Business Combination and Consolidation on Acquisition Date (Summary) Part 1: Business Combination 1. Journal entries related to acquisition. 2. Computation of Goodwill or Gain on acquisition. 3. Computation of Total Assets, Total Liabilities and Total SHE after combination. a. To record the business combination on Acquirer’s books: Acquiree’s assets at FV Goodwill (if applicable) Acquiree’s Liabilities at FV Contingent Consideration (if applicable) Cash paid by acquirer (if applicable) Common stock (if applicable) APIC (if applicable) xx xx xx xx xx xx xx b. To record acquisition-related costs: Expense (Direct or indirect costs) APIC (stock-issue costs) Cash xx xx xx c. To compute for Goodwill/Gain: Price paid (if in cash, record at face value; if shares, use Fair value) Contingent consideration/ Contingent fee (Fair value) Total consideration xx Less:: Fair value of net asset of acquiree Goodwill (Gain) d. Computation of total assets, total liabilities, and total SHE after combination: BV of Assets of Acquirer FV of Assets of Acquiree Goodwill Acquisition related costs Cash paid Total assets xx xx xx (xx) (xx) xx BV of liabilities, Acquirer FV of liabilities of Acquiree Contingent consideration Total liabilities xx xx xx xx Total Assets Total Liabilities Total SHE xx (xx) xx Or SHE of Acquirer before combination Shares issued (Fair Value) Acquisition-related costs Gain on acquisition Total SHE xx xx (xx) xx xx xx xx (xx) xx Part 2: Consolidation on Acquisition Date 1. Journal entries related to stock acquisition. 2. Computation of Excess, Goodwill/Gain, Total Assets, Total Liabilities and Total SHE. 3. Allocation of Goodwill 4. Determination and Allocation of excess schedule 5. Working paper entries a. To record the acquisition of stock: Investment in Subsidiary Cash Common Stock APIC xx xx xx xx b. To record acquisition-related costs: Acquisition Expense (R.E) APIC Cash xx xx xx c. To compute for Goodwill: Price paid NCI Previously-held interest Total Fair value of Net assets Goodwill/Gain xx xx xx xx (xx) xx d. Allocation of Goodwill to Parent and NCI and floor test: Fair Value FV of Net assets Parent Xx (xx) Non-controlling interest (1)Xx (2)(xx) Goodwill Xx Xx Floor test: Fair value of NCI (1) should be greater than or equal to NCI share in FV of Net Assets (2). If FV of NCI (1) is less than NCI in FV of Net Assets (2), use NCI in FV as the Fair Value of NCI. e. Determination and Allocation of Excess Schedule: Total Parent NCI Fair Value of Subsidiary Xx Xx Xx (1)Less: BV of acquire Xx Xx Xx (2)Excess Xx Xx Xx Adjustment of accounts Assets (FV>BV) (xx) Assets(FV<BV) Xx Liabilities (FV>BV) Xx Liabilities (FV<BV) (xx) Goodwill xx f. Working paper entries: (1) Eliminate BV of SHE of Acquiree on acquisition date: SHE (acquiree) xx Investment in Subsidiary xx NCI (if applicable) xx (2) To allocate the excess: Goodwill Assets (FV>BV) Liabilities (FV<BV) Investment in Subsidiary NCI (if applicable) Assets (FV < BV) Liabilities ( FV>BV) xx xx xx xx xx xx xx g. Computation of Total Assets, Liabilities, SHE, and NCI on Consolidated FS. BV of assets of acquirer FV of assets of acquiree Goodwill Cash paid Acquisition-related costs Total Assets xx xx xx (xx) (xx) xx BV of Liabilities of acquirer FV of Liabilities of acquiree Total Liabilities xx xx xx Total Assets: Total Liabilities Total SHE xx (xx) xx Or SHE of Acquirer before consolidation Stock issued at FV NCI at FV Acquisition-related costs Total SHE xx xx xx (xx) xx Problems Part 1: Net Asset Acquisition 1. On January 1, 2011, Polo Company pays P270, 000 cash and also issue 18, 000 shares of P10 par common stock with a market value of P330, 000 for the net asset of Sure Company. In addition, Polo pays P30, 000 for registering and issuing the 18, 000 shares and P70, 000 for professional fees to effect the combination. Summary balances immediately before the combination is as follows: Cash Inventories Other current assets Plant assets – net Total assets Polo Book Value P350, 000 120, 000 30, 000 260, 000 P760, 000 Sure Book Value P40, 000 80, 000 20, 000 180, 000 P320, 000 Sure Fair Value P40, 000 100, 000 20, 000 180, 000 P340, 000 Current Liabilities P160, 000 P30, 000 P30, 000 Other liabilities P80, 000 50, 000 40, 000 Common stock, 10 par 420, 000 200, 000 Retained earnings 100, 000 40, 000 Total liabilities and equity P760, 000 P320, 000 • Prepare journal entries, compute for goodwill/gain, total assets, total liabilities and total SHE after the acquisition. 2. Condensed Statement of Financial Position for Pablo and Siso Corporations at December 31, 2010, are as follows (in thousands): Pablo Siso Current Assets P130 P60 Non-current Assets 570 440 Total Assets P700 P500 Current Liabilities Capital Stock, P10 par Additional paid-in capital Retained earnings P50 500 50 100 P60 200 140 100 Total Liabilities and shareholders’ equity P700 P500 On January 2, 2011, Pablo issues 30, 000 shares of its stock with a market value of P20 per share for the assets and liabilities of Siso Corporation. Siso is dissolved. The book values reflect their fair values, except a non-current asset of Pablo, which have a fair value of P400, 000, and the current assets of Siso which have a net realizable value of P100, 000. Pablo pays the following expenses in connection with the business combination: Cost of registering and issuing securities issued Other acquisition costs of combination P15, 000 25, 000 Contract for contingent consideration to be paid to Siso, P75, 000. This is determined on the date of acquisition. • Prepare journal entries, compute for the goodwill/gain, total assets, total liabilities, and total SHE after acquisition. Part 2: Stock Acquisition 1. The June 1, 2011 statement of financial position of Straw Company at book value and fair market values are as follows: Current assets Land Building and equipment (net) Patents Book Value P240, 000 20, 000 400, 000 10, 000 Fair Value P280, 000 100, 000 270, 000 30, 000 Total Assets 670, 000 P680, 000 Liabilities Common stock Retained earnings P250, 000 100, 000 320, 000 P250, 000 Total liabilities and shareholder’s equity P670, 000 P680, 000 430, 000 On June 1, 2011 Pepsi Inc. purchased all of Straw Company’s stock for P600, 000. Required: Prepare journal entries, schedule of D & A of excess, and working paper entries. 2. The January 1, 2011 statement of financial position of Sotto Company at book and market values are as follows: Current assets Property, Plant and Equipment (net) Book Value Fair Value P800, 000 P750, 000 900, 000 1, 000,000 Total Assets P1,700,00 P1,750, 000 Current liabilities Long-term liabilities Common stock, Par P1 Additional paid-in capital Retained earnings P300, 000 500, 000 100, 000 200, 000 600, 000 P300, 000 460, 000 Total liabilities and shareholders’ equity P1,700, 000 Pedro Company paid P950, 000 in cash for 80% of Sotto Company’s common stock. Pedro Company also pays P80, 000 of professional fees to effect the combination. The fair value of the NCI is assessed to be P230, 000. Required: Journal entries, D & A of excess schedule, working paper entries. 3. Statement of financial position for Puro Corporation and Sato Company on December 31, 2010 are given below. ` Cash and cash equivalents Inventory Property, plant and equipment (net) Puro Corporation P330, 000 100, 000 500, 000 Sato Company P90, 000 60, 000 250, 000 Total Assets P930, 000 P400, 000 Current Liabilities Long-term liabilities Common stock Retained earnings Total Liabilities and shareholders’ equity P180, 000 200, 000 300, 000 250, 000 P930, 000 P60, 000 90, 000 100, 000 150, 000 P400, 000 Puro Corporation purchased 80% ownership of Sato Company on December 31, 2011, for P260, 000. On that date, Sato Company’s property and equipment had a fair value of P50, 000 more than the book value shown. All other book values approximated fair value. Required: Working paper entries, D & A excess schedule, goodwill or gain, total assets, liabilities and SHE. Challenge Problem: Primo Corporation acquired majority of the stock of Sonia Company on January 2, 2011, and a consolidated statement of financial position was prepared. Partial statement of financial position for Primo, Sonia, and the consolidated entity follow: Primo Corporation and Sonia Company Partial Statement of Financial Position January 2, 2009 Accounts Primo Corporation Sonia Company Consolidated Entity Cash and Cash Equivalents Accounts Receivable Inventory Equipment Investment in Sonia Company Goodwill P100, 000 80, 000 200, 000 500, 000 P40, 000 20, 000 100, 000 200, 000 P140, 000 100, 000 340, 000 800, 000 ? ________ _________ 10, 000 10, 000 Total P ?______ P360, 000 P1,390, 000 Accounts payable Bonds payable Common stock Retained earnings Non-controlling interest P70, 000 300, 000 ? 567 ,000 ________ P40, 000 150, 000 170, 000 ________ P110, 000 300, 000 250 ,000 ? 163, 000 Total P ?_____ P360, 000 P1,390, 000 Required: 1. Consolidated retained earnings 2. FV of inventory of Sonia on Janauary 2, 2011 3. FV of Sonia’s Net Assets 4. Amount Primo paid to acquire the stock in 2011 5. Allocation of Goodwill to Controlling and NCI