

Condensed statements of financial position of Cure Corp. and Class Corp. as of December 31, 2012 are as follows:

Current Asset  Noncurrent Asset Total Asset

CURE P 43,750 181,250 P225,000

CLASS P 16,250 10,6250 P122,500

Liabilities Common Stocks, P20 Par Additional Paid in Capital Retained earnings

P18,750 137,500 8750 62500

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

On January 1, 2013, Cure corp. issued 8750 stocks with a m,arket value on P25/share for the assets and liabilities of Class corp. the book value reflects the fair value of the assets and liabilities except that the noncurrent assets of classhas a temporary appraisal of 15 7500 and the noncurrent assets of Cure are overstated by P7500 . Contingent consideration, which is determinable, is equal to P3750. Cure also paid for the stock issuance costs worth P8500 and the other acquisitioncosts amounting to P4750. On march 1, 2013 the contingent consideration has a determinable amount of P5000. On june 1, 2013, the provisional fair value of the noncurrent assets of class increased by P2250. How much is the combined total assets at the end of 2013? Problem 5

On September 1, 2013, SLU acquires 75%(750,000 ordinary shares) of UB company for P7,500,000. When UB,s shares are trading at P8 per share at the stock market .An independent appraiser estimated that the fair of UB is P9,7000,000. Assuming that the net identifiable assets with a carrying value of P6,000,000 has a fair value of P8,000,000, determine the following:

a)  Non-Controlling Interest and Goodwill/gain if the non-controlling interest is to be valued at the proportionate allocation of acquires net assets.  b)  Non-controlling interest and Goodwil/Gain if the non-controlling interest is to be valued at the fair value of shares held by NCI.

Problem 6

The statemet of financial Position of Lancer Corporation on June 30, 2013 is presented below: Curremt Assets Land Building Equipment Total Assets

32,500 220,000 110,000 87,500 450,000

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 Lancer 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. Krista Corporation acquired 80% of Lancer’s capital stock for P500, 000. Required 1. Assuming the consideration paid includes control premium of P14 2,00, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? 2. Assuming the consideration paid excludes control premium goodwill/(gain on acquisition) on the consolidated financial statement? 3. Assuming the consideration paid includes control premium of P37,000, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? Problem 7

Baguio Company acquires 15% of San Fernando company’s ordinary shares for  P5,000,000 cash and carries the investment using the cost the cost method. A few months later, Baguio purchases another 60% of San Fernando’s ordinary shares for P2,160,000. At that date, San Fernando company reports identifiable assets with a book value of P3,900,000 a fair value of P5,100,00 and it has liabilities with a book value of and fair value of P1,900,000. The fair value of the 25% non-controlling interest in San Fernando company is P0900,000. Determine the: a.  Non-Controlling Interest and Goodwill/ Gain arising from the business combination if  NCI is to be valued using the proportionate basis.  b.  Non-Controlling Interest and Goodwill/Gain arising from the business combination if  NCI is to be valued at the NCI shares Fair Value.

Problem 8

FMM Corporation purchased 30% interest in STO Corporation for P90,000 on January 1, 2013 when STO had ordinary shares of P240,000 and retained earnings of P40,000. Any difference  between the cost of investment and book value acquired is due to undervalued equipment with remaining useful life of 3 years. For the years 2013 to 2015 STO Corporation r eported the following : Net Income

Dividend Declaired

2013

30,000

20,000

2014

50,000

40,000

2015

10,000

40,000

FMM Corporation purchased additional 40% of STO Corporation on January 1, 2013 for P140,000 Assuming that the 30% investment acquired in 2013 is now with a fair value of P90,000 (representing 30% of net assets fair value on that date-difference attributable to land.) Required: 1.) Journal entire to record the above transaction. 2.) The cost of acquisition on January 1, 2013. 3.) The resulting goodwill/gain from acquisition. 4.) The non-controlling interest on January 1, 2013. Problem 9

Entity A issued equity instrument to Entity B on 30 September 20X1. Their price combination balance sheets are: A Current Assets

 _______________

________________

P

P

Non-current Assets

Current Liabilities

B 500

700

1,300

3,000

 _______________

________________

P

1,800

P

P

300

Non-Current Liabilities

3,700

P

600

400

1,100

 _______________

_______________

P

P

700

1,700

800

Owner’s Equity

1,400

Retained Earnings Issued Equity 100 ordinary shares

300

60 ordinary shares

600  _______________ P

1,800

_________________ P

3,700

Additional information: a. On 30 September 20X1, A issues 2 ½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their share in B. A issues 150 ordinary shares in exchange for all

60 ordinary shares of B. b. The fair value of each ordinary share of B at 30 September 20X1 is P40. The quoted market price of A’s ordinary shares at that date is P12.

c.

The fair value of A’s identifiable assets and liabilities at 30 September 20X1 are the same as

their carrying amounts, with the exc emption of non-current assets. The fair value of A’s non current assets at 30 September 20X1 is P1,500. Required: 1. What is the consideration effectively transferred to effect the combination?_____________ 2. How much is goodwill?________________ 3. Prepare theconsolidation financial statement after the combination. 4. What is the number and type of equity interest issued to be disclosed in the equity structure of the consolidated financial statements?________________ 5. Assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. a. How much is the minority interests?_______________ b. How much is the cost of business combination?___________________ c.

How much is goodwill?________________

MULTIPLE CHOICE QUESTION

1. TBB issued 120,000 shares of it’s P25par ordinary shares for all the net assets of HAF Company on July 1, 2013. TBB’s ordinary shares were selling at P30 per share at the acquisition date. In

addition a cash payment of P200,000 was made plus an agreement deferred cash payment of P990,000 payable on July 1, 2013. The market rate ofinterest at the time is 10%. TBB also agreed to pay additional cash consideration of P250,000 in the event TBB’s net income

falls below the current level within the next 2 years. TBB’s financial officers were 99% sure the current level of income at least be sustained during the prescibed period. The following out-of-pocket costs were paid in cash by TBB. Legal and accounting fees paid to advisers

P 8,000

Broker’s fees 

4,000

Indirect acquisition costs

3,000

Costs to issue and register the shares Total

10,400 P 25,400

Determine the cost of the investments for TBB A. 4,700,000 B. 3,800,000 C. 5,040,000 D. 4,950,000 Questions 2 – 3 are based on the following On October 1, 2013, Water Corporation acquired all the assets and assumed all the liabilities of Gulaman Company by issuing 20,000 shares with a fair value of P 67.5 per share and an obligation to pay a contingent consideration with a fair value of P750,000.

In addition, Water paid the following acquisition related costs: Legal fees

P 105,600

Audit fee for SEC registration of stock issue

320,400

Costs of stock certificates

35,000

Broker’s fee 

49,000

Other direct cost of acquisition

50,000

General and Allocated expenses

14,000

The Statement of Financial Position as of Se ptember 30, 2013 of Water and Gulaman, together with the fair market value of the assets and liabilities are presented below:

Water Book Value Cash

P 640,000

Gulaman Fair Value P

640,000

Book Value P

45,000

Fair Value P

45,000

Accounts Receivable

360,000

335,000

70,000

54,000

Inventories

475,000

390,000

87,000

78,000

13,500

5,000

Prepaid Expenses

25,000

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

-

-

P 5,000,000

P 5,750,000

P 2,500,000

Accounts Payable

312,500

312,500

200,000

200,000

Notes Payable

937,500

980,000

700,000

765,000

Total assets

Capital stock,50 par

300,000

2,000,000

850,000

Additional paid in cap.1,000,000

400,000

Retained Earnings

750,000

350,000

P 5,000,000

P 2,500,000

Total Equities

P 2,860,000

Compute for the balances that will be shown on October 1,2013 statement of financial position of the surviving company: 2. Reatained earnings a. P480,000 b. P540,000 c.

P526,000

d. P475,000 3. Total assets

a. P7,015,000 b. P6,980,000 c.

P7,118,000

d. P7,491,000 Question 4-5 are based on the following

Best Company has gained control over the operations of Cure Corporations by acquiring 85% of its outstanding capital stock for P 2,580,000. This amounts includes a control premium of P30,000. Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000 respectively. Best Book Value Cash

Cure Book Value

P3,541,500

P128,000

Accounts Receivable

300,000

325,000

Inventories

550,000

360,000

Prepaid Expense

148,500

125,000

Land

2,350,000

879,000

Building

1,560,000

558,000

300,000

185,000

Equipment Goodwill Total Assets

300,000 P8,750,000

P2,860,000

675,000

253,000

Notes Payable

1,400,000

730,000

Capital Stock,50 Par

3,400,000

800,000

Additional Pain in Capital

1,575,000

600,000

Retained Earnings

1,700,000

477,000

P8,750,000

P2,860,000

Accounts Payable

Total Equities

Fair Value

The following was ascertained on the date of acquisition for Cure 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 w hereas the value of land anfair value of 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 prese nted in the consolidated statement of financial position at the date of business combination: 4. Total assets A. P9,875,000 B. P10,093,000 C. P10,112,000 D. P9,215,000

5. Shareholder’s equity A. P7,000,000 B. P7,500,000 C. P8,200,000 D. P8,000,000 6. AIG Company acquired a 70% interest in EASTWEST Company for P1,960,000 when the fair value of EASTWEST’s identifiable assets and liabilities was P700,000 and elected to measure the non -

controlling interests at its share of the identifiable net assets. Annual impairment reviews of goodwill have not resulted in any impairment losses being recognized. EASTWEST’s current statement of financial position shows share capital of P100,000, a

revaluation reverse of P300,000 and ret ained earnings of P1,400,000. Under IFRS3 Business

combinations,

the figure in respect of goodwill should now be carried in

AIG’s consolidated statement of financial position?

A. P1,470,000 B. P 160,000 C. P1,260,000 D. P700,000 7. Patrick Company acquired the assets (except for cash) and assumed the liabilities of Steve Company on January 2,2013 and Steve Company is dissoved. As compensation, Patrick Company gave 24,000 shares its common stock, 12,000 shares of its 8% preferred stock, and cash of P240,000 to the stockholders of Steve Company. On the date of acquisition, Patrick Company had the following characteristics: Common,par value P5; fair value,P25 Preferred,par value P100; fair value, P100 Immediately prior to acquisition, Steve Company’ s balance sheet was as follows:

Cash

132,000

Current Liabilities

228,000

170,000

Bonds Payable, 10%

400,000

Inventory-LIFO Cost

200,000

Common Stock,P5 par value

600,000

Land

384,000

Additional Paid-in Capital

380,000

Retained Earnings

310,000

Accounts Receivable(net of P4,000 allowance)

Buildings and Equipment(net) Total

1,032,000 P 1,918,000

Total

P 1,918,000

An appraisal of Steve Company showed that the fair values of its assets and liabilities were equal to their book values except for the following, which had fair values as indicated: Accounts Receivable

P158,000

Land

P540,000

Inventory

412,000

Bonds Payable

448,000

How much must be the goodwill recognized as a result of this business combination? A. P322,000 B. P454,000 C. P 94,000 D. P 0 8. On October 2013 BDO Company acquired 100% of PCI Company when the fair value of PCI’s net assets was P116 million and their carrying amount was P120, 000 million. The consideratrion transferred comprised P200 million in cash transferred at the acquisition date, plus another P60 million in cash be transferred 11 months after the acquisition date if a specified profit target was met by PCI. 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 P10 million. In the event, the profit target was met and the P60 million cash was transferred. What amount should BDO present for goodwill in its statement of consolidated financial position at 31 December 2 014, according to IFRS3 Business combinations?  A. P94 Million B. P80 Million C. P84Million D. P144 Million Question 9 and 10 are based on the following :

Giordano Company purchased the net assets of Hanes Company on January 1, 2013, and made the following entry to record the purchase: Current assets

100,000

Equipment

150,000

Land

50,000

Buildings

300,000

Goodwill

100,000 Liabilities

80,000

Common stock,P1 par

100,000

Paid-in Capital in excess of par

520,000

9. A contingent consideration agreement was made on Jan. 1, 2013, wherein an additional cash payment would be on Jan. 1, 2015, e qual to twice the amount by which average annual earnings of the Hanes Division exceed P25,000 per year, prior to January 1, 2015. Net income was P50,000 in 2013 and P60,000, in 2014. How much goodwill will still be recorded on the books on January 1, 2015? A. P60,000 B. P120,000 C. P85,000

D. None 10. A contigent consideration agreement was made on January 1, 2013, wherein additional shares would be issued on January 1,2015, to compensate for any fall in the value of Giordano common stock below P6 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on Jan. 1,2015. The market price of the shares on Jan. 1,2015, was P4. How many shares will Giordano still issue on January 1,2015? A.

50,000

B. 100,000 C. 20,000 D. 51,667