PBB Corporation acquires SUV Corporation through a business combination on December 31, 2022. PBB's consideration for the acquisition includes cash, shares of its stock, bonds payable, and contingent consideration dependent on SUV meeting certain cash flow targets over the next two years. The document provides financial information for PBB and SUV before the merger, and poses calculation questions related to goodwill, total assets and liabilities, and shareholders' equity accounts after the business combination.
PBB Corporation acquires SUV Corporation through a business combination on December 31, 2022. PBB's consideration for the acquisition includes cash, shares of its stock, bonds payable, and contingent consideration dependent on SUV meeting certain cash flow targets over the next two years. The document provides financial information for PBB and SUV before the merger, and poses calculation questions related to goodwill, total assets and liabilities, and shareholders' equity accounts after the business combination.
PBB Corporation acquires SUV Corporation through a business combination on December 31, 2022. PBB's consideration for the acquisition includes cash, shares of its stock, bonds payable, and contingent consideration dependent on SUV meeting certain cash flow targets over the next two years. The document provides financial information for PBB and SUV before the merger, and poses calculation questions related to goodwill, total assets and liabilities, and shareholders' equity accounts after the business combination.
PBB Corporation acquires SUV Corporation through a business combination on December 31, 2022. PBB's consideration for the acquisition includes cash, shares of its stock, bonds payable, and contingent consideration dependent on SUV meeting certain cash flow targets over the next two years. The document provides financial information for PBB and SUV before the merger, and poses calculation questions related to goodwill, total assets and liabilities, and shareholders' equity accounts after the business combination.
Handout 01 – Business Combination – Date of Acquisition
Numbers 1- 5
On December 31, 2022, PBB Corporation enters into a business combination by acquiring all the assets and assuming all the liabilities of SUV Corporation in which the latter will be dissolved. PBB’s consideration consists of the following:
• Cash payment of P1,977,500. • 60,000 unissued shares of its P100 par ordinary shares with a market value of P101 per share. • 6% P2,000,00 bonds payable. • A contingent consideration of P1,500,000 cash on December 31, 2024 if the cash flows from operations during the 2-year period 2022-2024 exceed P2,500,000 per year. PBB estimates that there is a 40% change of probability that the P1,500,000 will be required.
In addition, PBB paid the following at the time of the merger: Finder’s fee P 110,000 Diligent audit fee prior to business combination 75,000 Cost of printing and issuing stock certificates 150,000 General and administration salaries attributable to the merger 75,000
Statement of financial position for the two companies as of December 31 2022 before the merger follow:
PBB Corporation SUV Corporation Book Value Fair Value Book Value Fair Value Cash P 2,950,000 P 2,950,000 P 720,000 P 720,000 Receivables 1,200,000 1,200,000 900,000 900,000 Inventories 2,400,000 2,500,000 1,500,000 1,750,000 Land 3,000,000 3,200,000 3,000,000 3,100,000 Building, net 12,000,000 10,000,000 5,500,000 4,500,000 Equipment 2,000,000 2,000,000 900,000 950,000 Goodwill 750,000 750,000 50,0000 - In process Research and Development - - - 500,000
Accounts payable P 3,600,000 P 3,750,000 P 1,120,000 P 1,200,000 Accrued expense 1,500,000 1,100,000 880,000 900,000 Share capital, P100 par 10,000,000 - 5,000,000 - Share premium 4,200,000 - 2,500,000 - Retained earnings 5,000,000 - 3,070,000 -
1. What is the amount of goodwill to be recognized on the acquisition date? A. 317,500 C. 617,500 B. 1,067,500 D. 1,217,500
2. What is the amount of total assets immediately after the merger? A. 34,332,500 C. 34,687,500 B. 34,650,000 D. 34,650,000
3. What is the amount of total liabilities immediately after the merger? A. 9,537,500 C. 9,800,000 B. 10,990,000 D. 9,787,500
4. What are the amounts of share premium and retained earnings immediately after the merger?
Share Premium Retained Earnings A. 4,110,000 4,740,000 B. 4,740,000 4,110,000 C. 4,050,000 4,650,000 D. 4,650,000 4,050,000
Numbers 6 - 10
On January 1, 2019, Good Corporation and Evil Company decided to enter into a business combination. Good’s book shows assets and liabilities amounting to P1,350,000 and P300,000, respectively. The shareholders’ equity is composed of P300,000 common stocks (P10 par); P150,000 Additional-paid in capital and P600,000 retained earnings. The book value asset of Good is understated by P150,000 while its liability is overstated by P75,000.
Evil Company’s assets inclusive of P15,000 goodwill amounted to P500,000 while liabilities amounted to P150,000. The shareholders’ equity composed of P120,000 common stocks (P10 par); P105,000 Additional paid in capital and P125,000 retained earnings. The fair value of assets without goodwill and liabilities should be reduced both by P75,000.
Good Company acquired the net assets of Evil Company by issuing 25,000 shares and cash of P10,000. Moreover, a contingent consideration of P80,000 will be paid when the result of the pending litigation existing at the date of acquisition on the quieting title of the land of Evil is affirmative. The determinable amount the said contingent consideration at the date of combination amounted to P50,000. The current market price of Good Company’s stock is traded at P12 per share.
Good Corporation paid the following as a result of business combination:
Finder’s fee P 50,000 Legal, accounting and other consulting fees 50,000 Cost of stockholders’ meeting to vote the acquisition 20,000 SEC registration of the business combination 15,000 General administrative cost 15,000 Cost of printing stock certificates 10,000 Accountant’s fee related to the stock issuance 20,000 SEC registration of new shares issued 40,000
5. How much is the result of the combination on January 1, 2019? A. 10,000 goodwill C. 25,000 goodwill B. 10,000 income D. 25,000 income
6. How much is the combined total asset? A. 1,330,000 C. 1,555,000 B. 1,500,000 D. 1,575,000
7. How much is the combined total liability? A. 350,000 C. 425,000 B. 375,000 D. 450,000
8. How much is the combined common stock? A. 420,000 C. 670,000 B. 550,000 D. 720,000
9. How much is the combined additional paid-in capital? A. 130,000 C. 235,000 B. 150,000 D. 255,000
10. How much is the combined retained earnings? A. 430,000 C. 520,000 B. 450,000 D. 540,000
Numbers 11 – 12
The balance sheet of Salt Company, along with market values of its assets and liabilities, is as follows:
Book Values Market Values Current assets P 2,000,000 P 1,500,000 Plant & equipment 30,000,000 35,000,000 Patents 100,000 2,000,000 Completed technology - 10,000,000 Broader customer base - 16,000,000 Technically skilled workforce - 3,000,000 Potentially profitable future contracts - 2,000,000 Licensing agreements - 4,000,000 Potential contracts with new customers - 1,500,000 Advertising jingles - 1,000,000 Future cost savings - 1,800,000 Goodwill 200,000 700,000 Liabilities (28,000,000) (30,000,000) Common stock (1,000,000) Additional paid-in capital (5,000,000) Retained earnings 1,700,000
11. Pail Company pays P100,000,000 in cash for Salt’s Company’s assets and liabilities. Pail records goodwill of A. 50,800,000 C. 72,500,000 B. 66,800,000 D. 76,500,000
12. Assume three months later, Salt’s patents are determined to have been worthless as of the date of acquisition. The entry to record this information includes A. A debit to loss of P2,000,000 B. A debit to patents of P2,000,000 C. A debit to goodwill of P2,000,000 D. A debit to retained earnings of P2,000,000
Numbers 13 – 145
AA Co. bought the net assets of BB Co. by issuing 120,000 shares at P10 par. The fair value of the shares was P2,550,000. Immediately before the acquisition, the following balances were ascertained for BB Co.
AA Co. also incurred the following costs: • Professional fees to arrange business combination P27,000. • SEC registration P12,000. • Printing and issuing of stocks for P3,000.
13. What is the result of the business combination? A. 450,000 C. 350,000 B. (450,000) D. (350,000)
14. What is the share premium recorded by AA Co.? A. 1,330,000 C. 1,335,000 B. 1,350,000 D. 1,365,000
15. What is the net increase (decrease) in the retained earnings of AA Co.? A. 450,000 C. (27,000) B. 408,000 D. 423,000
Numbers 16 – 19
Entity A acquired the net assets of Entity B by issuing 10,000 ordinary shares with par value of P10 and bonds payable with face amount of P500,000. The bonds are classified as financial liability at amortized cost.
At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other hand, the bonds payable are trading at 110. Entity A paid P10,000 share issuance costs and P20,000 bond issue costs. Entity A also paid P40,000 acquisition related costs and P30,000 indirect costs of business combination.
Before the date of acquisition, Entity A and Entity B reported the following data:
At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the noncurrent assets of Entity B have fair value of P1,300,000. On the same date, the current liabilities of Entity B have fair value of P600,000 while the noncurrent liabilities of Entity A have fair value of P500,000.
16. What is the goodwill or gain on bargain purchase arising from business combination? A. 50,000 goodwill B. 150,000 gain on bargain purchase C. 120,000 goodwill D. 70,000 gain on bargain purchase
17. What total amount should be expensed as incurred at the time of business combination? A. 20,000 B. 70,000 C. 30,000 D. 50,000
18. What is Entity A’s amount of total assets after the business combination? A. 4,520,000 B. 4,810,000 C. 4,750,000 D. 4,440,000
19. What is Entity A’s amount of total liabilities after the business combination? A. 2,240,000 B. 2,510,000 C. 2,320,000 D. 2,130,000
Numbers 20 – 21
Summary information is given for San Miguel Brewery (SMB) and Tanduay Philippines at July 1, 2022. The quoted market price of SMB and Tanduay shares are P36 and P40, respectively.
SMB Tanduay Book Value Fair Value Book Value Fair Value Current asset 24,000,000 24,000,000 8,000,000 9,000,000 Plant asset 26,000,000 25,000,000 22,000,000 26,000,000 Liabilities 15,000,000 15,500,0000 5,000,000 5,000,000 Common stock, P10 Par 20,000,000 10,000,000 APIC 3,000,000 1,000,000 Retained earnings 12,000,000 14,000,000
SMB Company acquired all the net assets of Tanduary by issuing 1,000,000 of its own shares. SMB Company incurred the following out of pocket costs relating to the acquisition:
Legal fees to arrange the business combination P 25,000 Cost of SEC registration 12,000 Cost of printing and issuing new stock certificates 3,000 Indirect cost of combination 20,000 Finder’s fee 35,000
20. Calculate the goodwill from the business combination A. 10,000,000 C. 10,040,000 B. 10,025,000 D. 10,060,000
21. The total retained earnings of the surviving company after the combination is A. 13,920,000 C. 11,920,000 B. 13,980,000 D. 11,980,000
Numbers 22 – 24
The statement of Financial Position of Lumina Corporation on June 30, 2022 is presented below:
Current assets P 195,000 Land 1,320,000 Building 660,000 Equipment 525,000 Total assets P 2,700,000
Liabilities P 525,000 Ordinary shares, P5 par 900,000 Share premium 825,000 Retained earnings 450,000 Total liabilities and equities P 2,700,000
All the assets and liabilities of Lumina assumed to approximate their fair values except for land and building. It is estimated that the land has a fair value of P2,100,000 and the fair value of the building increased by P480,000. Enigma Corporation acquired 80% of Lumina’s outstanding shares for P3,000,000. The non-controlling interest is measured at fair value.
The following are independent assumptions.
22. Assuming the consideration paid includes control premium of P222,000, how much is the goodwill (gain on acquisition) on the consolidated financial statements? A. 259,500 C. 340,500 B. 439,500 D. 410,100
23. Assuming the consideration paid includes control premium of P852,000, how much is the goodwill (gain on acquisition) on the consolidated financial statement? A. 315,000 C. 102,000 B. (750,000) D. 252,000
24. Assuming the consideration paid excludes control premium of P138,000 and the fair value of the non- controlling interest is P736,000, how much is the goodwill (gain on acquisition) on the consolidated financial statement? A. 469,500 C. 301,500 B. 439,500 D. 448,500
Numbers 25 – 26
Great Company has gained control over the operation of Super Corporation by acquiring 85% of its outstanding capital stock for P15,480,000. This amount includes a control premium of P180,000. Acquisition expenses, direct and indirect, amounted to P498,000 and P252,000, respectively.
The following is the balance of the Great and Super at book values:
Great Company Super Corporation
Cash P 21,249,000 P 768,000
Accounts receivable 1,800,000 1,950,000
Inventories 3,300,000 2,160,000
Prepaid expenses 891,000 750,000
Land 14,100,000 5,274,000
Building 9,360,000 3,348,000
Equipment 1,800,000 1,110,000
Goodwill - 1,800,000
Total assets P 52,500,000 P 17,160,000
Accounts payable P 4,050,000 P 1,518,000
Notes payable 8,400,000 4,380,000
Ordinary shares, P50 par 20,400,000 4,800,000
Share premium 9,450,000 3,600,000
Retained earnings 10,200,000 2,862,000
Total liabilities and equity P 52,500,000 P 17,160,000
The following were ascertained on the date of acquisition for Super Corporation • The value of receivable and equipment has decreased by P150,000 and P84,000 respectively. • The fair value of inventories are now P2,616,000 whereas the value of the land and building have increased by P2,826,000 and P642,000 respectively. • There was an unrecorded accounts payable amounting to P162,000 and the fair value of notes is P4,428,000.
Compute the following balances to be presented in the consolidated financial position on the date of business combination:
25. Total assets A. 73,500,000 C. 61,308,000 B. 60,558,000 D. 76,788,000
26. Total shareholders’ equity A. 42,000,000 C. 39,300,000 B. 45,000,000 D. 40,050,000
Numbers 27 – 28
The balance sheet of Padre Enterprise and Sister Company at December 31, 2021 are summarized as follows:
Padre Sister Assets 5,000,000 2,000,000 Liabilities 1,500,000 500,000 Capital stock, P40 par 2,500,000 Capital stock, P25 par 1,000,000 Retained earnings 1,000,000 500,000
At the date of acquisition, Sister’s assets are understated while its liabilities are fairly valued. On January 1, 2022, Padre purchased 80% of Sister Company’s outstanding shares for P2,000,000 when the fair value of Sister Company’s net asset was P2,000,000. Padre issued 10,000 previously unissued shares in consideration of the acquisition.
Padre is to assign an amount to the non-controlling interest at the date of acquisition based on the total fair value of Sister’s outstanding shares.
27. How much is the consolidated assets at the date of acquisition? A. 9,000,000 C. 8,000,000 B. 9,700,000 D. 8,700,000
28. How much is the consolidated liability at the date of acquisition? A. 2,000,000 C. 1,800,000 B. 1,500,000 D. 500,000
29. How much is the consolidated liability at the date of acquisition? A. 7,000,000 C. 6,000,000 B. 5,500,000 D. 6,700,000
Numbers 30 – 31
Entity A acquired 80,000 out of 100,000 outstanding ordinary shares of Entity B which enabled the former to obtain control of the latter at an acquisition price of P1,000,000. Entity A paid P100,000 acquisition related costs and P50,000 indirect costs of business combination. At the date of acquisition, the net assets of Entity B are reported at P1,600,000. An asset of Entity B is overvalued by P60,000 while one liability is undervalued by P40,000.
30. What is the initial measurement of noncontrolling interest in net assets in the consolidated statement of financial position? A. 320,000 B. 300,000 C. 250,000 D. 316,000
31. What is the goodwill or gain on bargain purchase arising from business combination? A. 250,000 gain on bargain purchase B. 150,000 gain on bargain purchase C. 50,000 goodwill D. 200,000 gain on bargain purchase