Advanced Accounting Part 2

Take Home Activity

On January 1, 2015, Miami Corporation enters into a business combination by acquiring the assets and
assumed the liabilities of Heat Corporation in which Heat Corporation will be dissolved. Miami
consideration transferred consists of the following:

a. Cash P1,000,000
b. Issued 100,000 common shares with a market value of P50.
c. Equipment with a book value of P300,000 (net of P200,000 accumulated depreciation) and fair
market value of P280,000.
d. Patent relating to the manufacturing business of Miami. This has a fair value of P500,000 but has
not been recognized in the records of Miami because it resulted from an internally generated
research project.
e. One of the stockholders of Heat Corporation accepted bond certificate as payment. Miami gave
its 10% bond debt instrument with a maturity value of P500,000, a stated interest payable semi-
annually on June 30 and December 31. The maturity date of the bonds is on January 1, 2020
with a yield rate of P12%. (Rounded off to nearest peso – total present value)

Contingent consideration

Under future events

 A contingent payment of P120,000 cash on December 31, 2016, if the average income of during
the 2-year period of 2015 – 2016 exceeds P250,000 per year. Miami estimates that there is a
30% percent change or probability that the P120,000 payment will be required.
 Miami also agreed to pay P250,880 if Heat Corporation will generate cash flows from operation of
an average of P1,000,000 for year 2015 and 2016. Heat estimates that there is a 50% chance
that the P250,880 will be required. The yield rate is 12%.
 On January 1, 2015, Miami also agreed to issue additional 5,000 shares if the market value of the
shares during year-end 2016 falls below P50. The expected value of the shares in the year-end
2016 is P200,000.

Under present obligation

 Heat Corporation had been plagued by many troubles including a lawsuit from a competitor for
patent infringement with a fined of P200,000.

Other acquisition costs paid were as follows:

Broker’s fee paid to firm that located Heat 10,000

Accountant’s fee for pre-acquisition 20,000
Legal fee for contract of business combination 35,000
Stock issue cost, including accounting and legal fees 20,000
Printing cost of stock certificates issued 10,000
General and administrative expenses 25,000
Bond issue cost 10,000
Liquidation cost 100,000
Payments to all Acquiree’s employees retirement, separation and benefits pays
in the event of liquidating Heat Corporation. 1,070,800
The separate balance sheets of the two companies before acquisition:
Miami Heat
Current Assets
Cash and cash equivalents 5,875,000 1,762,500
Trade and other receivables 2,345,780 1,372,890
Inventories 1,450,750 1,825,375
Prepayments 235,000 117,500
Total Current assets 9,906,530 5,078,265

Non-Current Assets
Land 2,500,000 1,785,000
Building 4,000,000 3,000,000
Accumulated Depreciation - Building (1,000,000) (600,000)
Equipment 1,754,750 750,000
Accumulated Depreciation - Building (500,000) (281,250)
Machineries 1,250,000 1,250,000
Accumulated Depreciaion - Machineries (250,000) (250,000)
Goodwill 100,000
Total Non-Current Assets 7,754,750 5,753,750

Total Assets 17,661,280 10,832,015

Liabilities
Accounts payable 851,530 1,325,000
Accrued expense 150,000 317,985
Salaries and employees benefits payable 750,000 622,015
Notes payable 1,000,000 1,000,000
Bonds payable 3,000,000 2,000,000
Less: Discount on bonds payable (745,250) (215,000)
Total Liabilities 5,006,280 5,050,000

Stockholders' Equity
Common stock, P30 3,600,000
Common stock, P20 2,000,000
Paid in capital in excess of par 4,900,000 2,500,000
Retained earnings 4,155,000 1,282,015
Total Stockholders' equity 12,655,000 5,782,015

Total Liabilities and Stockholders' equity 17,661,280 10,832,015

On the same date, the current value of Heat Corporation identifiable assets and liabilities were
the same as their carrying values except for the following assets:

Assets Increase Decrease

Trade and other receivables 234,515
Inventories 800,000
Prepayments 117,500
Land 1,500,000
Building 500,000
Equipment 100,000
Machinery 120,000
Bonds Payable 100,000

Subsequent Events from the Date of Acquisition (Measurement Period)

a. On July 1, 2015 Miami Corporation received the final value from the independent appraisal. The
fair value of the building was P3,200,000 at acquisition date.
b. On September 1, 2015, Patent with a fair value of P200,000 was identified. It was related to Heat
Corporation research project. At the date of acquisition the patent was not existing and recorded
as a separately identified intangible asset of Heat Corporation.
c. On October 1, 2015, because of sufficient information about facts and circumstances that exists
at the acquisition date, the contingent consideration for the average income of Heat to achieve
the agreed average minimum amount was revised to an expect value of P86,000.
d. On November 1, 2015, the expected value of the contingent consideration for the average income
agreement was increase to 80%.
e. On December 31, 2015, the market value of the Land acquire from Heat Corporation was
significantly increase due to the developments made by the government on the nearby area. The
market value of the Land was P5,000,000.

Requirements:
Determine the following:

Date of acquisition
1. Acquisition cost
2. Result of acquisition
3. Miami’s total assets
4. Miami’s total liabilities
5. Miami’s common stock
6. Miami’s paid in capital in excess of par
7. Miami’s retained earnings

Subsequent from the date of acquisition (indicate whether is an increase or decrease)

8. Change/s in result of acquisition
9. Net change/s in acquirer’s assets
10. Net change/s in acquirer’s profit and loss statement