Solution Chapter 14

Chapter 14 Problem I 1. Consideration transferred : FMV of shares issued by Robin Robin (80,000 sh × P28) = P2,240,000

2. Consideration trasnferred P1,200,000) Less: Fair value of Hope’s net assets ( P2,720,000+P200,000 – P1,200,000) Goodwill 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 + P20,000 550,000  – P70,000 - P160,000) Goodwill P 10,000

2.

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

P2,240,000 1,720,000 P 520,000

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

Consideration trasnsferred : Cash P500,000 Less : Fair value of West’s net assets (P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000 550,000  – P70,000 - P160,000) Bargain Purchase Gain (P 50,000)

Problem III Accounts Receivable Inventory Land Buildings and Equipment

231,000 330,000 550,000 1,144,000

Goodwill 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) Other Contributed Capital (P25 - P10) x 30,000 Cash Consideration transferred: (P1,500,000 + P750,000 + P50,000) Less: Fair value of net assets (198,000 + 330,000 + 550,000 + 1,144,000 –  275,000  275,000 – 495,000) = Goodwill

848,000 33,000 275,000 450,000 45,000 1,500,000 300,000 450,000 50,000

P2,300,000 1,452,000 P 848,000

Problem IV Current Assets Plant and Equipment Goodwill Liabilities Cash Estimated Liability for Contingent Consideration

960,000 1,440,000 336,000 216,000 2,160,000 360,000

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 Estimated Liability for Contingent Consideration

Consideration transferred (P720,000 + P135,000) Total fair value of net assets acquired (P1,064,000 - P263,000) Goodwill

500,000

100,000 400,000

72,000 99,000 162,000 450,000 288,000 54,000 7,000 83,000 180,000 720,000 135,000 P855,000 801,000 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

135,000

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

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

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) Other Contributed Capital (144,000 x  P15 - P5)) * (144,000



362,000 2,013,000 395,000

P15) –  [P362,000 + P2,013,000 –  (P119,000 + P491,000)] = P395,000

Total shares issued (P700,000 / P5) + P20,000 / P5) Fair value of stock issued (144,000  P15)

144,000 = P2,160,000

Problem IX Case A Consideration transferred Less: Fair Value of Net Assets Goodwill

P130,000 120,000 P 10,000

119,000 491,000 720,000 1,440,000

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

Case A Case B Case C

Assets Goodwill Current Assets P10,000 P20,000 20,000 30,000 0 20,000

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

Liabilities Long-Lived Assets P130,000 80,000 40,000

P30,000 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

Retained Earnings (Gain) 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%: Present value of interest annuity, 20 periods @ 6%: Total Present value Par value Discount on bonds payable 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)

0.3118 x P600,000 = 11.46992 x 30,000 =

P187,080 344,098 531,178 600,000 P68,822 114,000 135,000 310,000 315,000 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) Less: Total fair value of assets received Excess of fair value of net assets over cost

P886,478 P968,350 (P 81,872)

Problem XII In accounting for the combination of NT and OTG, t he 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 O TG: Cash Receivables Trademarks Record Music Catalog Capitalized R&D Equipment Goodwill Accounts Payable Notes Payable Common Stock (NewTune par value) Additional Paid-in Capital (To record merger with OTG at fair value) Additional Paid-in Capital Cash (Stock issue costs incurred)

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

723,000 P27,000

29,000 63,000 225,000 180,000 200,000 105,000 27,000 34,000 45,000 60,000 690,000

25,000 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

Liabilities and Owners’ Equity Accounts payable Notes payable

Common stock Additional paid-in capital Retained earnings Total

P 144,000 415,000

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

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

P1,100,000 4,090,000 [P2,800,000 + (100,000 x P13) –  P10,000] 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) Additional Paid-In Capital (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 APIC

15,000 15,000 9,000

Cash

9,000

Note: The following amounts will appear in the income statement and statement of retained earnings after business combination: PP Inc. Revenues (1,200,000) Expenses (P875,000 + P15,000) 890,000 Net income (310,000) Retained earnings, 1/1 (950,000) Net income (310,000) Dividends paid 90,000 Retained earnings, 12/31 *(1,170,000) * 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 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 Buildings – net Equipment – net In-process research and development Accounts payable Other liabilities Positive Excess - Goodwill

10,000 10,000

P 750,000 180,000 36,000 P 966,000

P

24,000 48,000 72,000 240,000 360,000 300,000 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

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

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.

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 Equipment – net In-process research and development Goodwill Total Assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Other liabilities Notes payable Estimated liability for contingent consideration Total Liabilities Stockholders’ Equity

P

162,000 144,000 360,000 348,000 840,000 732,000 60,000 102,000 P2,748,000

P 288,000 408,000 180,000 36,000 P 912,000

Common stock, P10 par Paid-in capital in excess of par 1 Retained earnings2  Total Stockholders’ Equity   Total Liabilities and Stockholders’ Equity 1 P240,000 + P446,400 –  P32,400  2 P264,000 - P78,000 –  P27,600

P 1,020,000 657,600 158,400 P1,836,000 P2,748,000

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 consideration 24,000  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 recomp uted 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 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 106,386 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]

P

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

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): P120,000 x 30% probability 36,000 Contingent consideration (stock contingency) 18,000 Total P 984,000 Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) 864,000 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 Consideration 36,000 Paid-in capital for Contingent Consideration 18,000

Common stock (P10 par x 30,000 shares) Additional paid-in capital [(P25  –   P10) x 30,000 shares]  Acquisition of Saul Company.

300,000 450,000

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 20 Divide by fair value per share on January 1, 20x7…………. P 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 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. 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

P 750,000 180,000

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

In-process research and development Goodwill 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]

60,000 158,308 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 20 Divide by fair value per share on December 31, 20x5……P 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 Accounts receivable Copyrights Equipment Accounts payable Loan payable Negative Excess  – Bargain Purchase Gain

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

P1,440,000 900,000 240,000 1.380,000 ( 300,000) ( 120,000)

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 Loan payable

3,540,000 P ( 21,600)

300,000 120,000

Cash Common stock (P10 par x 120,000 shares) Paid-in capital in excess of par [(P12 – P10) x 120,000 shares] Gain on sale of Patent Estimated liability for contingent consideration Bargain purchase gain 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 (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)

1,812,000 1,200,000 240,000 240,000 26,400 21,600

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

34,700 39,000 130,000 40,000 46,000 132,000 40,000 88,000 29,700

132,000 132,000

1,200 1,200

2.

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

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 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

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

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 P600,000 472,800 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 P19,000 3. b P80,000 Consideration transferred (fair value)……………………..   Less: Fair value of net identifiable assets acquired: P 98,000 Fair value of assets……………………………………… 23,000 75,000 Less: Present value/ Fair Value of liabilities………… P 5,000 Goodwill……………………………………………………  A net identifiable asset means net assets excluding goodwill (unidentifiable asset). An acquisition-related costs are considered outright expenses.  4. a 5. b Consideration transferred (fair value) Fair value of identifiable assets Cash A/R Software In-process R&D Liabilities Fair value of net identifiable assets acquired Goodwill

P800,000 P150,000 140,000 320,000 200,000 (130,000) 680,000 P120,000

The application of recognition measurements in business combination means that an acquirer must, in recognizing separately the acquirer’s intangible assets, recognize intangible assets that the acquiree has not recognized in its records, such as in-process research and development that cannot be recognize under PAS 38 as internally

generated assets. As noted in par 34, recognition by an acquirer of an acquiree’s in process research and development project only depends whether the project meets the definition of an intangible asset. It can be seen that intangible assets in a business combination will be able, and in fact are required, to recognize intangible assets that are not separately recognizable when acquired by other means. The costs on individual assets acquired are measured but reference to the fair value of those assets.

Therefore, In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews. 6. c - [(24,000 shares x P30)  –  P686,400] = P33,600 7. d - [(24,000 shares x P30)  –  (P270,000 + P726,000 –  P168,000)] = P108,000, gain 8. d –  [P500,000 –  (P200,000 + P220,000 –  P110,000)]= P190,000 9. d 10. 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. 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.  2.  Any balance should be recognized immediately in profit or loss.

11. d –  [P1,600,000 –  P1,210,000] = P390,000 12. d 13. c –  [(12,000 shares x P30) –  P343,200 = P16,800 14. b –  (P863,000 + P363,000) = P1,226,000 15. a 16. d P215,000 = P130,000 + P85,000 17.

b

P23,000

18 .

c

P1,109,000

= =

P198,000 –  (P405,000 - P265,000 + P15,000 + P20,000) Total Assets of TT Corp.

P 844,000

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

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

19.

c

P701,500

=

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

20.

d

P257,500

=

The amount reported by TT Corporation

21. 22.

a P407,500 = The amount reported by TT Corporation b –  [(P47 x 12,000 shares)  –  (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 –  P420,000)

= P104,000 23. d APIC: P20,000 + [(P42 –  P5) x12,000 = P464,000 Retained earnings: P160,000, parent only 24. b Inventory: PP230,000 + P210,000 = P440,000 Land: P280,000 + P240,000 = P520,000 25. b –  [P480,000 –  (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 –  P420,000)] = P20,000 26. 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. 27. c –  [P400 + (40 shares x P10)] = P800 28. d –  [P1,080 + (P280 + P10) = P1,370 29. b –  [P1,260 + (P440 + P60) = P1,760 30. a –  [P600 + (P360 + P40)] = P1,000 31. e –  [P480 + P100] = P580 32. b –  [P330 + (40 shares x P1)] = P370 33. d –  [P1,080 + 40 shares x (P10 - P1)] –  P15, stock issuance costs = P1,425 34. a –  [P180 + P40 –  P20 –  P15} =P185 35. c –  [(50,000 shares x P 35) + P5,000] = P1,755,000 36. d –  [P1,230,000 + P580,000] = P1,810,000 37. c - [P1,800,000 + P250,000] = P2,050,000 38. e –  (P1,800,000 + P650,000]= P2,450,000 39. c –  [P1,755,000 –  (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000 - P240,000 –  P60,000 –  P1,120,000)] = P455,000 40. e –  [P660,000 + P400,000} = P1,060,000 41. d 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

42. c –  P2,880,000, parent only on the date of combination 43. c –  (P2,760,000 + P10,000) = P2,770,000 44. d –  [(P870,000 –  P15,000 –  P10,000) + P240,000] = P1,085,000 45. 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.

46. c

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

P153,000 51,000 P102,000 90,000 P192,000

At the date of acquisition, the parent makes no change to retained earnings. 47. c Common stock – combined…………………………………………………………P 160,000 Common – Acquirer Zyxel………………………………….. …………………….…  100,000 Common stock issued………………………………………………………………...P 60,000 2 Divided by: Par value of common stock………………………………………….P Number of Zyxel shares to acquire Globe Tattoo………………………….....…  30,000 48. d 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 fro m the shares issued to acquire Globe Tattoo…………... P 240,000 30,000 Divided by: No. of shares issued (No. 31)……………………………………..... 8 Fair value per share when stock was issued………………………………….... P 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

2 6 8

49. b 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 acqui sition..…………………………………………………….. P227,000 50. a 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

 51. c 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. 52. b Consideration transferred (fair value) Less: Fair value of net assets acquired (P60,000 + P175,000 + P200,000 + P225,000 + P75,000 – P100,000) Goodwill

P400,000 385,000 P 15,000

53. a Only the subsidiary’s post -acquisition income is included in consolidated totals. 54. d Cost P180,000 Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs) 18,000 Net book value P162,000 55. c Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] Less: Shares issued at par (15,000 shares x P10 par) APIC

P312,000 150,000 P162,000

 56. 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 identifia ble 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 …”

57. 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. 58. 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.

59. 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 PFRS3 pars. 39, 40 and 58.

60. b 61. c 62. c 63. b 64. d Consideration transferred: P620,000 Shares: (100,000 shares x P6.20)……………………… 184,000 Contingent consideration………………………………. P804,000 Total……………………………………………………. Less: Fair value of net identifiable assets acquired: Current assets…………………………………………  P100,000 Equipment……………………………………………… 150,000 50,000 Land …………………………………………………… Buildings ……………………….……………………… 300,000 Liabilities………………………………………………. ( 80,000) 520,000 P284,000 Goodwill…………………………………………………….  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.

65. 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

66. a –  refer to No. 64 and 65 for further discussion. 67. c Deficiency: (P16 – P10) x 100,000 shares issued to acquire………P 600,000 10 Divided by: Fair value of share……………………………………...... P 60,000 Added number of shares to issue…………………………………..... 68. (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  2. 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

69. 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

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

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

P250,000 56,000 P194,000

71. 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

72. d PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their acquisition-date fair values.

73. c Selling price Less: Book value of Comb (P50,000 + P80,000 + P40,000 - P30,000) Loss on sale of business by the acquiree (Comb)

P 110,000 140,000 P( 30,000)

74. a –  Blue Town: Stockholders’ equity before issuance of shares (P700,000 + P980,000)  Issued shares: 34,000 shares x P35 Consolidated SHE/Net Assets 75. No available answer - P115,000 Cost of Investment (100,000 shares x P1.90) Less: Market value of net assets acquired: Cash Furniture and fittings Accounts receivable Plant Accounts payable Current tax liability Liabities Goodwill

P1,680,000 1,190,000 P2,870,000

P 190,000 P 50,000 20,000 5,000 25,000 (15,000) ( 8,000) ( 2,000)

75,000 P 115,000

76. b 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 60,500

58,000 P 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. 77. c Consideration transferred: Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses

128,000 45,100 44,000 52,500 2,400 144,000 (12,000)

Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain

132,000 260,000

P34,700 39,000 130,000 40,000 46,000

289,700 29,700

78. d 79. c Assets, appraised value Add: Goodwill: Annual earnings Less: Normal earnings 6% x Assets Excess earnings / capitalized at Goodwill Total stock to be issued

Percentage

CC_____ P375,000 P41,250 22,500 P18,750 20% P93,750 P468,750 P468,750 1,800,000 26%

DD_______ P750,000

EE P375,000

Total______ P1,500,000

P75,000

P33,750

P150,000

45,000 P30,000 20% _ P150,000 P900,000 P900,000 1,800,000 50%

22,500 P11,250 20%__ P56,250 P431,250 P431,250 431,250 24% (c)

90,000 P60,000 20%__ P300,000 P1,800,000

80. a Average annual earnings Divided by: Capitalized at

II ____ P 46,080

_____JJ P 69,120

_

____Total____ P 115,200 _ 10%

Total stock to be issued Less: Net Assets (for P/S) Goodwill (for Common Stock) Preferred stock (same with Net Assets): 864,000/P100 par

P1,152,000 864,000 P 288,000 8,640 shares

81. c Theories 1. a 2. a 3. c 4. d 5. d

6. 7. 8. 9. 10,

c d d d c

11. 12. 13. 14. 15,

d d b d b

16. 17. 18. 19. 20.

c c c a d

21. 22. 23. 24. 25.

d c b b b

26. 27. 28. 29. 30.

d b a d a

31 32. 33. 34. 35.

c b b b b

36. 37. 38. 39. 40.

c b c c c