University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
Business Combination
Points to Remember:
Business combination maybe achieved either by:
• Statutory Consolidation- Combination of two or more existing legal entities into one new legal entity. (A+B=C)
e.g. Landbank plus Postal Bank= Overseas Filipino Bank
• Statutory Merger-Absorption of one or more existing legal entities by another existing company that continues
as the sole surviving legal entity. (A+B=A or B) e.g. Allied Bank plus PNB=PNB
Control of another company may be achieved either by:
• Acquisition of Assets – all of the company’s assets are acquired directly from the company.
• Stock acquisition – a controlling interest (typically, more than 50%) of another company’s voting stock is
acquired.
How to apply the acquisition method of accounting:
1. Identify the acquirer
2. Determine the acquisition date – date on which the acquirer obtains control of the acquiree. Usually the
closing date. It is the date used to establish the fair value of the company acquired.
3. Determine the Consideration given:
a. The fair values at the date of exchange of assets given, liabilities incurred or assumed and equity
instruments issued by the acquirer in exchange for control of the acquiree.
b. Contingent consideration- an agreement to issue additional consideration (asset or stock) at a later
date if specified events occur. Measured at its acquisition-date fair value (expected value).
Changes in the value of contingent consideration is accounted for as follows:
Assets
Within the measurement period (not After the measurement Period
than one year)
Goodwill/Gain on BP XX
Loss on CCP XX
Conting. Cons. Pay. XX
CCP
XX
Stocks
more
APIC
XX
Common Stock XX
Note: Acquisition related costs and Stock issuance costs does not form part of the consideration given, rather they
are treated as follows:
1. Acquisition Related Costs- Expensed outright
2. Stock Issuance Costs - Deduction in APIC
- If APIC is reduced to zero, remaining is treated as contra account from
retained earnings.
4. Record and Measure the Acquirer’s Assets and Liabilities that are assumed – Measured at Fair Value.
If Price Paid > FV of Net Assets Acquired = Goodwill
If Price Paid < FV of Net Assets Acquired = Gain on Bargain Purchase
Financial Statements after Consolidation:
Assets
Assets of Acquirer
XX
Assets Acquired
XX
Goodwill, if any
XX
Payment of Acq. Exp.
(XX)
Payment of SIC
(XX)
Total Assets after acquisition XX
Liabilities and Equity
Liabilities of Acquirer
Liabilities Assumed
Contingent Cons. Pay.
Total Liabilities
XX
XX
XX
XX
Common Stock, Acquirer XX
APIC, Acquirer
XX
R/E, Acquirer*
XX
Total Equity
XX
*Retained Earnings includes adjustment for Expenses Paid and Gain on Bargain Purchase
-Done-
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
Theories
1. It is a transaction or other events in which an acquirer obtains control of one or more businesses.
a. Business Combination
b. Controlling Interest
c. Merger
d. Consolidation
2. An acquirer might obtain control of an acquiree in which of the following?
a. By transferring cash, cash equivalents and other assets
b. By issuing equity interests
c. By contract alone, even without consideration
d. All of the above
3. With respect to business combinations, PFRS 3 provides that
a. The pooling of interest method must be used for all combinations
b. The pooling of interest method may be used only when specific requirements are met
c. The purchase method must be used for all combinations
d. The purchase method may be used only when specific requirements are met.
4. The purchase method of accounting for a business combination requires all of the following, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recoginizing and measuring the identifiable assets acquired, the liabilities assumed and the
noncontrolling interest in the acquiree at carrying amount.
d. Recognizing goodwill or gain from bargain purchase
5. Which of the following staatements in relation to an acquisition date of a business combination is incorrect?
a. The acquisition date is the date on which an acquirer obtains control over the acquiree.
b. The acquisition date is normally the closing date or the date on which the acquirer legally transfers the
consideration, acquires assets and assumes the liabilities of the acquiree
c. Where several dates are key to a business combination, the date on which control passes is the
acquisition date.
d. The acquisition date can never precede the closing date.
6. Which costs should be included in the consideration transferred in a combination?
a. Fees paid to accountants
b. Cost of maintaining an acquisition department
c. Both cost of maintaining an acquisition department and fees paid to accountants.
d. Neither cost of maintaining an acquisition department nor fees paid to accountants.
7. In a business combination, goodwill is measured as the excess of
a. The consideration transferred over the identifiable assets acquired.
b. The total of the consideration transferred and the amount of any noncontrolling interest in the acquire
over the identifiable net assets acquired
c. The total of the consideration received and the fair value of the previously held interest in the acquire over
the identifiable net assets acquired.
d. The total of the consideration transferred, the amount of any noncontrolling interest in the acquire
and the fair value of previously held interest in the acquire over the identifiable net assets
acquired.
Multiple Choice Problems
1. Quad corporation purchases all of the net assets of Chrome, Inc., for P320,000. Immediately prior to the
combination, Chrome’s net assets were carried on the books at P180,000, and chrome had retained earnings of
P24,000. The fair value of Chrome’s net assets at the date of combination is P248,000. Quad Corporation
had retained earnings of P40,000 and no goodwill immediately prior to the combination.
Immediately after the combination, the combined company reports goodwill and retained earnings of:
Goodwill
Retained Earnings
a.
P0
P40,000
b.
P0
P64,000
c.
P72,000
P40,000
d.
P72,000
P64,000
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
Lakers Company issued 120,000 shares of P10 par ordinary shares with a fair value of P3,160,000 for all the net assets
of Lebron Company and a deferred cash payment of P500,000 payable one year after the acquisition date. Market rate
of interest is 10%. Lakers retained earnings prior to business combination amounted to P600,000. Lakers incurred the
following additional costs:
Legal fees to arrange the business combination
P30,000
Accounting and consultancy fees related with the business combination
15,000
Cost of printing and issuing new stock certificates
3,000
Indirect costs of combining, including allocated overhead and executive salaries
25,000
Broker’s and Finder’s fees related with the business com.
28,000
EXPENSE = 98,000
APIC = 3,000
Immediately before the business combination in which Lebron Company was dissolved, Lebron’s assets and equities
were as follows:
Book Value
Fair Value
Current Assets
P1,000,000
P1,100,000
Plant Assets
1,500,000
2,200,000
Liabilities
300,000
Ordinary shares
2,000,000
Retained Earnings
200,000
2. Determine the goodwill as a result of the business combination
a. 614,546
b. 660,000
c. 360,000
d. 314,546
Solution:
3,160,000 + 454,545* - 3,000,000* = 614,546
454,545*
Deferred Cash Payment
Multiply: PV of 1.10 for one year
Total
500,000
0.909090909
454,545.4545
3,000,000*
Fair Value
Current Assets
1,100,000
Plant Assets
2,200,000
Total Assets
3,300,000
Less: Liabilities
300,000
(If there is no FV indicated, BV = FV)
Net Assets
3,000,000
3. How much is the retained earnings of Lakers Company after the business combination?
a. 250,000
b. 468,870
c. 502,000
d. 468,780
Solution:
Retained Earnings
600,000
Less: Expenses
Legal fees to arrange the business combination
30,000
Accounting and consultancy fees related with the business combination
15,000
Indirect costs of combining, including allocated overhead and executive salaries 25,000
Broker’s and Finder’s fees related with the business com.
28,000 98,000
Retained earnings of Lakers Company after the business combination
502,000
The Thunder Company will issue P10 par value common stock for the net assets of PG Company. The fair market value
per share of Thunder’s common stock is P40. The following is the list of accounts of PG company on the date of the
acquisition.
Book Value
Fair Value
Current Assets
P280,000
P320,000
Plant Assets
680,000
1,280,000
Liabilities
320,000
Ordinary shares
64,000
Additional paid-in capital
256,000
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
Retained Earnings
320,000
4. To have an income from acquisition of P120,000, the number of shares to be issued by Thunder company should
be
a. 30,000 shares b. 30,400 shares
c. 29,000 shares
d. 35,000 shares
Solution:
1,160,000* - 1,280,000* = 120,000
If the Fair value of net assets is higher then the result is Gain on Bargain Purchase, which is to be added in the income.
Consideration Paid is Lower than Fair Value of Net Assets
1,160,000*
Fair Market Value of P 40 per share
(Multiply) 29,000 shares
40 x 29,000 = 1,160,000
1,280,000*
Current Assets
Plant Assets
Total Assets
Less: Liabilities
Net Assets
Fair Value
320,000
1,280,000
1,600,000
320,000
1,280,000
5. Same data as in No. 4, to have a goodwill of P120,000, the number of shares to be issued by Thunder Company,
should be
a. 30,000 shares b. 30,400 shares
c. 29,000 shares
d. 35,000 shares
Solution:
1,400,000* - 1,280,000* = 120,000
If the Fair Value of Net Assets is lower, then the resulting amount is Goodwill.
Consideration Paid is Higher than Fair Value of Net Assets
1,400,000*
Fair Market Value of P 40 per share
(Multiply) 35,000 shares
40 x 35,000 = 1,400,000
1,280,000*
Current Assets
Plant Assets
Total Assets
Less: Liabilities
Net Assets
Fair Value
320,000
1,280,000
1,600,000
320,000
1,280,000
On August 1, 2018, Near Company paid P850,000 for all the net assets of Mello Enterprises in a transaction properly
recorded as a purchase. The recorded assets and liabilities of Mello Enterprises on August 1, 2018, follow:
Cash
P80,000
Inventory
240,000
Property and equipment, net
480,000
Liabilities
(180,000)
On August 1, 2018 it was determined that the inventory of Near had a fair market value of P190,000, and the property and
equipment (net) had a fair market value of P560,000.
6. What is the amount of goodwill resulting from the business combination?
a. 0
b. P20,000
c. P200,000
d. P230,000
Solution:
850,000 – 650,000* = 200,000
650,000*
Book Value
Fair Value
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
Cash
Inventory
Property and Equipment (net)
Liabilities
Net Assets
80,000
240,000
480,000
(180,000)
80,000 (if no FV, BV = FV)
190,000
560,000
(180,000) (if no FV, BV = FV)
650,000
Summary information is given for P company and S company at July 1, 2018. The quoted market price of P Co.’s stock on
July 1, 2018 is P32 per share.
P Company
S Company
S Company
Per books
Per books
Fair Values
Current assets
P19,200,000
P6,400,000
P7,200,000
Plant assets
20,800,000
17,600,000
20,800,000
Liabilities
12,000,000
4,000,000
Common stock, P10 par
16,000,000
8,000,000
Additional paid-in capital
800,000
800,000
Retained Earnings
11,200,000
11,200,000
Assume that P company issues 1,000,000 shares of its own stock for the net assets of S Company on July 1, 2018, in a
purchase business combination in which S Company is dissolved.
P Company incurred the following costs:
Legal fees to arrange the business combination
P20,000
Cost of SEC registration
9,600
Cost of printing and issuing new stock certificates
2,400
Indirect costs of combining
16,000
7. The goodwill from business combination is
a. 10,000,000
b. 10,025,000 c. 10,040,000 d. 8,000,000
Solution:
32,000,000* – 24,000,000* = 8,000,000
32,000,000*
1,000,000 shares x P 32 per share = 32,000,000
24,000,000*
Current Assets
Plant Assets
Total Assets
Liabilities
Net Assets
S Company
Book Value
6,400,000
17,600,000
24,000,000
4,000,000
20,000,000
S Company
Fair Value
7,200,000
20,800,000
28,000,000
4,000,000 (if no FV, BV = FV)
24,000,000
8. The total RE of P company immediately after the business combination
a. 13,980,000
b. 14,000,000 c. 13,955,000 d. 11,164,000
Solution:
11,200,000* – 36,000* = 11,164,000
11,200,000*
From book value of S Company
36,000*
Legal fees to arrange the business combination
Indirect costs of combining
Total Expenses
20,000
16,000
36,000
Sixers Corporation exchanged all its common stock, worth P280,000 for all of the net assets of Philly Company in a
business combination treated as a purchase. At the date of combination, Sixers’ net assets had a book value of P480,000
and a fair value of P680,000. Philly’s net assets had a book value of P260,000 and a fair value of P272,000.
9. Immediately following the combination, the net assets of the combined company should have been reported at
what amount?
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
a. 740,000
b. 752,000
Solution:
Sixers Fair Value of Net Assets
Philly Fair Value of Net Assets
Total Net assets of the combined company
c. 760,000
d. 952,000
680,000
272,000
952,000
Ideal Corporation is a company involved in manufacturing mining equipment. At the beginning of the year, the board
of directors of the said company has decided to enter into a business combination with Superior Corporation and
Bright Corporation, top suppliers of materials in the mining industry which they use in production. The said
acquisition is expected to result in producing higher quality mining equipment with lower total cost. The deal was
closed on February 28, 2018 and the following information was gathered from the books of the entities:
Current assets
Non-current assets
Total Assets
IDEAL
P8,250,000
18,750,000
P27,000,000
SUPERIOR
P2,340,000
15,300,000
P17,640,000
BRIGHT
P1,560,000
10,200,000
P11,760,000
Liabilities
Ordinary shares, P100 Par
Share premium
Retained Earnings
Total equities
P1,950,000
16,491,000
1,059,000
7,500,000
P27,000,000
P1,260,000
10,681,200
1,018,800
4,680,000
P17,640,000
P840,000
7,120,800
679,200
3,120,000
P11,760,000
Ideal will issue 135,000 of its ordinary shares in exchange for the acquisition of Superior and 67,200 of its ordinary
shares in exchange for the acquisition of Bright. The fair value of Ideal’s shares is P150. In addition, the following
adjustments should be made to the current assets of Superior and Bright which has a fair value of P2,700,000 and
P1,380,000, respectively. The noncurrent assets has a fair value of P12,900,000 and P11,850,000 for Superior and
Bright, respectively.
Compute for the following balances in the books of Ideal Corporation at the date of acquisition:
10. Stockholder’s equity
a. P25,050,000
b. P55,380,000
c. P53,070,000
Solution:
25,050,000* + 20,250,000* + 10,080,000* + 2,310,000* = 57,690,000
d. P57,690,000
25,050,000*
Current Assets
Non-Current Assets
Total Assets
Liabilities
Net Assets
Ideal
Book Value
8,250,000
18,750,000
27,000,000
1,950,000
25,050,000
20,250,000*
135,000 ordinary shares (superior) x fair value of ideal shares P150 = 20,250,000
10,080,000*
67,200 ordinary shares (bright) x fair value of ideal shares P150 = 10,080,000
2,310,000*
Current Assets
Non-Current Assets
Total Assets
Liabilities
Net Assets
Shares of Bright
Bright
Book Value
1,560,000
10,200,000
11,760,000
840,000
10,920,000
10,080,000
Bright
Fair Value
1,380,000
11,850,000
13,230,000
840,000 (if no FV, BV = FV)
12,390,000
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City Advanced Financial Accounting and Reporting
Less: Net Assets (Bright)
Gain on Bargain Purchase
12,390,000
2,310,000
11. Assets
a. P61,740,000
b. P55,440,000
c. P55,830,000
Solution:
27,000,000* + 15,600,000* + 13,230,000* + 5,910,000* = 61,740,000
d. P56,400,000
27,000,000*
Current Assets
Non-Current Assets
Total Assets
Ideal
Book Value
8,250,000
18,750,000
27,000,000
15,600,000*
Current Assets
Non-Current Assets
Total Assets
Superior
Fair Value
2,700,000
12,900,000
15,600,000
13,230,000*
Current Assets
Non-Current Assets
Total Assets
Bright
Fair Value
1,380,000
11,850,000
13,230,000
5,910,000*
Current Assets
Non-Current Assets
Total Assets
Liabilities
Net Assets
Superior
Book Value
2,340,000
15,300,000
17,640,000
1,260,000
16,380,000
Shares of Superior*
Less: Net Assets (Superior)
Goodwill
Superior
Fair Value
2,700,000
12,900,000
15,600,000
1,260,000 (if no FV, BV = FV)
14,340,000
20,250,000
14,340,000
5,910,000
*135,000 ordinary shares (superior) x fair value of ideal shares P150 = 20,250,000