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