Solution Chapter 14 - advanced accounting II 2014 by Dayag

Chapter 14

Problem I 1. Consideration transferred : FMV of shares issued by Robin (80,000 sh × P28) = P2,240,000 2. Consideration trasnferred P2,240,000 Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000 Goodwill P 520,000 Problem II 1.. Accounts Receivable Inventory Land Building Equipment Patent Goodwill Acquisition Expense Current Liabilities Long-term Debt Cash Consideration trasnsferred : Cash P560,000 Less : Fair value of West’s net assets (P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000 – P70,000 - P160,000) 550,000 Goodwill P 10,000 2.

Acquisition Expense Accounts Receivable Inventory Land Building Equipment Patent Current Liabilities Long-term Debt Cash Gain on Acquisition

180,000 400,000 50,000 60,000 70,000 20,000 10,000 20,000 70,000 160,000 580,000

20,000 180,000 400,000 50,000 60,000 70,000 20,000

Consideration trasnsferred : Cash P500,000 Less : Fair value of West’s net assets (P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000 – P70,000 - P160,000) 550,000 Bargain Purchase Gain (P 50,000) Problem III Accounts Receivable Inventory Land Buildings and Equipment Goodwill

231,000 330,000 550,000 1,144,00 0 848,000

70,000 160,000 520,000 50,000

Allowance for Uncollectible Accounts (P231,000 P198,000) Current Liabilities Bonds Payable Premium on Bonds Payable (P495,000 - P450,000) Preferred Stock (15,000 x P100) Common Stock (30,000 x P10) PIC - par (P25 - P10) x 30,000 Cash

33,000 275,000 450,000 45,000 1,500,000 300,000 450,000 50,000

Consideration transferred: (P1,500,000 + P750,000 + P50,000)

P2,300,000

Less: Fair value of net assets (198,000 + 330,000 + 550,000 + 1,144,000 – 275,000 – 495,000) = Goodwill

Problem IV Current Assets Plant and Equipment Goodwill Liabilities Cash

1,452,000 P

848,000

960,000 1,440,000 336,000

Estimated Liability for Contingent Consideration

216,000 2,160,00 0 360,000

Problem V The amount of the contingency is P500,000 (10,000 shares at P50 per share) 1. Goodwill 500,000 Paid-in-Capital for Contingent Consideration Issuable 2.

Paid-in-Capital for Contingent Consideration – Issuable 500,000 Common Stock (P10 par) Paid-In-Capital in Excess of Par Platz Company does not adjust the original amount recorded as equity.

Problem VI 1. January 1, 20x4 Accounts Receivable Inventory Land Buildings Equipment Goodwill Allowance for Uncollectible Accounts Accounts Payable Note Payable Cash

72,000 99,000 162,000 450,000 288,000 54,000

500,000

100,000 400,000

7,000 83,000 180,00 0 720,00

0 135,00 0

Estimated Liability for Contingent Consideration

Consideration transferred (P720,000 + P135,000) P855,000 Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000 Goodwill P 54,000 2. January 2, 20x6 Estimated Liability for Contingent Consideration Cash

135,000

3. January 2, 20x6 Estimated Liability for Contingent Consideration Gain on Contingent Consideration

135,000

Problem VII 1. Accounts Receivable Inventory Land Buildings Goodwill Allowance for Uncollectible Accounts Accounts Payable Note Payable Cash

240,000 320,000 1,508,000 1,392,000 30,000

Goodwill Estimated Liability for Contingent Consideration Consideration transferred Fair value of net assets acquired (P3,440,000 – P870,000) Goodwill 2.

135,000

135,000

20,000 270,000 600,000 2,600,000

200,000 200,000

P2,600,000 2,570,000 P 30,000

Estimated Liability for Contingent Consideration Gain on Contingent Consideration

200,000 200,000

Problem VIII Current Assets Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) Goodwill * Liabilities Long-term Debt Common Stock (144,000  P5) PIC - par (144,000 x P15 - P5))

362,000 2,013,000 395,000 119,000 491,000 720,000 1,440,000

* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000 Total shares issued (P700,000 / P5) + P20,000 / P5)

144,000

Fair value of stock issued (144,000P15)

= P2,160,000

Problem IX Case A Consideration transferred

P130,000

Less: Fair Value of Net Assets Goodwill

120,000 P 10,000

Case B Consideration transferred Less: Fair Value of Net Assets Goodwill

P110,000 90,000 P 20,000

Case C Consideration transferred Less: Fair Value of Net Assets Gain

Goodwill Case A

P15,000 20,000 (P 5,000)

Assets Current Assets

P10,000

Liabilities Long-Lived Assets P130,000

P20,000 Case B Case C

20,000 0

Retained Earnings (Gain)

30,000 20,000

P30,000 80,000 40,000

20,000 40,000

Problem X 1. Fair Value of Identifiable Net Assets Book values P500,000 – P100,000 = Write up of Inventory and Equipment: (P20,000 + P30,000) = Consideration transferred above which goodwill would result

0 0 5,000

P400,000 50,000 P450,000

2.

Equipment would not be written down, regardless of the purchase price, unless it was reviewed and determined to be overvalued originally. 3. A gain would be shown if the purchase price was below P450,000. 4. Anything below P450,000 is technically considered a bargain. 5. Goodwill would be P50,000 at a purchase price of P500,000 or (P450,000 + P50,000). Problem XI Present value of maturity value, 20 periods @ 6%: P187,080 Present value of interest annuity, 20 periods @ 6%: 344,098 Total Present value Par value Discount on bonds payable

0.3118 x P600,000 = 11.46992 x 30,000 = 531,178 600,000 P68,822

Cash Accounts Receivable Inventory Land Buildings Equipment Bond Discount (P40,000 + P68,822) Current Liabilities Bonds Payable (P300,000 + P600,000) Gain on Acquisition of Stalton (ordinary)

114,000 135,000 310,000 315,000 54,900 39,450 108,822 95,300 900,000 81,872

Computation of Excess of Net Assets Received Over Cost Consideration transferred (P531,178 plus liabilities assumed of P95,300 and P260,000)

P886,478

Less: Total fair value of assets received Excess of fair value of net assets over cost

P968,350 (P 81,872)

Problem XII In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated to each identifiable asset and liability acquired with any remaining excess attributed to goodwill. Consideration transferred (shares issued) Fair value of net assets acquired: Cash Receivables Trademarks Record music catalog In-process R&D Equipment Accounts payable Notes payable Goodwill Entry by NT to record combination with OTG: Cash Receivables Trademarks Record Music Catalog Capitalized R&D Equipment Goodwill Accounts Payable Notes Payable Common Stock (NewTune par value) PIC - par (To record merger with OTG at fair value) PIC - par

P750,000 P29,000 63,000 225,000 180,000 200,000 105,000 (34,000) (45,000)

29,000 63,000 225,000 180,000 200,000 105,000 27,000

25,000

723,000 P27,000

34,000 45,000 60,000 690,000

Cash (Stock issue costs incurred)

25,000

Post-Combination Balance Sheet: Assets Cash Receivables Trademarks Record music catalog Capitalized R&D Equipment Goodwill Total

P

64,000 213,000 625,000 1,020,000 200,000 425,000 27,000 P 2,574,000

Problem XIII Stockholders’ Equity: Common Stock, P1 par Other Contributed Capital P10,000] Retained Earnings Total stockholders’ Equity

Liabilities and Owners’ Equity Accounts payable Notes payable Common stock Paid-in capital - par Retained earnings Total

P 144,000 415,000 460,000 695,000 860,000 P 2,574,000

P1,100,000 4,090,000 [P2,800,000 + (100,000 x P13) – 600,000 P 5,790,000

Problem XIV Entry to record the acquisition on Pacifica’s records: Cash Receivables and inventory PPE Trademarks IPRD Goodwill Liabilities Common Stock (50,000 x P5) Paid-In Capital in excess of par (50,000 x P15) Contingent performance obligation

85,000 180,000 600,000 200,000 100,000 77,500 180,000 250,000 750,000 62,500

The goodwill is computed as: Consideration transferred: 50,000 shares x P20 P1,000,000 Contingent consideration: P130,000 payment x 50% probability x 0.961538 62,500 Total P1,062,500 Less: Fair value of net assets acquired (P85,000 + P180,000 + P600,000 + P200,000 + P100,000 - P180,000) 985,000 Goodwill P 77,500 Acquisition expenses Cash PIC - par Cash

15,000 15,000 9,000

9,000

Note: The following amounts will appear in the income statement and statement of retained earnings after business combination:

PP Inc. (1,200,000) 890,000 (310,000) (950,000) (310,000) 90,000 *(1,170,000)

Revenues Expenses (P875,000 + P15,000) Net income Retained earnings, 1/1 Net income Dividends paid Retained earnings, 12/31 * or, P1,185,000 – P15,000 = P1,170,000

Problem XV Acquisition Method—Entry to record acquisition of Sampras Consideration transferred Contingent performance obligation Consideration transferred (fair value) Fair value of net identifiable assets Goodwill

P300,000 15,000 315,000 282,000 P33,000

Receivables Inventory Buildings Equipment Customer list IPRD Goodwill Current liabilities Long-term liabilities Contingent performance liability Cash

80,000 70,000 115,000 25,000 22,000 30,000 33,000 10,000 50,000 15,000 300,000

Acquisition expenses Cash

10,000

Problem XVI 1. a. The computation of goodwill is as follows: Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 30% probability Total Less: Fair value of identifiable assets acquired and liabilities assumed: Cash Receivables – net Inventories Land

10,000

P 750,000 180,000 36,00 0 P 966,000

P

24,000 48,000 72,000 240,000

Buildings – net Equipment – net In-process research and development Accounts payable Other liabilities Positive Excess – Goodwill

360,000 300,000 60,000 ( 72,000) ( 168,000)

864,000 P 102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows: Cash Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Goodwill Accounts payable Other liabilities Notes payable Estimated Liability for Contingent Consideration Common stock (P10 par x 30,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares] Acquisition of Saul Company.

24,000 48,000 72,000 240,000 360,000 300,000 60,000 102,000 62,000 168,000 180,000 36,000 300,000 450,000

Acquisition-related expenses Cash Acquisition related costs – direct costs.

78,000

Paid-in capital in excess of par Cash Acquisition related costs – costs to issue and register stocks.

32,400

Acquisition-related expenses Cash Acquisition related costs – indirect costs.

27,600

78,000

32,400

27,600

c. The balance sheet of Pure Corporation immediately after the acquisition is as follows: Pure Corporation Balance Sheet December 31, 20x4 Assets Cash Receivables – net Inventories Land Buildings – net

P

162,000 144,000 360,000 348,000 840,000

Equipment – net In-process research and development Goodwill

732,000 60,000 102,00 0 P2,748,000

Total Assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Other liabilities Notes payable Estimated liability for contingent consideration Total Liabilities Stockholders’ Equity Common stock, P10 par

P 288,000 408,000 180,000 36,000 P 912,000 P 1,020,000 657,600 158,400 P1,836,000 P2,748,000

Paid-in capital in excess of par1 Retained earnings2 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 1 P240,000 + P446,400 – P32,400 2 P264,000 - P78,000 – P27,600

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the acquisition date. This requirement does not extend to R&D in contexts other than business combinations.

2.

a. Assets that have been provisionally recorded as of the acquisition date are retrospectively adjusted in value during the measurement period for new information that clarifies the acquisition-date value. The adjustments affect goodwill since the measurement period is still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill to be reported then on the acquisition should be P78,000 (P102,000 – P24,000). b. Buildings Goodwill

24,000 24,000

Adjustment to goodwill due to measurement date.

3.

a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 + P24,000). b. The adjustment is still within the measurement period, the entry to adjust the liability would be: Goodwill 24,000 Estimated liability for contingent 24,000 consideration Adjustment to goodwill due to measurement date.

c.

c.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to P48,000, the entry to adjust the liability would be: Estimated liability for contingent consideration Gain on estimated contingent consideration Adjustment after measurement date.

12,000 12,000

In this case, the measurement period ends at the earlier of:  one year from the acquisition date, or  the date when the acquirer receives needed information about facts and circumstances (or learns that the information is unobtainable) to consummate the acquisition.

c.3. c.3.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5). c.3.2. On December 15, 20x5, the entry would be: Loss on estimated liability contingent consideration Estimated liability for contingent consideration

30,000 30,000

Adjustment after measurement date.

c.3.3. c.3.3.1. P126,000. c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000, which means that the target is met, Peter Corporation will make the following entry: Estimated liability for contingent consideration Loss on estimated contingent consideration Cash

78,000 42,000 120,000

Settlement of contingent consideration.

4. a. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 35% probability x (1/[1 + .04]*) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Goodwill

P

750,000 180,000 40,385 P 970,385 864,000 P 106,385

b. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000

Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Goodwill Accounts payable Other liabilities Notes payable Estimated Liability for Contingent Consideration Common stock (P10 par x 30,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares]

48,000 72,000 240,000 360,000 300,000 60,000 106,386 62,000 168,000 180,000 40,385 300,000 450,000

c. c.1. Goodwill remains at P106,385. c.2. The entry for Pure Corporation on December 31, 20x5 to record such occurrence would be: Estimated liability for contingent consideration Gain on estimated contingent consideration

40,385 40,385

Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the conditions that prevent the target from being met occurred in a subsequent period and that Peter had the information to measure the liability at the acquisition date based on circumstances that existed at that time. Thus the adjustment will flow through income statement in the subsequent period. d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent consideration would be: Estimated liability for contingent consideration Loss on estimated contingent consideration Cash [(P78,000 + P84,000)/2 – P30,000] x 2

36,000 66,000 102,000

Settlement of contingent consideration.

5.

a. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 P 750,000 Notes payable 180,000 Contingent consideration (cash contingency): 36,000 P120,000 x 30% probability Contingent consideration (stock 18,000 contingency) Total P 984,000 Less: Fair value of identifiable assets acquired and 864,000 liabilities assumed (refer to 1a above)

Positive Excess – Goodwill

P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 120,000 Accounts payable 72,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 36,000 Consideration Paid-in capital for Contingent Consideration 18,0 00 Common stock (P10 par x 30,000 shares) 300,000 Additional paid-in capital [(P25 – P10) x 450,000 30,000 shares] Acquisition of Saul Company. c. Pure Corporation will make the following entry for the issuance of 1,200 additional shares: Paid-in capital for Contingent Consideration 18,000 Common stock (P10 par x 1,200 shares) 12,000 Paid-in capital in excess of par 6,000 Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to contingency) would be: Paid-in capital in excess of par Common stock (P10 par x 6,000 shares)

60,000 60,000

Settlement of contingent consideration.

7. On January 1, 20x7, the contingent event happens since the fair value per share fall below P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be: Paid-in capital in excess of par Common stock (P10 par x 7,500 shares)

75,000 75,000

Settlement of contingent consideration.

* Deficiency: (P25 – P20) x 25,000 shares issued to acquire..P150,000 Divide by fair value per share on January 1, 20x7………….P 20 Added number of shares to issue………………………………. 7,500 8. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25

P 750,000

Notes payable Contingent consideration (stock contingency): [(P750,000 – P510,000) x 40% probability x (1/[1 + .04]*) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Positive Excess – Goodwill * present value of P1 @ 4% for one period.

180,000 92,308 P1,022,308 864,000 P 158,308

The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 158,308 Accounts payable Other liabilities Notes payable Paid-in capital for Contingent Consideration Common stock (P10 par x 25,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares]

62,000 168,000 180,000 92,308 300,000 450,000

On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul Corporation. The entry for Peter Corporation on December 31, 20x5 to record such occurrence such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be: Paid-in capital for Contingent Consideration Common stock, P10 par Paid-in capital in excess of par

92,308 75,000 17,308

Settlement of contingent consideration.

* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000 Divide by fair value per share on December 31, 20x5……P 20 Added number of shares to issue……………………………… 7,500 Problem XVII 1. The computation of bargain purchase gain is as follows: Consideration transferred; Cash Common shares: 120,000 shares x P12 Costs of liquidation Patent Contingent consideration (P12,000 guarantee + P14,400 to vendors) Total Less: Fair value of identifiable assets acquired and liabilities assumed: Merchandise inventory

P 1,800,000 1,440,000 12,000 240,000 26,400 P3,518,400 P1,440,00

0 900,000 240,000 1.380,000 ( 300,000 ) ( 120,000)

Accounts receivable Copyrights Equipment Accounts payable Loan payable Negative Excess – Bargain Purchase Gain

3,540,000 P ( 21,600)

2. The journal entries by Ponder Corporation to record the acquisition is as follows: Merchandise inventory 1,440,000 Accounts receivable 900,000 Patent 240,000 Equipment 1,380,000 Accounts payable 300,000 Loan payable 120,000 Cash 1,812,000 Common stock (P10 par x 120,000 shares) 1,200,000 Paid-in capital in excess of par [(P12 – P10) x 120,000 shares] 240,000 Gain on sale of Patent 240,000 Estimated liability for contingent consideration 26,400 Bargain purchase gain 21,600 Problem XVIII 1. Consideration transferred: Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain Homer Ltd Accounts Receivable Inventory Freehold Land Buildings Plant and Equipment Payable to Tan Ltd Common stock, P1 par x 40,000 shares Additional paid-in capital Gain on acquisition

128,000 45,100 44,000 52,500 2,400 144,000 (12,000) P34,700 39,000 130,000 40,000 46,000

34,700 39,000 130,000 40,000 46,000

132,000 260,000

289,700 29,700

132,000 40,000 88,000 29,700

(Acquisition of net assets of Tan Ltd and shares issued) Payable to Tan Ltd Cash (Being payment of cash consideration) Paid-in capital in excess of par Cash (Being costs of issuing shares)

132,000

1,200

132,000

1,200

2. Tan LTD General Ledger Liquidation P 34,700 Additional paid in capital 27,600 Retained earnings 100,000 Receivable from Homer Ltd 30,000 46,000 2,000 4,000 2,400 2,500 1,600 68,000 318,800

Accounts Receivable Inventory Freehold Land Buildings Plant and Equipment Goodwill Interest Payable Liquidation Expenses Premium on Debentures Accounts Payable Shareholders’ Distribution

Opening Balance Receivable from Homer Ltd

Shares in Homer Ltd

Liquidator’s Cash P 12,000 Liquidation Expenses 132,000 Mortgage and Interest Debentures and Premium Accounts Payable 144,000

Shareholders’ Distribution P 128,000 Common stock Liquidation 128,000

Problem XIX Cash Accounts Receivable Inventory Land Plant Assets Discount on Bonds Payable Goodwill* Allowance for Uncollectible Accounts Accounts Payable Bonds Payable Deferred Income Tax Liability Cash

P 26,800 32,000 260,000

318,800 P 2,400 44,000 52,500 45,100 144,000

P 60,000 68,0000 128,000 20,000 112,000 134,000 55,000 463,000 20,000 127,200

10,000 54,000 200,000 67,200 600,000

Consideration transferred P600,000 Less: Fair value of net assets acquired (P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800 Goodwill P127,200

* Increase in net assets Increase inventory, land, and plant assets to fair value P52,000 + P25,000 + P71,000) Decrease bonds payable to fair value Increase in net assets Establish deferred income tax liability (P168,000 x 40%)

P148,000 ( 20,000) P168,000 P 67,200

Multiple Choice Problems 1. c

Finder’s fees…………………………………………………….P 40,000 Legal fees………………………………………………………. 13,000 Total expenses…………………………………………………. P53,000 Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fee; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is required to recognize acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception, i.e. the costs to issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and PAS 39 (for debt).

2. b – refer to No. 1 for further discussion. Audit fees related to stock issuance………………………………P 10,000 Stock registration fees……………………………………………...... 5,000 Stock listing fees…………………………………………………......... 4,000 P 19,000 3. c 4. a – at fair value 5. c – (P50,000 + P8,000 + P100,000 = P158,000) The acquirer should recognize, separately from goodwill, the identifiable assets acquired in a business combination. [PFRS 3 (2008).B31] A patent that have no useful life is not considered an asset. An intangible is separable if it capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually together with a related contract…[PFRS 3(2008).B33] The amount by which the lease terms are favorable compared with the terms of current market transactions for the same or similar items is an intangible assets that meets the contractual-legal criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease contract. [PFRS 3 (2008).B32 (a)] Customer and subscriber lists are frequently licensed and thus meet the separability criterion. [PFRS 3(2008).B33].

It may seem that the terms “research” and “development”, which may be associated with such assets as patent and software development, are not applicable to all internally intangibles, such as brand names. However, it needs to be remembered that all intangible assets must meet the identifiability criterion, one part of which is separability. 6. a PFRS 3 (2008 requires that, at the acquisition date, the identifiable assets acquired and liabilities assumed should be designated as necessary to apply other PFRSs subsequently. The acquirer makes those classifications or designations on the basis of contractual terms, ... as they exist at the acquisition date [PFRS 3 (2008).15] Since, the patent was not recorded separately as identifiable intangible asset on the date of acquisition, and then no amount of patent should be subsequently recognized. 7. b Consideration transferred (fair value)…………………….. P80,000 Less: Fair value of net identifiable assets acquired: Fair value of assets……………………………………… P 98,000 Less: Present value/ Fair Value of liabilities………… 23,000 75,000 Goodwill…………………………………………………… P 5,000  A net identifiable asset means net assets excluding goodwill (unidentifiable asset).  An acquisition-related costs are considered outright expenses. 8. d – [P1,600,000 – P1,210,000] = P390,000 9. a – [(P1,600,000 – PP390,000) - P1,210,000] = P0 10. b PFRS No. 3 par. 62 states that: “If the initial accounting for business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities, or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognize any adjustments to those provisional values as a result of completing the initial accounting: (a) within twelve months of the acquisition date; and …” 11. b The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par 32. When provisional fair values have been identified at the first reporting date after the acquisition, adjustments arising within the measurement period (a maximum of 12 months from the acquisition date) should be related back to the acquisition date. Subsequent adjustments are recognized in profit or loss, unless they can be classified as errors under PAS8 Accounting policies, changes in accounting estimates and errors. See PFRS 3 pars. 45 and 50. The final amount of goodwill is P160 million consideration transferred less P135 million fair values on May 31, 20x5 = P25 million. 12. c Fair value of Subsidiary - Homer Consideration transferred………………………………………………………P 200 million Add: Fair value of contingent consideration……………………………… 10 million Fair value of subsidiary………………………………………………………… P 210 million Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million

Goodwill…………………………………………………………………………… P 94 million Note: The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The contingent consideration should be measured at its fair value at the acquisition date; any subsequent change in this cash liability comes under PAS 39 Financial instruments: recognition and measurement and should be recognized in profit or loss, even if it arises within the measurement period. See PFRS 3 pars. 39, 40 and 58. 13. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000) = P104,000 14. d APIC: P20,000 + [(P42 – P5) x12,000 = P464,000 Retained earnings: P160,000, parent only 15. b Inventory: PP230,000 + P210,000 = P440,000 Land: P280,000 + P240,000 = P520,000 16. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000 17. a Cost of Investment (100,000 shares x P1.90) 190,000 Less: Market value of net assets acquired: Cash Furniture and fittings Accounts receivable Plant Accounts payable Current tax liability Liabilities 175,000 Goodwill 18. b

P P 50,000 20,000 5,000 125,000 (15,000) ( 8,000) ( 2,000) P 15,000

Cost of Investment [P20,000 + (16,000 shares x P2.50) + P500, incidental costs) Less: Market value of net assets acquired: Plant P 30,000 Inventory 28,000 Accounts receivable 5,000 Plant 20,000 Accounts payable ( 20,000) Goodwill P

P 60,500

58,000 2,500

When it liquidates, costs of liquidation paid by the acquiree should be for the liquidation account of the acquiree and will eventually be transferred to shareholders’ equity account. Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of the combination.

Any direct costs of acquisition should be capitalizable under the cost model reiterated in PFRS No. 3 Phase I. This model in PFRS No. 3 will be amended under Phase II (pending implementation possibly until early 2008), wherein all direct costs will be outright expense. Costs of issuing shares will be debited to share premium or APIC account. Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of the combination. The fair values of liabilities undertaken are best measured by the present values of future cash outflows. Intangible assets are recognized when its fair value can be measured reliably. Assets other than intangible assets must be recognized if it is probable that the future economic benefits will flow to the acquirer and its fair value can be measured reliably. 19. c

AA records new shares at fair value Value of shares issued (51,000 × P3)............................................... P153,000 Par value of shares issued (51,000 × P1)......................................... 51,000 Additional paid-in capital (new shares) ............................................ P102,000 Additional paid-in capital (existing shares) ...................................... 90,000 Consolidated additional paid-in capital............................................. P192,000

At the date of acquisition, the parent makes no change to retained earnings. 20. a – at fair value 21. c Depreciation expense: Building, at book value (P200,000 – P100,000) / 10 years Building, undervaluation (P130,000, fair value – P100,000, book value) / 10 years Equipment, at book value (P100,000 – P50,000) / 5 years Equipment, undervaluation (P75,000, fair value - P50,000, book value) / 5 years Total depreciation expense

P 10,000 3,000 10,000 5,000 P 28,000

22. c - [(24,000 shares x P30) – P686,400] = P33,600 23. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain 24. b Consideration transferred (fair value) P400,000 Less: Fair value of net assets acquired (P60,000 + P175,000 + P200,000 + P225,000 + P75,000 – P100,000) 385,000 Goodwill P 15,000 25. a - only the subsidiary’s post-acquisition income is included in consolidated totals. 26. c

A bargain purchase is a business combination in which the net fair value of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred.

2.

It should be noted that bargain purchase gain would arise only in exceptional circumstances. Therefore, before determining that gain has arisen, the acquirer has to: 1. Reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed. The acquirer should recognize any additional assets or liabilities that are identified in that review. Any balance should be recognized immediately in profit or loss. 27. d

Cost P180,000 Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs) 18,000 Net book value P162,000

28. c Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] P312,000 Less: Shares issued at par (15,000 shares x P10 par) 150,000 APIC

P162,000

29. c The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and should be recognized in profit or loss, per PFRS3 par. 34. 30. c Consideration transferred: Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain 31. d

32. c

128,000 45,100 44,000 52,500 2,400 144,000 (12,000) P34,700 39,000 130,000 40,000 46,000

132,000 260,000

289,700 29,700

PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their acquisition-date fair values. Selling price Less: Book value of Comb (P50,000 + P80,000 + P40,000 - P30,000)

P 110,000 140,000

Loss on sale of business by the acquiree (Comb)

P( 30,000)

33 .

d

P215,000

= P130,000 + P85,000

34 .

b

P23,000

= P198,000 – (P405,000 - P265,000 + P15,000 + P20,000)

35.

c

P1,109,000

= Total Assets of TT Corp. Less: Investment in SS Corp. Book value of assets of TT Corp. Book value of assets of SS Corp. Total book value Payment in excess of book value (P198,000 - P140,000) Total assets reported

36 .

c

P701,500

P 844,000 (198,000) P 646,000 405,000 P1,051,000 58,000 P1,109,000

= (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000 +P200,000)

37 .

d

P257,500

= The amount reported by TT Corporation

38 .

a

P407,500

= The amount reported by TT Corporation

39. d Consideration transferred: Shares: (100,000 shares x P6.20)……………………… P620,000 Contingent consideration………………………………. 184,000 Total……………………………………………………. P804,000 Less: Fair value of net identifiable assets acquired: Current assets………………………………………… P100,000 Equipment……………………………………………… 150,000 Land …………………………………………………… 50,000 Buildings ……………………….……………………… 300,000 Liabilities………………………………………………. ( 80,000) 520,000 Goodwill……………………………………………………. P284,000 The P184,000 is one classical example of contingencies is where the future income of the acquirer is regarded as uncertain; the agreement contains a clause that requires the acquirer to provide additional consideration to the acquiree if the income of the acquirer is not equal to or exceeds a specified amount over some specified period. 40. d Goodwill, 1/1/20x4……………………………………………………............ P 284,000 Less: Adjustment on contingent consideration (P184,000 – P170,000) 14,000 Goodwill, 8/1/20x4……………………………………………………............. P 270,000 Changes that are the result of the acquirer obtaining additional information about facts and circumstances that existed at the acquisition date, and that occur within the measurement period (which may be a maximum of one year from the acquisition

date) are recognized as adjustments against the original accounting for the acquisition (and so may impact goodwill) – see Section 11.3.[PFRS 3 (2008) par. 58] Incidentally, the entry to record the revision of goodwill should be: Estimated liability for contingent consideration…. 14,000 Goodwill……………………………………… 14,000 41. a – refer to No. 39 and 40 for further discussion. 42. c Deficiency: (P16 – P10) x 100,000 shares issued to acquire………P 600,000 Divided by: Fair value of share……………………………………...... P 10 Added number of shares to issue…………………………………..... 60,000

2.

43. (b) – (P520,000 – P60,000 = P460,000) Changes resulting from events after (post-combination changes) the acquisition date (e.g. meeting an earnings target, reaching a specified chare or reaching a milestone on research and development project) are not measurement period adjustments. Such changes are therefore accounted for separately from the business combination. The acquirer accounts for changes in the fair value of contingent consideration that are not measurement period adjustments as follows: 1. contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity; and contingent consideration classified as an asset or liability… The problem on hand falls within No. 1, so no adjustment would be required to goodwill but accounted for within the equity section. Incidentally, the entry would be: Paid-in capital in excess of par………………………….. 60,000 Common stock, P1 par…………………………….. 60,000 44. 45. 46. 47. 48.

b c c b c Par value of shares outstanding before issuance Par value of shares outstanding after issuance Par value of additional shares issued Divided by: No. of shares issued* Par value of common stock *Paid-in capital before issuance (P200,000 + P350,000) Paid-in capital after issuance (P250,000 + P550,00) Paid-in capital of share issued at the time of exchange Divided by: Fair value per share of stock Shares issued

49. a

Consideration transferred: Shares – 12,500 shares Less: Goodwill Fair value of identifiable net assets acquired

50. a – Blue Town:

P200,000 250,000 P 50,000 __12,500 P 4 P 550,000 800,000 P 250,000 P 20 12,500 P250,000 56,000 P194,000

Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000 Issued shares: 34,000 shares x P35 1,190,000 Consolidated SHE/Net Assets P2,870,000 51. d 52. c

53. d

Common stock – combined…………………………………………………………P 160,000 Common – Acquirer Zyxel………………………………….. …………………….… 100,000 Common stock issued………………………………………………………………...P 60,000 Divided by: Par value of common stock………………………………………….P 2 Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000 Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P 165,000 Paid-in capital in the combined balance sheet (P160,000 + P245,000)…………………………………………………….… 405,000 Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000 Divided by: No. of shares issued (No. 31)……………………………………..... 30,000 Fair value per share when stock was issued………………………………….... P 8 Or, Par value of common stock of Zyxel……………………………………… P Add: Share premium/APIC per share from the additional issuance of shares (P245,000 – P65,000)/30,000…………............ Fair value per share when stock was issued……………………………....... P

54. b

55. a

56. c

2 6 8

Net identifiable assets of Zyxel before acquisition: (P65,000 + P72,000 + P33,000 + P400,000 – P50,000 - P250,000)……………………………………………………………………. P270,000 Net identifiable assets in the combined balance sheet: (P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)….......... 497,000 Fair value of the net identifiable assets held by Globe Tattoo at the date of acquisition..…………………………………………………….. P227,000 Consideration transferred (30,000 shares x P8)………………………………… P240,000 Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000 Goodwill……………………………………………………………………………….. P 13,000 Retained earnings: Acquirer – Zyxel (at book value)……………………………………….... P105,000 Acquiree – Globe Tattoo (not acquired)……………………………… __ 0 P105,000 It should be noted that, there was no bargain purchase gain and acquisition-related costs which may affect retained earnings on the acquisition date.

57. a Average annual earnings Divided by: Capitalized at Total stock to be issued Less: Net Assets (for P/S)

II ____ P 46,080

_____JJ _ P 69,120

____Total____ P 115,200 _ 10% P1,152,000 864,000

Goodwill (for Common Stock) Preferred stock (same with Net Assets): 864,000/P100 par

P 288,000 8,640 shares

Quiz - XIV 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

P90,000 = P65,000 + P25,000 P280,000 = P210,000 + P70,000 P180,000 P475,000 P100,000 = P600,000 - (P25,000 + P180,000 + P475,000 - P60,000 - P120,000) [P500,000 – (P200,000 + P220,000 – P110,000)]= P190,000 Gain of P45,000 [(12,000 shares x P30) – P343,200 = P16,800 (P863,000 + P363,000) = P1,226,000 [P400 + (40 shares x P10)] = P800 [P1,080 + (P280 + P10) = P1,370 [P1,260 + (P440 + P60) = P1,760 [P600 + (P360 + P40)] = P1,000 [P480 + P100] = P580 [P330 + (40 shares x P1)] = P370 [P1,080 + 40 shares x (P10 - P1)] – P15, stock issuance costs = P1,425 [P180 + P40 – P20 – P15} =P185 [(50,000 shares x P 35) + P5,000] = P1,755,000 [P1,230,000 + P580,000] = P1,810,000 [P1,800,000 + P250,000] = P2,050,000 (P1,800,000 + P650,000]= P2,450,000 [P1,755,000 – (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000 - P240,000 – P60,000 – P1,120,000)] = P455,000 23. [P660,000 + P400,000} = P1,060,000 24. P1,280,000 Retained earnings – Atwood, January 1, 20x4 P1,170,000 Add: Net income – 20-x4 Revenues P2,880,000 Less: Expenses 2,760,000 Direct costs 10,000 110,000 Retained earnings – Atwood, December 31, 20x4 P1,280,000 25. P2,880,000, parent only on the date of combination 26. (P2,760,000 + P10,000) = P2,770,000 27. [(P870,000 – P15,000 – P10,000) + P240,000] = P1,085,000 28. P46,000 = (P60,000 + P26,000, fair value) – P40,000, cash paid 29. P154,000 = (P100,000 + P54,000, fair value) 30. P7,000 = [P40,000 – (P26,000 + P54,000 – P35,000 – P12,000)] 31. P98,000 = (P90,000 + P8,000), only the stockholders’ equity of acquirer 32. CC, 26%; DD, 50%; EE, 24% CC_____ DD_______ EE Total______ Assets, appraised value P375,000 P750,000 P375,000 P1,500,000 Add: Goodwill: Annual earnings P41,250 P75,000 P33,750 P150,000 Less: Normal earnings 6% x Assets 22,500 45,000 22,500 90,000

Excess earnings P60,000 / capitalized at 20%__ Goodwill P300,000 Total stock to be issued P1,800,000 Percentage

P18,750

P30,000

20%

P11,250

20% _

P93,750

20%__

P150,000

P468,750 P468,750 1,800,000 26%

P56,250

P900,000 P900,000 1,800,000 50%

P431,250 P431,250 431,250 24%

(c)

Theories 1.

True

2.

False

3.

True

4.

True

5.

False

6.

True

7.

False

8.

True

9.

True

10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 .

True True True False False False True False True True

21 . 22 . 23 . 24 . 25 , 26 . 27 . 28 . 29 . 30 , 31 . 32 . 33 . 34 . 35 . 36 . 37 . 38 . 39 .

False True False True True False True False True True False True True False True True False True False

41 . 42 . 43 . 44 . 45 , 46 . 47 . 48 . 49 . 50 , 51 . 52 . 53 . 54 . 55 . 56 . 57 . 58 . 59 .

True False a c b b d c c b a b c a c b a c a

61 . 62 . 63 . 64 . 65 , 66 . 67 . 68 . 69 . 70 , 71 . 72 . 73 . 74 . 75 . 76 . 77 . 78 . 79 .

c

81.

b

b

82.

a

c

83.

d

d

84.

a

d

85.

c

a

86.

d

a

87.

c

d

88.

a

a

89.

c

b

90,

d

c

91.

b

A

92.

a

c

93.

C

c

94.

B

a

95.

D

d

96.

A

a

97.

A

d

98.

c

b

99.

d

101 . 102 . 103 . 104 . 105 . 106 . 107 . 108 . 109 . 110 , 111 . 112 . 113 . 114 . 115 . 116 . 117 . 118 . 119 .

c

121

a

d

122 . 123 . 124 . 125 . 126 . 127 .

b

d d c d d d b c c c a d d c b b b

b c b c c

20 False 40 False 60 c 80 c 100 d 120 a . , , , , . Note for the following numbers: 2. A horizontal combination occurs when management attempts to dominate an industry. 5. A vertical combination exists when an entity purchases another entity that could have a buyer-seller relationship with the acquirer. The combination described here is a horizontal combination. 7. A conglomerate combination is one where an unrelated or tangentially related business is acquired. A vertical combination occurs when a supplier is acquired. 13. 15.

17. 20. 21. 23.

26. 28. 31. 34. 37. 39. 40. 42.

Greenmail is the payment of a price above market value to acquire stock back from a potential acquirer. The sale of the crown jewels results when a target sells assets that would be particularly valuable to the potential acquirer. The scorched earth defense results when a target generally sells large amounts of assets without regard to the specific desirability to the potential acquirer. Golden parachutes are generally given only to top executives of the acquiree. Control over the net assets of an entity can be accomplished by purchasing the net assets or by purchasing the acquiree voting common stock that represents ownership of the assets. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the acquirer book value will not change due to an acquisition. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in ownership structure of either entity.

The acquiree corporation becomes an acquirer stockholder, not the acquiree stockholders. A combination that results in one of the original entities in existence after the combination is a statutory merger. The combination results in the stockholders of one entity controlling the other entity. The Retained Earnings of the entity acquiring control is carried forward to the newly formed corporation. The stock of the acquiree company must be purchased by the acquirer, but the value transferred to the acquiree stockholders does not have to be in stock. Payment may be in another asset or the issuance of debt. The consideration to be given by the acquirer is sometimes not completely known because the consideration is based partially on acquiree future earnings or the market value of acquirer debt or stock. Any change in the number of shares of acquirer stock given returns the purchase price to the agreed level. The adjustment is to stock and additional paid-in capital. The investment account is unchanged. The acquiree stockholders must continue to have an indirect ownership interest in the acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect ownership as well as voting common stock. A net operating loss carryforward cannot be acquired. They are only available to the acquirer if the combination qualifies as a nontaxable exchange.