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APR4 Unit -I (Midterm)
Bachelor of Science in Accountancy (Catanduanes State University)
Studocu is not sponsored or endorsed by any college or university
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UNIT I – BUSINESS COMBINATIONS
Business Combination –


PFRS 3 definition– is a transaction or other event which an acquirer obtains control of one or
more businesses.
Occurs when one company (acquirer) acquires another company (acquired) or when two or more
companies merge into one. After the combination, one company gains control over the other.
PFRS # 3 - objective is to improve the relevance, reliability and comparability of financial reporting of an
entity in relation to a business combination by establishing the recognition and measurement principles
and disclosure requirements for the acquirer.
Essential elements in the definition of a business combination:
1. Control
2. Business
Control



an investor controls an investee when the investor is exposed or has rights and the ability to
affect those returns through its power over the investee .
Normally presumed to exist when the ownership interest acquired in the voting rights of the
acquire is more than 50% or 51% or more.
May still be obtained without necessarily acquiring more than 50% of the acquiree’s voting rights
in the following instances:
1. The acquirer has the power to appoint or remove the majority of the board of directors of the
acquire; or
2. The acquirer has the power to cast the majority votes at board meetings or equivalent bodies
within the acquire; or
3. The acquirer has the power over more than half of the voting rights of the acquire because
of an agreement with other investor; or
4. The acquirer has the power to control the financial and operating policies of the acquire
because of law or an agreement.
Acquisition Method of Accounting for Business Combinations
 Four steps are to be used as follows:
1. Identify the acquirer
2. Determine the acquisition date
3. Determine the consideration given (price paid) by the acquirer
4. Recognize and measure the identifiable assets acquired, the liabilities assumed, noncontrolling interest and previously held equity interest in the acquire. Any resulting goodwill
or gain from bargain purchase should be recognized.
Identify the acquirer
 Acquirer is the entity that obtains control of the acquire.
a. In asset acquisition, the acquirer is the company transferring cash or other assets and/or
assuming liabilities.
b. In stock acquisition, the acquirer is the company transferring cash and/or other assets for a
controlling interest in the voting common stock of the acquire. “Reverse acquisition” may
occur when a publicly traded company is acquired by privately traded company where the
issuing company is the acquire.
Determine the acquisition date
 Acquisition date – date on which the acquirer’s obtain control of the acquire – the date which the
acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquire – generally the closing date.

Acquisition date is usually the date the fair values are established for the accounts of the acquired
company
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Determine the consideration given
 Consideration given is assumed to be the fair value of the acquire as an entity which is calculated
as the sum of:
a. The cash or noncash assets transferred by the acquirer
b. The shares of stocks or bonds issued by the acquirer.
c. Contingent consideration

Contingent consideration –
 is an agreement to issue additional consideration (asset or stock) at a later date if
specified events occur - measured at its acquisition date fair value.

Changes resulting from events after the acquisition date but within the measurement
period ( which maybe a maximum period of 1 year from the acquisition date) are
recognized as an adjustment as an adjustments against the original accounting for the
acquisition (may affect goodwill or gain from acquisition)

Changes resulting from events after the acquisition date but after the measurement
period ( which maybe a maximum period of 1 year from the acquisition date) are not
measurement period adjustment. The additional consideration given is to be accounted
for as follows:
a. If it is equity – the original amount is not measured
b. If additional consideration is cash or other assets, the changed amount is
recognized in profit or loss.

Acquisition-related costs – costs incurred to effect business combination- broker’s fees,
accounting, legal and other professional fees, general and administrative costs are expensed.

Stock issuance costs – when shares are issued for the net assets acquired, stock issuance
costs – Sec registration fees, documentary stamp tax, newspaper publication fees are treated as
a deduction from Share Premium(APIC) from previous share issuances. In case Share Premium
or APIC is reduced to zero, the remaining stock issuance costs is treated deduction from
retained earnings.

Cost to issue debt securities – accounted for as bond issue costs which are deducted from the
bonds payable when determining the carrying amount of the bonds.
Record and Measure Acquirer’s Assets and Liabilities that are assumed.
 Fair values of all identifiable assets and liabilities are recorded

Total fair value of all identifiable assets less liabilities is equal to fair value of the net assets.

The total identifiable assets should never include goodwill that may exist on the acquiree’s books.

The goodwill to be recorded is the “new goodwill” which is the result of the combination or based
on the price paid by the acquirer.
a. If Price paid by the acquirer exceeds the fair value of net assets – the excess is recorded as
“Goodwill”. Goodwill (an asset) is not amortized but its impairment is tested in future
accounting periods.
b. If Price paid is less than the fair value of net assets (bargain purchase) – the difference is
record as “ Gain on bargain purchase” and shown as gain in profit or loss statement.
However, before recognizing gain on bargain purchase, the acquirer shall reassess if it has
correctly identified all the assets and liabilities and shall recognize any additional assets or
liabilities that are identified in that review.

Acquirer is not permitted to recognize valuation allowance as of acquisition date for assets
acquired in a business combination that are measured at acquisition-date fair values- no
valuation allowance for acquired accounts receivables, loans and property, plant and equipment.
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
Classified into:
1. Asset acquisition - acquirer purchases the assets and assume the liabilities of acquiree in
exchange for cash or non cash assets or bonds or shares of stock of acquirer. Acquired
company is dissolved.
a. Merger - two or more companies merge into single company and the acquirer is one the
combining companies. Example: D Co + E Co,+ F Co. = E Co.,
b. Consolidation - two or more companies merge into single company and the acquirer is a
new company. Example: D Co + E Co,+ F Co. = G Co.,
c.
Goodwill/Gain on acquisition
Consideration transferred
Less: Fair value of net assets of acquiree
Goodwill (Gain on acquisition)
xxx
xxx
xxx
Note: If consideration transferred exceeds the fair value of net assets acquired, the
excess is Goodwill, but if consideration is less than the fair value of net assets
acquired the differences is a Gain or income from acquisition.
2. Stock acquisition – The acquirer obtains control by acquiring a majority ownership in the
voting rights of the acquiree. Acquirer is the parent, the acquiree is the subsidiary. Both
companies retain their legal existence but for financial reporting purposes they are viewed as
a single reporting entity.

May described as:
1. Horizontal combination – combination of similar businesses, example a bank acquires another
bank.
2. Vertical combination - combination of entities operating a different levels in a marketing chain.
A manufactures acquires a supplier of raw materials.
3. Conglomerate – combination of entities with dissimilar business, example a real estate
acquires a bank..
Asset acquisition:
To illustrate:
A Company and B Company
Balance Sheets
June 1, 2021
A Company
B Company
Book values
P 1,650,000
350,000
P 250,000
200,000
120,000
800,000
550,000
250,000
180,000
____________
____20,000
P 3,250,000
P 1,120,000
Assets
Cash
Accounts Receivable
Inventories
Building
Equipment
Goodwill
Liabilities and Equity
Accounts Payable
Bonds Payable
Ordinary Shares (P 100 par)
Share Premium
Retained Earnings
P
P
150,000
400,000
1,500,000
400,000
800,000
3,250,000
A Company incurred the following expenses:
Direct acquisition costs
Indirect acquisition costs
P
P
50,000
100,000
400,000
200,000
370,000
1,120,000
P 45,000
15,000
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FMV
P 150,000
300,000
200,000
P 50,000
100,000
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REQUIRED:
1. Journal entries on the books of A Company to record the purchase of the net assets of B
company in a business combination assuming the following purchase price:
a) P 945,000
b) 620,000
2. Assuming A Company issued 8,000 shares of its ordinary shares for the net assets of B
company. The market value of A Company’s share on June 1, 2021 was P 120 per share.
Costs of SEC registration and issuance of the equity securities amounted to P 40,000.
Solution:
Req. 1 (a) Price paid P 945,000
GENERAL JOURNAL
Date
2021
June
Particulars
1
PR
Accounts receivable
Inventories
Building
Equipment
Goodwill
Accounts Payable
Bonds Payable
Cash
Acquisition of B Company.
Debit
Credit
250,000
150,000
300,000
200,000
195,000
50,000
100,000
945,000
Acquisition Expense
Cash
To record acquisition related costs
60,000
60,000
To compute for Goodwill:
Total price paid:
Cash
Fair value of net asset acquired:
Total assets
Less: Total liabilities
Goodwill
945,000
900,000
150,000
750,000
195,000
Req. 1 (b) Price paid P 620,000
GENERAL JOURNAL
Date
2021
June
Particulars
1
PR
Accounts receivable
Inventories
Building
Equipment
Accounts Payable
Bonds payable
Cash
Gain on acquisition
Acquisition of B Company.
Debit
Credit
250,000
150,000
300,000
200,000
Acquisition Expense
Cash
To record acquisition related costs
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50,000
100,000
620,000
130,000
60,000
60,000
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To compute for Gain on acquisition:
Total price paid:
Cash
Fair value of net asset acquired:
Total assets
Less: Total liabilities
Gain on acquisition
620,000
900,000
150,000
750,000
(130,000)
The Statement of Financial Position of A Company after the combination:
A Company
Balance Sheet
June 1, 2021
P 970,000 Accounts Payable
600,000 Bond Payable
350,000 Total Liabilities
1,100,000
450,000 Ordinary shares, P 100 par
Share Premium
Retained Earnings (800 + 130 ___________ Total Equity
P 3,470,000 Total Liabilities & Equity
Cash (1,650 – 620 – 60)
Accounts receivable
Inventory
Building
Equipment
Total Assets
P
200,000
500,000
P 700,000
60)
P 1,500,000
400,000
870,000
P 2,770,000
P 3,470,000
Req. 2: Assuming A Company issued 8,000 shares of its ordinary shares for the net assets of B
company. The market value of A Company’s share on June 1, 2021 was P 120 per share. Costs
of SEC registration and issuance of the equity securities amounted to P 40,000.
GENERAL JOURNAL
Date
2021
June
Particulars
1
PR
Accounts receivable
Inventories
Building
Equipment
Goodwill
Accounts Payable
Bonds Payable
Ordinary Share (8,000 x 100)
Share Premium ( 8,000 x 20)
Acquisition of B Company.
Debit
Credit
250,000
150,000
300,000
200,000
210,000
50,000
100,000
800,000
160,000
Acquisition Expense
Share Premium
Cash
To record acquisition related costs
60,000
40,000
100,000
To compute for Goodwill:
Total price paid:
Stocks issued ( 8,000 shares x P 120(mv.))
Fair value of net asset acquired:
Total assets
Less: Total liabilities
Goodwill
960,000
900,000
150,000
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750,000
210,000
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The Statement of Financial Position of A Company after the combination:
A Company
Balance Sheet
June 1, 2021
Cash
Accounts receivable
Inventory
Building
Equipment
Goodwill
P 1,550,000
600,000
350,000
1,100,000
450,000
210,000
Total Assets
__________
P 4,260,000
Accounts Payable
Bond Payable
Total Liabilities
P
200,000
500,000
P 700,000
Ordinary shares, P 100 par
Share Premium (560,000 – 40,000)
Retained Earnings (800,000 -60,000)
Total Equity
Total Liabilities & Equity
P 2,300,000
520,000
740,000
P 3,560,000
P 4,260,000
Note: The Statement of Financial Position of the acquirer after the combination includes book
value of all assets and liabilities of the acquirer plus the fair value of assets and liabilities
of the B Company – the acquire.
In the books of the B Company (acquiree)
GENERAL JOURNAL
Date
2021
June
Particulars
1
PR
Debit
Investment in A Company
Accounts Payable
Bonds Payable
Loss on sale of business
Accounts receivable
Inventories
Building
Equipment
Goodwill
To record sale of net assets
960,000
50,000
100,000
10,000
Ordinary Shares
Share Premium
Retained Earnings
Investment in A Comp
Loss on sale of business
Distribution of A’s share to
stockholders and liquidation of B Company
400,000
200,000
370,000
Credit
250,000
120,000
550,000
180,000
20,000
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960,000
10,000
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Problem 2:
The company to be acquired by MMC, Inc. has the following balance sheet on December 31, 2020:
JYR Company
Balance Sheet
December 31, 2020
Cash
Marketable Securities
Inventory
Land
Building ( net)
Equipment
P 40,000
60,000
100,000
30,000
150,000
80,000
_________
P 460,000
Total Assets
Current Liabilities
5%, 5-year Bond Payable
Total Liabilities
P 25,000
100,000
P 125,000
Ordinary shares, P 1 par
Share Premium
Retained Earnings
Total Equity
P 10,000
140,000
185,000
P 335,000
P 460,000
Note 1: A customer list with a significant value exists.
Note 2: There is an unrecorded warranty liability on prior product sales.
Fair values of all accounts have been established as of December 31, 2020, in conformity with the fair
value measurement as follows:
Account
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer list
Current liabilities
Bonds Payable
Premium on Bonds Payable
Warranty liability
Method of Estimation
Book value
Market value
Market value
Adjusted market value
Adjusted market value
Market value
Other estimate, discounted cash
flow based on estimated future
cash flows
Book value
Fair value(adjusted with
premium/discount)
Adjusted market value using
market based interest rate applied
to contractual cash flows
Other estimate, discounted cash
flow based on estimated future
cash flows
Fair value
P 40,000
66,000
110,000
72,000
288,000
145,000
125,000
( 25,000)
100,000
(4,000)
(12,000)
On December 31, 2020, MMC, Inc. issued 40,000 shares of its P1 par value ordinary shares with
a market value of P 20 each for JYR Company. MMC, Inc. also incurred the following costs of
P 47,000 as a result of this transaction:



P 16,000 for consultant’s fee and brokerage fee, P 5,000 for accountant’s fee and P 4,000 for
attorney’s fee.
Internal secretarial and administrative costs of P 10,000 are indirectly attributable to combination.
Costs to register (SEC) such as accountant’s and legal fees and issue (printing stock certificates)
stock certificates amounts P12,000.
REQUIRED; Record the acquisition of the net assets of JYR Company and related transactions on
MMC’s books.
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Solution:
Problem 2:
GENERAL JOURNAL
Date
2020
Dec.
Particulars
31
PR
Debit
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Ordinary Shares (40,000 x P 1)
Share Premium
Acquisition of net assets of JYR Co.
40,000
66,000
110,000
72,000
288,000
145,000
125,000
95,000
Acquisition expenses
Share Premium
Cash
Direct and indirect acquisition
expenses and cost to issue & register stocks.
35,000
12,000
Credit
25,000
100,000
4,000
12,000
40,000
760,000
47,000
Problem 3 –Using Problem 2: Prepare the necessary journal entries in the books of MMC, under the
following independent cases:
1. (Cash contingency): Using the same information in Problem 2, assuming that MMC Inc. , issued
33,500 shares and the acquirer agreed to pay an additional P 100,000 on January 1, 2023 , if
the average income during the 2-year period of 2021-2022 exceeds P 5,000,000 per year. The
expected value is P 40,000 calculated based on the 40% probability of achieving the target
income.
Solution:
GENERAL JOURNAL
Date
2020
Dec.
Particulars
31
PR
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Contingent consideration payable
Ordinary Shares (33,500 x P 1)
Share Premium
Acquisition of net assets of JYR
Company.
Debit
Credit
40,000
66,000
110,000
72,000
288,000
145,000
125,000
5,000
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25,000
100,000
4,000
12,000
40,000
33,500
636,500
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2. (Cash contingency) Using the same information in Problem 2, assuming that in addition to the
stock issue, the acquirer agreed to pay an additional P 100,000 on January 1, 2023 , if the
average income during the 2-year period of 2021-2022 exceeds P 5,000,000 per year. The
expected value is P 40,000 calculated based on the 40% probability of achieving the target
income.
On February 1, 2021, the expected value of the contingent consideration was revised to P 65,000,
due to facts and circumstances existing on the acquisition date.
On March 1, 2021, the estimate was again revised to P 62,000 due to events that affect the
contingency.
On January 1, 2023, the average income for 2021 amounted to P 5,500,000 and P 2022 amounted
to P 5,700,000.
Solution:
GENERAL JOURNAL
Date
2020
Dec.
2021
Feb.
Mar
2023
Jan.
Particulars
31
1
1
1
PR
Debit
Credit
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Contingent consideration payable
Ordinary Shares (40,000 x P 1)
Share Premium
Acquisition of net assets of JYR Co.
40,000
66,000
110,000
72,000
288,000
145,000
125,000
135,000
Goodwill
Contingent consideration payable
Revised within the measurement period.
25,000
Contingent consideration payable
Gain on contingent consideration
One time measurement is allowed,
charge to operations (subsequent measurement)
3,000
Contingent consideration payable
Loss on contingent consideration
Cash
Payment, contingent event happens.
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25,000
100,000
4,000
12,000
40,000
40,000
760,000
25,000
3,000
62,000
38,000
100,000
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3 Stock contingency with Market value given)
Using the same information in Problem 2, assuming that in addition to the stock issue, MMC
also agreed to issue additional stock to the former stockholders of JYR Company if the average
post-combination earnings over the next two years equaled or exceeded P 700,000 per year.
The additional 10,000 shares expected to be issued are valued at P 15,000.
On January 1, 2023, the earnings for 2021 and 2022 amounted to P 700,000 and P 760,000,
respectively.
Solution:
GENERAL JOURNAL
Date
2020
Dec.
2023
Jan.
Particulars
31
1
PR
Debit
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Contingent consideration payable
Ordinary Shares (40,000 x P 1)
Share Premium
Paid in capital for contingent consideration.
Acquisition of net assets of JYR Co. .
Paid in Capital for contingent consideration
Ordinary share
Share Premium
Payment. Contingent event happens.
Credit
40,000
66,000
110,000
72,000
288,000
145,000
125,000
110,000
25,000
100,000
4,000
12,000
15,000
40,000
760,000
15,000
15,000
10,000
5,000
4. Stock contingency
Using the same information in Problem 2, assuming that in addition to the stock issue, MMC Inc.
also agreed to issue 5,000 additional shares if the average income during the 2 year period of
2021 – 2022 exceeded P 80,000 per year.
.
On January 1, 2023, the average income amounted to P 110,000. (the contigent event happens)
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Solution:
GENERAL JOURNAL
Date
2020
Dec.
2023
Jan.
Particulars
31
1
PR
Debit
Credit
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Ordinary Shares (40,000 x P 1)
Share Premium
Acquisition of net assets of JYR Co.
40,000
66,000
110,000
72,000
288,000
145,000
125,000
95,000
Share Premium
Ordinary share
Issuance, contingent event happens.
5,000
25,000
100,000
4,000
12,000
40,000
760,000
5,000
Note: If contingent event did not occur, NO ENTRY ( No issuance of additional shares. )
5. Stock contingency
Using the same information in Problem 2, assuming that in addition to the stock issue, MMC Inc.
also agreed to issue 5,000 additional shares two years later if the fair value of acquirer’s common
stock fell below P 20 per share.
On January 1, 2023, the contingent event happens and the common stock of MMC had a fair value
below P 20.
Solution:
Date
2020
Dec.
31
2023
Jan.
1
GENERAL JOURNAL
Particulars
PR
Debit
Credit
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Ordinary Shares (40,000 x P 1)
Share Premium
Acquisition of net assets of JYR Co.
40,000
66,000
110,000
72,000
288,000
145,000
125,000
95,000
Share Premium
Ordinary share
Issuance, contingent event haapens.
5,000
25,000
100,000
4,000
12,000
40,000
760,000
Note: If contingent event did not occur, NO ENTRY ( No issance of additional shares.
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5,000
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6. On December 31, 2020, MMC issued 40,000 shares of its P 1 par value common stock with a
market value of P 800,000. In addition to the stock issue, MMC also agreed that added shares would
be issued on January 1, 2023, to compensate for any fall in the market of MMC common stock
below P 20 per share. The settlement would be to cure the deficiency by issuing added shares
based on their fair value on January 1, 2023.
On January 1, 2023, the contingent event happens and the stock had fair value of P 16.
Solution:
Date
2020
Dec.
2023
Jan.
GENERAL JOURNAL
Particulars
31
1
PR
Debit
Credit
Cash
Marketable Securities
Inventory
Land
Building
Equipment
Customer List
Goodwill
Current liabilities
Bonds Payable
Premium on bonds payable
Warranty Liability
Ordinary Shares (40,000 x P 1)
Share Premium
Acquisition of net assets of JYR Co.
40,000
66,000
110,000
72,000
288,000
145,000
125,000
95,000
Share Premium
Ordinary share ( 10,000 x 1)
Issuance, contingent event haapens.
10,000
25,000
100,000
4,000
12,000
40,000
760,000
10,000
Note: If contingent event did not occur, NO ENTRY ( No issuance of additional shares.
Stock Acquisition
a. Non-controlling interest (NCI) Equity in the subsidiary not attributable directly or indirectly to parent, also called minority
interest.
 Measured by the acquirer either at:
1. Fair value, or
2. The NCI’s proportionate share of the acquiree’s identifiable net assets.

Fair value of NCI in net assets of subsidiary computation:
a. If problem is silent –
1. = if there is an assessment , higher between Fair value of Assessed and
Proportionate share, or
2. = If there is no assessment , higher between Fair value Implied and Proportionate
share
to compute: Fair value Implied = Consideration transferred /acquirer’s interest x
NCI’s interest
Note: the Fair value of NCI can never be less than the NCI percentage of the fair
value of the net assets of the subsidiary.
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b.
If problem is not silent:
a. Problem selected Full Goodwill Method, use
1. Fair value assessed, if given,
2. If not given, then implied fair value ( based on acquirer’s consideration given)
b. Problem selected Partial Goodwill Method, use Proportionate share basis
b. Statement of Determination and allocation of Excess:
Consideration transferred
Fair value of Non-controlling interest in net assets of subsidiary
Total value of subsidiary
Less: Book value of net assets of subsidiary
Allocated Excess
Allocation of excess:
Add: Decrease in asset or Increase in liabilities
Deduct: Increase in asset or Decrease in liabilities
Goodwill or (Gain or Income from acquisition)
xxx
xxx
xxx
xxx
xxx
(xxx)
xxx
KEY DIFFERENCES BETWEEN FULL PFRS AND PFRS FOR SME
Item
Full PFRS
Acquisition method –
PFRS3
PFRS for SMEs
Purchase method – under
Sec. 19 par. 6
2. As to non-controlling interest
Measurement
At the option of the entities:
1. at Fair value
2. at Proportionate share
In the Net identifiable
Asset of the acquiree
at Proportionate share
in the Net Asset of the
acquiree
2. Contingent Consideration
Initially recognized as part of
the consideration transferred
- non occurrence of a future
event(e.g. not meeting
earnings target) is not
considered to be a
measurement period
adjustment – therefore not
adjusted against goodwill
-Initially recognized in the
cost of the combination only
if it meets probability and
reliably easurable” criteria
- if future event does not
occur, then only the
adjustments to the cost of
business combination are
made against goodwill.
1. As to method
3. Cost incurred in a business
combination
 Direct costs

Indirect costs

Cost to issue
register stocks

Costs to issue debts
and
Expensed
Capitalized – added to
consideration transferred
Expensed
Debited to APIC/Share
Premium
Debited to APIC/Share
Premium
Debited to Bond issue costs
Debited to Bond issue costs
Expensed
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4. Recognizing and measuring
assets acquired and liabilities
assumed on initial
recognition.
- identifiable intangible
assets
5. Exceptions to recognition or
measurement principles or
both, on initial recognition.
- Contingent liabilities
6. Accounting Method
 Term used
 Measuring
goodwill/bargain
purchase gain

Valuation of goodwill
Recognized separately from
goodwill if it is either
contractual or separable
Requires recognition if their
fair value can be measure
reliably
Recognized only where there is
a present obligation that arises
from past events and its fair
value be measured reliably.
Requires
recognition
of
possible obligations if their fair
value can measured reliably.
Acquisition method
Options:
1. Full Fair value/Full
goodwill
2. Proportionate share of
identifiable net
assets (Partial Goodwill)
Cost less impairment loss
Purchase Method
Proportionate
share
of
identifiable net assets (Partial
Goodwill)
Cost less impairment losses
and amortization (life should
be presumed to be 10 years)
Cost
less
impairment
amortization
accumulated
loss
less
Problem: (Adapted)
On January 1, 2020, AA Co. acquired 80% of the outstanding voting stocks of ABC Company for
P 600,000. On the same date, the book value of net assets of ABC Company was P 550,000 and the
land is understated by 100,000. The direct costs and indirect costs incurred and paid amounted to
P 10,000 and P 5,000, respectively.
Q1: How much is the amount of consideration transferred under Full PFRS and PFRS for SMEs?
Solution:
Full PFRS
Consideration transferred
= P 600,000
PFRS for SMEs
Consideration transferred = P 600,000
Add: Direct transaction cost
10,000
Total consideration given
P 610,000
Q2: Under Full PRS, how much is the amount of full goodwill to be recognized?
Consideration transferred
Add: NCI at fair value (implied) (600,000 ÷ 80%) × 20%
Total value of Acquiree
Less: Fair value of net assets of Acquiree ( 550,000 + 100,000)
Goodwill - full
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600,000
150,000
750,000
650,000
100,000
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Q3: Under Full PRS, how much is the amount of partial goodwill to be recognized?
Consideration transferred
Add: NCI at proportionate share (650,000 × 20%)
Total value of Acquiree
Less: Fair value of net assets of Acquiree ( 550,000 + 100,000)
Goodwill - partial
600,000
130,000
730,000
650,000
80,000
Q4: Under PFRS for SMEs, how much is the amount of partial goodwill to be recognized?
Consideration transferred
Add: Direct costs
Total consideration given
Add: NCI at proportionate share (650,000 × 20%)
Total value of Acquiree
Less: Fair value of net assets of Acquiree ( 550,000 + 100,000)
Goodwill
600,000
10,000
610,000
130,000
740,000
650,000
90,000
Reverse Acquisition (source: Accounting for Business Combination by Zeus Vernon B. Milan)

The entity that issued the securities (legal acquirer) is identified as the acquiree for accounting
purposes and the entity whose equity interests are acquired (the legal acquiree) is the acquirer
for accounting purposes.

Example: ABC Co. a private entity wants to become a public entity but does not want to register
its shares. To accomplish this, ABC will arrange for a public entity, DBC Co., to acquire its
equity interests in exchange for public entity’s equity interest.
In substance, the accounting entity acquirer, DBC Co. issues no consideration to the acquire.
Instead the accounting acquire, ABC Co., issues its equity shares to the owners of the
accounting acquirer, DBC Co., to enable the accounting acquirer to obtain control over the
accounting acquire, ABC Co.
The acquisition date fair value of the consideration transferred by the accounting acquirer shall
be measured as an amount based on the number of equity interests the legal subsidiary
(accounting acquirer) would have to issue to give the owners of the legal parent (accounting
acquire) the same percentage of equity interest in the combined entity that results from the
reverse acquisition.
KEY DIFFERENCES BETWEEN CONVENTIONAL ACQUISITION AND REVERSE ACQUISITION
Item
Issuer of shares as
consideration transferred
Conventional Acquisition
The issuer of shares is the
accounting acquirer
Reverse Acquisition
The issuer of shares is the accounting
acquire
Reference to combining
constituents
- accounting acquirer – Legal
Parent
- accounting acquire – Legal
Subsidiary
- accounting acquirer – Legal
Subsidiary
- accounting acquire – Legal
Parent
Measurement of
consideration
Fair value of consideration
transferred by the accounting
acquirer
Illustrative Problem:
Fair value of the notional number of
equity that the accounting acquirer
would have to issue to the accounting
acquiree to give the owners of the
accounting acquire the same
percentage of ownership in the
combine entity.
Please refer to Accounting for Business Combination by Milan.
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UNIT I – BUSINESS COMBINATION
Activity 1 – Problems
1. On June 1, 2020, BIG Company acquired all of the assets and liabilities and assumed all the
liabilities of SMALL Company. As of this date, the carrying amounts and fair values of the assets and
liabilities of SMALL Company are shown below:
Carrying amounts
Fair values
Cash in bank
15,000
15,000
Receivables
195,000
115,000
Allowance for bad debts
(25,000)
Inventory
420,000
300,000
Furniture and Equipment , net
100,000
50,000
Land
200,000
250,000
Building, net
1,000,000
1,200,000
Goodwill
100,000
Total assets
2,005,000
Liabilities
Payables
Equity:
Ordinary shares, P 10
Share Premium
Retained Earnings
Total liabilities & Equity
650,000
650,000
700,000
350,000
305,000
2,005,000
BIG Company incurred transactions costs amounting to P 125,000 for legal, accounting and
consultancy services.
.
REQUIRED:
1. Journal entries on the books of BIG Company to record the purchase of the net assets SMALL
company in a business combination assuming BIG Company paid cash of:
a) P 1,500,000
b) P 1,000,000
2. Journal entries on the books of SMALL Company to record the combination and the liquidation of
the company under requirement 1-a and b.
2. Pool Company issued 120,000 shares of P10 par common stock with the fair value of P2,550,000 for
the net assets of Spot Company. In addition, Pool incurred the following acquisition-related costs:
Legal fees to arranged the business combination
Cost of SEC registration, including accounting and legal fees
Cost of issuing stock certificates
General administrative costs
P25,000
12,000
3,000
20,000
Immediately before the business combination in which Spot Company was dissolved, Spot’s assets
and equities were as follows (in thousands):
Book Value
Fair Value
Current assets
P2,000
P1,100
Plant assets
1,500
2,200
Liabilities
300
300
Ordinary Shares
2,000
Retained earnings
200
Q1:
What is the amount of goodwill (income from acquisition) and Share Premium to be
recognized by Pool Company?
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Q2. Prepare the necessary journal entries in the books of Pool Company.
Date
Particulars
PR
Debit
Credit
3. FEER Corporation acquired all the assets and liabilities of CARE Corporation by issuing shares of its
common stock on January 1, 2021. Partial balance sheet data for the companies prior to the business
combination and immediately following the combination is provided:
FEER
CARE
Combination
Corporation
Corporation
Book value
Book value
Cash
P 65,000
P 25,000
P 90,000
Accounts receivable
72,000
20,000
94,000
Inventory
33,000
45,000
88,000
Building and Equipment (net)
400,000
150,000
650,000
Goodwill
_________
_________
?
Total Assets
P 570,000
P 240,000
?
Accounts Payable
Bonds Payable
Ordinary shares, P 2 par
Share Premium
Retained Earnings
Total Liabilities and stockholders’ equity
P
50,000
250,000
100,000
65,000
105,000
P 570,000
P
25,000
100,000
25,000
20,000
70,000
P 240,000
P 75,000
350,000
160,000
245,000
?
P
?
Determine:
Q1. The number of shares issued by FEER for this acquisition _______________.
Q2. The market value per share of the stock issued by the acquiring corporation on January 1, 2021:
Q3. The fair value of the net assets of CARE Corporation on the date of combination _______________
Q4. The amount of Goodwill to be reported immediately following the combination________________
Q5. The Retained Earnings balance immediately following the combination ___
Q6. Prepare journal entries in the books of FEER.
Books of FEER Corp.
Date
Particulars
PR
Debit
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Credit
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UNIT I – BUSINESS COMBINATION
Activity 2 – Short Problems
The balance sheet of Green Company as of December 31, 2019 is as follows:
Assets
Cash
Accounts receivable
Inventories
Property,
Plant
and
Equipment
Total assets
P
175,000
250,000
725,000
950,000
________
P 2,100,000
Liabilities and Stockholders’ Equity
Current liabilities
P
250,000
Mortgage payable
450,000
Common Stock
200,000
Additional paid-in capital
400,000
Retained Earnings
800,000
P 2,100,000
On January 1, 2020, Red Company bought all the outstanding stock of Green Company for P 1,800,000
for cash. On the date of purchase, the fair value of Green’s inventories was P 675,000 while the fair
value of Green’s property, plant and equipment was P 1,100,000. The fair values of all other assets
and liabilities of Green Company were equal to their book values.
1. The goodwill to be recorded in the books of Green Company is ________________
2. The journal entry in the books of Red Company to record the business combination:
Date
Particulars
PR
Debit
Credit
For items 3 - 5:
On July 1, 2019 A Company acquired the net assets of Company B by issuing 10,000 ordinary shares
with par value of P 20 and bonds payable with face amount of P 1,000,000. The bonds are classified as
financial liability at amortized cost. At the time of acquisition, the ordinary shares are publicly quoted
at P 40 per share. On the other hand, the bonds payable are trading at 110.
Company A paid P 20,000 share issuance costs and P 40,000 bond issue costs. Company A also paid
P80,000 acquisition related costs and P 40,000 indirect costs of business combination. On the same
date, the current liabilities of Company B have fair value of
P 1,200,000 while the noncurrent liabilities of Company A have fair value of P 1,000,000
Before the date of acquisition, Company A and Company B reported the following data:
Company A
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Ordinary shares
Share premium
Retained Earnings
2,000,000
4,000,000
400,000
600,000
1,000,000
2,400,000
1,600,000
Company
B
1,000,000
2,000,000
800,000
1,000,000
400,000
600,000
200,000
At the time of acquisition, the current assets of Company A have fair value of P 2,400,000 while the
noncurrent assets of Company B have fair value of 2,600,000 on the same date.
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3. What is the goodwill or (gain on bargain purchase) arising from business combination?
________
4 – 5: The journal entries in the books of Company A to record the business combination:
Date
Particulars
PR
Debit
Credit
6. On October 1, 2019, the Great Company acquired the net assets of the Lite Company when the fair
value of Lite Company’s net assets was P 116 million and their carrying amount was P 120 million.
The consideration transferred comprised P 200 million in cash transferred at the acquisition date,
plus another P 60 million in cash to be transferred 11 months after the acquisition date if a specified
profit target was met by Lite . At the acquisition date there was only a low probability at the profit target
being met, so the fair value of the additional consideration liability was P 10 million. In the event the
profit target was met, the P 60 million cash will be transferred.
What amount should Great Company present for Goodwill in its statement of consolidated financial
position on December 31, 2019? _________________
7. On January 1, 2019, ART Company and DRAW Company entered into a contract of merger wherein
ART will issue 100,000 ordinary shares with par value with a par value of P 10 and a quoted price of
P 21 to the existing shareholders of DRAW in exchange for the net assets of Draw. Art paid
acquisition related costs of business combination amounting to P 100,000 and stock issuance cost
amounting to P 200,000. AS of December 31, 2018 ART company has total assets with book value
of P 50,000,000 and fair market value of P 60,000,000 while DRAW has total assets with book value
of P 5,000,000 and fair market value of P 4,000,000. The net assets of Draw on December 31, 2018
is P 2,600,000.
Q1. What is the total assets of ART Company on January 1, 2019 after the merger? ____________
Q2. What is the goodwill (gain on bargain purchase) arising from business combination? __________
8. ABC Corporation paid P 800,000 to acquire all the net assets of PRT Company. PRT Company
reported assets with a book value of P 980,000 but with a fair value of P 1,080,000 and liabilities with
a book value and fair value of P 230,000 on the date of combination. ABC Corp. also paid P 30,000
for finder’s fees related to the acquisition.
The goodwill/(Gain on acquisition) is: __________________
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9. On September 30, 2020, ABC Company acquired all the TUV Company’s P 2,150,000 identifiable
assets and P 530,000 liabilities. book values of the TUV’s assets and liabilities equal to their fair
values except for the overvalued furniture and fixtures. As a consideration, ABC issued its own shares
of stock with a market value of P 1,715,000 and cash amounting P 375,000. Contingent consideration
is determined to be P 148,000 on the date of acquisition. The merger resulted into P 647,000 goodwill.
Assuming ABC had P 4,890,000 total assets and P 2,731,000 total liabilities prior to the combination
and no additional cash payments were made, but expenses were incurred for related cost amounting
to P 28,000.
After the merger, how much is the combined total assets in the books of the acquirer? __________
10. ABC Company acquired all of DOM Company’s assets and liabilities on July 1, 2018, in a business
combination at that date. DOM reported assets with a book value of P 2,496,000 and liabilities of
P 1,424,000. ABC noted that DOM had P 160,000 of research and development costs at the
acquisition date that did not appear of any value. ABC also determined that patents developed by
DOM had a fair value of P 480,000, but had not been recorded by DOM. xcept for building and
equipment. ABC determined the fair value of all other assets and liabilities reported by DOM
approximated the recorded amounts. In recording the transfer of assets and liabilities in its books,
ABC recorded goodwill of P 372,000. ABC paid P 2,068,000 to acquire DOM’s assets and liabilities.
If the book value of DOM’s building and equipment was P 1,364,000, what as their fair value?
______________
11. D Company, acquirer, made the following entry to report the acquisition:
Tangible assets
400,000
Customer lists
60,000
Goodwill
100,000
Liabilities
Cash
200,000
360,000
Six months after the acquisition , the customer lists is determined to be worthless. How is this new
information reported if (1) the new information relates to the value of the customer lists as of the date
of acquisition and (2) the new information relates to change in value since acquisition. Customer lists
are written off, and:
(1)
(2)
a) A gain on acquisition of P 60,000 is recorded
Goodwill decreases P 60,0000
b) Goodwill increases P 60,000
A loss of P 60,000 is recorded
c) A loss of P 60,000 is recorded
Goodwill increases P 60,000
d) Cash is reduced by P 60,000
A loss of P 60,000 is recorded.
12. Sweet Company purchased Sour Company in 2016. At that time the existing patent was not recorded
as separately identified intangible asset. At the end of fiscal year 2017, the patent is valued at P
15,000 and goodwill has a book value of P 100,000. How should these assets be reported at the
beginning of year 2018?
a) Goodwill, P 100,000; Patent P 0
b) Goodwill, P 115,000; Patent P 0
c) Goodwill, P 100,000; Patent P 15,000
d) Goodwill, P 85,000 : Patent P 15,000
13. POP Corporation acquires all of SISY Company at an acquisition cost of P 75,000,000 in cash.
Assets and liabilities of the acquired company are as follows:
Book value
Fair value
Current assetss
P
500,000
P
700,000
Land, buildings and equipment (net)
6,000,000
8,000,000
Brand names
0
2,000,000
Potential profitable future contracts
0
10,000,000
Liabilities
2,000,000
1,750,000
POP records goodwill of: __________________
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14. AD Corp. acquired the net assets of CE Company on July 1, 2017. In exchange for net assets at fair
market value of CE Company amounting to P 835,740. AD issued 81,600 shares at a market price of
P 12 per share (P 9 par value).
Out of pocket costs of the combination were as follows:
Legal fees for the contract of business combination
Audit fees for SEC registration of share issue
Cost of shares of stock certificates
Broker’s fee
Other direct cost of acquisition
General and allocated expenses
P 10,000
13,000
7,000
8,000
22,000
25,000
AD will pay an additional cash consideration of P 546,000 in the event that CE’s net income will be equal
or greater than P 1,140,000 for the period ended December 31, 20178. At acquisition, there is a high
probability of reaching the target net income and the fair value of the additional consideration was
determined to be P 234,000. Actual net income for the period ended December 31, 2017 amounted to
P 1,500,000. The additional consideration was paid.
Q1. Goodwill to be recognized as of December 31, 2017 is ____________________
Q2. The amount chargeable to operations (loss/expense) for the year ended December 31,2017 is
____________________.
15. DREAM Company is acquiring the net assets of BANN Company for an agreed-upon price of
P 900,000 on July 1, 2020. The value was tentatively assigned as follows:
Current assets
Land
Equipment - ( 5-year life)
Building ( 20- year life)
Current liabilities
Goodwill
P 100,000
50,000
200,000
500,000
(150,000)
200,000
Values were subject to change during the measurement period. Depreciation is taken to the nearest
month. The measurement period expired on July 1, 2021, at which time the fair values of the
equipment and building as of the acquisition data was revised to P 180,000 and P 550,000,
respectively.
REQUIRED: At the end of 2021 what adjustments are needed for the financial statements for the
period ending December 31, 2020 and 2021?
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