B.C.S.Villaluz
Accounting Lessons with BCSV
Net Asset Acquisition
Problem 1: (One acquiree)
The following Statement of Financial Position were prepared for PLDC Inc. and GLOBAL Telecom on January 1, 2020 just before they
entered into business combination:
PLDC Inc.
GLOBAL Telecom
Book Value
Fair Value
Book Value
Fair Value
Cash
200,000
200,000
30,000
30,000
Accounts receivable
140,000
25,000
Allowance for doubtful accounts
(40,000)
80,000
(5,000)
18,000
Inventory
400,000
350,000
100,000
120,000
Buildings and Equipment
800,000
300,000
Accumulated Depreciation
(200,000)
700,000
(150,000)
160,000
Accounts payable
100,000
100,000
40,000
35,000
Bonds payable
400,000
440,000
60,000
75,000
Common stock
P10 par value
300,000
P5 par value
100,000
Share premium
100,000
20,000
Retained earnings
400,000
80,000
PLDC Inc. acquired the net assets of GLOBAL Telecom by issuing 12,000 shares of its common stocks and paying cash amounting to
P75,000. In addition, the following costs were incurred and paid for by PLDC Inc.:
•
Legal fees, P22,000
•
Costs of SEC registration, P15,000
•
Cost of issuing stock certificates, P20,000
•
General administrative costs, P12,500
CASE 1: The stock market price of the PLDC Inc. and GLOBAL Telecom are P13.50 and P7.20, respectively at the time of acquisition.
Determine the following:
1.
2.
3.
4.
5.
6.
Goodwill or Gain on bargain purchase.
Combined Common Stock after acquisition.
Combined Share Premium after acquisition.
Combined Retained Earnings after acquisition.
Combined Total Liabilities after acquisition.
Combined Total Assets after acquisition.
CASE 2: The stock market price of the PLDC Inc. and GLOBAL Telecom are P10.80 and P6.60, respectively at the time of acquisition.
Determine the following:
1.
2.
3.
4.
5.
6.
Goodwill or Gain on bargain purchase.
Combined Common Stock after acquisition.
Combined Share Premium after acquisition.
Combined Retained Earnings after acquisition.
Combined Total Liabilities after acquisition.
Combined Total Assets after acquisition.
Problem 2: (More than one acquiree)
On January 1, 2020, Hedwig Company decided to enter into a business combination with Patricia Company and Dennis Company. The
following information was gathered from the books of the entities:
Hedwig
Patricia
Dennis
Company
Company
Company
Current assets
8,250,000.00
2,340,000.00
1,560,000.00
Non-current assets
18,750,000.00
15,300,000.00
10,200,000.00
TOTAL ASSETS
27,000,000.00
17,640,000.00
11,760,000.00
Liabilities
Ordinary shares, P100 par
Share premium
Retained earnings
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
1,950,000.00
16,491,000.00
1,059,000.00
7,500,000.00
27,000,000.00
7,260,000.00
1,260,000.00
4,440,000.00
4,680,000.00
17,640,000.00
2,840,000.00
1,240,000.00
1,960,000.00
5,720,000.00
11,760,000.00
Hedwig Company will issue 76,000 of its ordinary shares in exchange for the acquisition of Patricia Company and 67,200 of its ordinary
shares in exchange for the acquisition of Dennis Company. The fair value of Hedwig Company’s shares is P150. In addition, the following
adjustments should be made to the current assets of Patricia Company and Dennis Company which has a fair value of P2,700,000 and
P1,380,000, respectively. The non-current assets has a fair value of P12,900,000 and P11,850,000 for Patricia Company and Dennis
Company, respectively.
Compute for the following on the date of acquisition:
1.
2.
3.
4.
Result of the combination with Patricia Company.
Result of the combination with Dennis Company.
Combined retained earnings.
Combined total assets.
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B.C.S.Villaluz
Problem 3: (Accounting for Provisional Fair Values)
On January 1, 2020, X Company and Y Company decided to enter into a business combination. The balance sheets of X Company and Y
Company just before they enter into business combination are shown below:
X Company
Y Company
Cash and Receivable
Inventory
Land
Accounts Payable
Notes payable
Common Stocks
P10 par
P5 par
Share Premium
Retained Earnings
*provisional
Book Value
Fair Value
Book Value
Fair Value
560,000
200,000
325,000
460,000
100,000
560,000
230,000
445,000
460,000
50,000
100,000
100,000
200,000
50,000
50,000
100,000
120,000
230,000*
50,000
30,000
200,000
105,000
220,000
100,000
50,000
150,000
X Company acquired the net assets of Y Company by paying cash of P350,000. The direct and indirect cost paid by X Company to effect
the combination amounted to P45,000 and P15,000, respectively.
1.
2.
3.
4.
5.
How much is the result of the business combination on January 1, 2020?
How much is the combined retained earnings on January 1, 2020?
How much is the combined inventory on January 1, 2020?
How much is the combined land on January 1, 2020?
How much is the combined notes payable on January 1, 2020?
CASE 1: On June 30, 2020, the fair value of Y Company’s land increased to P250,000 due to facts existing at the date of acquisition.
1.
2.
How much is the result of the combination to be reported in 2020?
How much is the combined land to be reported in 2020?
CASE 2: On March 1, 2020, the fair value of Y Company’s land decreased to P200,000 due to facts existing at the date of acquisition but
increased to P250,000 on June 30, 2020 due to facts existing subsequent to the date of acquisition.
1.
2.
3.
How much is the result of the combination to be reported in 2020?
How much shall be reported as the gain due to change in fair value in 2020?
How much is the combined land to be reported in 2020?
Problem 4: (Accounting for Contingent Consideration)
Hades Company acquired the assets (except cash) and assumed the liabilities of Ochoa Company on January 1, 2020, paying P720,000
cash. Ochoa Company’s December 31, 2019 balance sheet, reflecting both book values and fair values, showed:
Accounts receivable, net
Inventory
Land
Buildings, net
Equipment, net
Accounts payable
Notes payable
Common stock, P2 par value
Share premium
Retained earnings
Book Value
72,000
86,000
110,000
369,000
237,000
83,000
180,000
153,000
229,000
229,000
Fair Value
65,000
99,000
162,000
450,000
288,000
83,000
180,000
As part of negotiations, Hades Company agreed to pay the former stockholders of Ochoa Company P300,000 cash on January 1, 2021 if
the post-combination earnings of the combined company reached certain level during 2020. Hades estimates that there is a 40% chance
that the P300,000 will be paid. Because of improved information about facts and circumstances that existed at date of acquisition, Hades
increased its estimate to 75% on August 1, 2020.
REQUIRED:
1. How much is the initial consideration transferred on January 1, 2020?
2. What is the initial result of the business combination on January 1, 2020?
3. What is the revised result of the business combination on January 1, 2020 due to change in estimate on August
1, 2020?
4. Assuming the earnings target is met, how much is the gain or loss on settlement?
5. Assuming the earnings target is not met, how much is the gain or loss on settlement?
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