CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA

PRACTICAL ACCOUNTING PROBLEMS II BUSINESS COMBINATION

GUERRERO/GERMAN/DE JESUS/LIM DATE OF ACQUISITION
SIY/FERRER

Problem A
The following are the condensed Statement of Financial Position of GM and SR on January 1,
2014:
GM SR
Total Assets P10,250,000 P3,057,500

Liabilities P 2,775,000 P 800,000

Ordinary Shares 3,100,000 1,295,000
Share Premium 1,250,000 100,000
Retained Earnings 3,125,000 862,500

SD Corp. acquired the net assets of both GM and SR. Paying cash in the amount of P185,000 and
by issuing 198,500 shares to GM. Paying cash in the amount of P72,000 and by issuing 54,350
shares to SR. The par value of these shares is P35/share and market value as of January 1, 2014
is P40/share. SD Corp. also incurred the following unpaid expenses:
GM SR
Indirect costs P 93,750 P101,250
Finder’s fee 66,250 35,000
Accounting and legal fees for SEC 343,750 362,500
registration
Printing costs of stock certificates 125,000 93,750

SD’s retained earnings has a balance of P10,750,000 on January 1, 2014 immediately before the
acquisition.

As a result of the merger, compute for the amount of:

 Goodwill
 Net increase or (net decrease) in retained earnings in the statement of financial position
of SD Corporation
 Net increase or (net decrease) in the stockholders’ equity of SD Corporation
 Net increase or (net decrease) in the identifiable assets of SD Corporation

Problem B
SMR Corporation acquired the net assets of GRN Company on January 1, 2014. Assets acquird
from GRN Co. at fair value include Current assetsm P1,150,000 ; Equipment, P1,700,000 ; Land,
P600,000 ; Building, P3,600,000. Liabilities assumed from the acquired company amount to
P640,000. Fair value of ordinary shares issued amount to P7,440,000.

The agreement further provides that additional cash payments would be made on January 1,
2016, equal to 135% of the amount by which annual earnings of SMR Company exceed P265,000
per year, prior to January 1, 2016. Net income was P367,500 in 2014 and P462,500 in 2015.
Assume that the liabilities recorded in January 1, 2014 exclude an estimated contingent liability
recorded at an estimated amount if P320,000.

The amount of the estimated contingent liability was determined to be at P272,500 in November
2, 2014. The estimated amount of the contingent liability was determined to increase by P85,000
in August 1, 2015 from the last date of the change in estimate.

 What amount of goodwill is presented in the separate statement of financial position of

the acquirer company on the date of acquisition?
 What amount of goodwill is presented in the separate statement of financial position of
the acquirer company as of January 1, 2015?
 What amount of goodwill is presented in the separate statement of financial position of
the acquirer company as of January 1, 2015?
 As a result of the additional cash payments made in 2016 (if any), how much will affect
profit or loss in 2016?

Problem C
The following are Statement of Financial Position of GR and SM Corporation as of December 31,
2013:
GR SR
Cash P750,000 P50,000
Receivables 175,000 37,500
Inventories 200,000 62,500
Land 187,500 250,000
Building (net) 550,000 250,000
Equipment (net) 375,000 600,000
Total Assets P2,237,500 P1,250,000

Accounts Payable P462,500 P150,000

Ordinary Shares, P10 par 1,250,000 500,000
Share Premium 125,000 350,000
Retained Earnings 400,000 250,000
Total Liabilities & Equity P2,237,500 P1,250,000

GR decided to acquire the net assets of SM on January 1, 2014. GR will issue 42,500 ordinary
shares with market value of P12 per share and cash purchase price of P60,000. The book values
reflect fair values except for building of the acquirer, which has a net realizable value of P900,000
and inventories and land of the acquired company which has a net realizable value of P95,000
and P245,000 respectively. GR also paid for the cost of registering and issuing securities
amounting to P87,500 and related costs of combination amounting to P62,500.

 How much is the total assets after the combination?

 How much is the retained earnings after the combination?
 How much is the total stockholders’ equity after the combination?

Problem D
On September 18, 2013, DG Co. acquired all the AX Inc.’s P2,150,000 identifiable assets and
P530,000 liabilities. Book values of the AX’s assets and liabilities equal to their fair values except
for the overvalued furniture and fixtures.

 As a consideration, DG issued its own shares of stock with a market value of P1,715,000
and cash amounting P375,000.

 Contingent consideration that was probable and reasonably estimated on the date of
acquisition amount to P148,000.

 The merger resulted into P647,000 goodwill

 Assuming DG Co. had P4,890,000 total assets and P2,732,000 total liabilities prior to the
combination and no additional cash payments were made, but expenses were incurred
for related cost amounting to P28,000.

After the merger, how much is the combined total assets in the books of acquirer?
After the merger, how much is the increase liabilities in the books of acquirer?

A. P7,283,000 ; P706,000
B. P7,128,000 ; P678,000
C. P7,658,000 ; P706,000
D. P7,255,000 ; P678,000

Problem E
On August 1, 2013 the Polo Company acquired the net assets of Sport Company for a
consideration transferred of P17,450,000.

 At the acquisition date, the carrying amount of Sport’s net assets was P11,925,000 and a
temporary appraisal of P12,385,000 was attributed to net assets
  In addition to the consideration transferred above is another P1,105,000 cash to be
transferred nine months after the acquisition date if a specified profit target was met by
the acquirer.

 At the acquisition date there was only a low probability of the profit target being met, so
the fair value of the additional consideration liability was determined to be P468,000.

 On December 31, 2013, an update of the provisional fair value of P16,815,000 was
attributed to the net assets. Also, at year end the estimated amount of the consideration
liability is determined to decrease by P72,000 from the last date of the change in estimate.

 On March 31, 2014 the estimated amount of the consideration liability is determined to
be probable at P284,000.

 On July 1, 2014 the temporary appraisal decreased by P940,000 from the last additional
valuation date.

 The provisional fair value was finalized to August 31, 2014 with an amount that is higher
by P1,070,000 from the temporary appraisal as of July 1, 2014.

 As a subsequent event, the profit target was met and the P1,105,000 cash was
transferred.

What amount of goodwill is presented in the separate statement of financial position of the
acquirer company as of December 31, 2014?
A. P1,859,000
B. P2,625,000
C. P789,000
D. P1,555,000

Problem F
On July 1, 2013, Giordano, Inc. acquired most of the outstanding common stock of Esprit
Company for cash. The incomplete working paper elimination entries on that date for the
consolidated statement of financial position of Giordano, Inc. and its subsidiary are shown below:

 Stockholders’ equity—Esprit 2,437,500

Investment in Esprit 1,584,375
Non-controlling interest 853, 125

 Inventorie 62,500
Equipment 312,500
Patent 61,250
 Goodwill ?
Investment in Esprit 468,750
Non-controlling interest ?

Included in the purchase price is a control premium of P68,750.

The amount of goodwill to be reported in the consolidated statement of financial position on

July 1, 2013:

Assuming non-controlling interest is measured at fair value

Assuming non-controlling interest is measured at the proportionate or relevant share

Assuming non-controlling interest is measured at fair value. The fair value of the non-controlling
interest P1,150,000.

A. P179,135 ; P185,188 ; P260,625

B. P 284,904 ; P253,938 ; P398,125
C. P247,885 ; P185,188 ; P329,375
D. P185,188 ; P284,904 ; P260,625