Problem IV

1.
(in millions)
Cash and receivables 200
Inventories 400
Property, plant & equipment 5,500
Customer contracts 25
In-process R&D 300
Goodwill 2,035
Current liabilities 400
Long-term debt 7,300
Warranty liability 10
Estimated liability for Contigent Cons. 50
Common stock 700
Note: Read the topic “Items included in Goodwill” in Chapter 1 about “Skilled
(assembled) workforce” (they are not identifiable at the date of acquisition) and
“Potential Contracts” (they are not qualified as assets at the acquisition date).
Consideration transferred:
Shares P 700,000,000
Estimated liability for Contigent Cons. ___50,000,000
Consideration transferred P 750,000,000
Less: MV of Assets and Liabilities Acquired:
Cash and receivables P 200,000,000
Inventories 400,000,000
Property, plant & equipment 5,500,000,000
Customer contracts 25,000,000
In-process R&D 300,000,000
Current liabilities ( 400,000,000)
Long-term debt (7,300,000,000)
Warranty liability ( 10,000,000) (1,285,000,000)
Positive excess: Goodwill P2,035,000,000

Acquisition expenses
Acquisition-related expenses/Retained earnings 150
Cash 150

Costs to Issue and Register Stocks

Share premium/APIC 100
Cash 100

2. (in millions)
Goodwill 1,500
Property, plant & equipment 1,500

Problem V
1.
a. The computation of goodwill is as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
 Notes payable 180,000
Contingent consideration (cash
contingency):
P120,000 x 30% probability 36,000
Total P 966,000
Less: Fair value of identifiable assets acquired and
liabilities assumed:
Cash P 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess – Goodwill P
102,000
b. The journal entries by Peter Corporation to record the acquisition is as follows:
Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 102,000
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent 36,000
Consideration
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 – P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

Acquisition-related expenses 78,000

Cash 78,000
Acquisition related costs – direct costs.

Paid-in capital in excess of par 32,400

Cash 32,400
Acquisition related costs – costs to issue and
register stocks.

Acquisition-related expenses 27,600

Cash 27,600
Acquisition related costs – indirect costs.
c. The balance sheet of Pure Corporation immediately after the acquisition is as
follows:
 Pure Corporation
Balance Sheet
December 31, 20x4
Assets
Cash P
162,000
Receivables – net 144,000
Inventories 360,000
Land 348,000
Buildings – net 840,000
Equipment – net 732,000
In-process research and development 60,000
Goodwill
102,000
Total Assets P2,748,000

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable P 288,000
Other liabilities 408,000
Notes payable 180,000
Estimated liability for contingent
consideration 36,000
Total Liabilities P 912,000
Stockholders’ Equity
Common stock, P10 par P 1,020,000
Paid-in capital in excess of par1 657,600
Retained earnings2 158,400
Total Stockholders’ Equity P1,836,000
Total Liabilities and Stockholders’ Equity P2,748,000
1
P240,000 + P446,400 – P32,400
2
P264,000 - P78,000 – P27,600

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the
acquisition date. This requirement does not extend to R&D in contexts other than business combinations.

2.
a. Assets that have been provisionally recorded as of the acquisition date are
retrospectively adjusted in value during the measurement period for new
information that clarifies the acquisition-date value. The adjustments affect
goodwill since the measurement period is still within one year (i.e., eight months)
from the acquisition date. Therefore, the goodwill to be reported then on the
acquisition should be P78,000 (P102,000 – P24,000).

b.
Buildings 24,000
Goodwill 24,000
Adjustment to goodwill due to measurement date.

3.
a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000
+ P24,000).
 b. The adjustment is still within the measurement period, the entry to adjust the liability
would be:
Goodwill 24,000
Estimated liability for contingent 24,000
consideration
Adjustment to goodwill due to measurement date.

c.
c.1. The goodwill remains at P126,000, since the change of estimate should be done
only once (last August 31, 20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration

amounted to P48,000, the entry to adjust the liability would be:

Estimated liability for contingent consideration 12,000

Gain on estimated contingent consideration 12,000
Adjustment after measurement date.

In this case, the measurement period ends at the earlier of:

 one year from the acquisition date, or
 the date when the acquirer receives needed information about facts and
circumstances (or learns that the information is unobtainable) to
consummate the acquisition.
c.3.
c.3.1. The goodwill remains at P126,000, since the change of estimate was
due to a subsequent event not existing on the acquisition date.
c.3.2. On December 15, 20x5, the entry would be:
Loss on estimated liability contingent consideration 30,000
Estimated liability for contingent 30,000
consideration
Adjustment after measurement date.

c.3.3.
c.3.3.1. P126,000.
c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is
P270,000 and 20x6 is P260,000, which means that the target is
met, Peter Corporation will make the following entry:
Estimated liability for contingent consideration 78,000
Loss on estimated contingent consideration 42,000
Cash 120,000
Settlement of contingent consideration.
4.
a.The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
Less: Fair value of identifiable assets acquired and
 liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 106,386
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent 40,385
Consideration
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 – P10) x 30,000 shares] 450,000
c.
c.1. Goodwill remains at P106,385.
c.2. Theentry for Pure Corporation on December 31, 20x5 to record such
occurrence would be:
Estimated liability for contingent consideration 40,385
Gain on estimated contingent consideration 40,385
Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is
that the conditions that prevent the target from being met occurred in a
subsequent period and that Peter had the information to measure the liability at
the acquisition date based on circumstances that existed at that time. Thus the
adjustment will flow through income statement in the subsequent period.

d. The entry by Peter Corporation on January 1, 20x7 for the payment of the
contingent consideration would be:
Estimated liability for contingent consideration 36,000
Loss on estimated contingent consideration 66,000
Cash [(P78,000 + P84,000)/2 – P30,000] x 2 102,000
Settlement of contingent consideration.

5.
a. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash
contingency): 36,000
P120,000 x 30% probability
Contingent consideration (stock
contingency) 18,000
 Total P 984,000
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess – Goodwill P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 120,000
Accounts payable 72,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent 36,000
Consideration
Paid-in capital for Contingent Consideration
18,000
Common stock (P10 par x 30,000 shares) 300,000
Additional paid-in capital [(P25 – P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

c. PureCorporation will make the following entry for the issuance of 1,200 additional
shares:
Paid-in capital for Contingent Consideration 18,000
Common stock (P10 par x 1,200 shares) 12,000
Paid-in capital in excess of par 6,000
Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event
occurs). Thus, the entry record the occurrence of such event to reassign the P750,000
original consideration to 36,000 shares (30,000 original shares issued + 6,000 additional
shares due to contingency) would be:
Paid-in capital in excess of par 60,000
Common stock (P10 par x 6,000 shares) 60,000
Settlement of contingent consideration.

7. On January 1, 20x7, the contingent event happens since the fair value per share fall
below P25. Thus, the entry record the occurrence of such event to reassign the
P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500*
additional shares due to contingency) would be:
Paid-in capital in excess of par 75,000
Common stock (P10 par x 7,500 shares) 75,000
Settlement of contingent consideration.
* Deficiency: (P25 – P20) x 25,000 shares issued to acquire...P150,000
Divide by fair value per share on January 1, 20x7………….P 20
Added number of shares to issue………………………………. 7,500
8. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (stock contingency):
[(P750,000 – P510,000) x 40% probability
x (1/[1 + .04]*) 92,308
Total P1,022,308
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess – Goodwill P 158,308
* present value of P1 @ 4% for one period.

The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 158,308
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Paid-in capital for Contingent Consideration 92,308
Common stock (P10 par x 25,000 shares) 300,000
Paid-in capital in excess of par[(P25 – P10) x 30,000 450,000
shares]
On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had
fallen to P20, thus requiring Peter to issue additional shares of stock to the former
owners of Saul Corporation. The entry for Peter Corporation on December 31, 20x5 to
record such occurrence such event to reassign the P750,000 original consideration to
37,500 shares (30,000 original shares issued + 7,500* additional shares due to
contingency) would be:

Paid-in capital for Contingent Consideration 92,308

Common stock, P10 par 75,000
Paid-in capital in excess of par 17,308
Settlement of contingent consideration.
* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000
Divide by fair value per share on December 31, 20x5……P 20
Added number of shares to issue……………………………… 7,500

Problem VI
1. January 1, 20x4
Accounts Receivable (net) 65,000
Inventory 99,000
Land 162,000
Buildings 450,000
Equipment 288,000
Goodwill 54,000
 Accounts Payable 83,000
Note Payable 180,000
Cash 720,000
Estimated Liability for Contingent Consideration 135,000
Consideration transferred (P720,000 + P135,000) P855,000
Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000
Goodwill P 54,000
2. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Cash 135,000
3. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Gain on Contingent Consideration 135,000
Problem VII
Current Assets 362,000
Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000
Goodwill * 395,000
Liabilities 119,000
Long-term Debt 491,000
Common Stock (144,000 P5) 720,000
PIC - par (144,000 x P15 - P5)) 1,440,000
* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000
Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000
Fair value of stock issued (144,000P15) = P2,160,000
Problem VIII
Case A
Consideration transferred P130,000
Less: Fair Value of Net Assets 120,000
Goodwill P 10,000
Case B
Consideration transferred P110,000
Less: Fair Value of Net Assets 90,000
Goodwill P 20,000
Case C
Consideration transferred P15,000
Less: Fair Value of Net Assets 20,000
Gain (P 5,000)
Assets Liabilities Retained
Goodwill Current Assets Long-Lived Assets Earnings (Gain)
Case A P10,000 P20,000 P130,000 P30,000 0
Case B 20,000 30,000 80,000 20,000 0
Case C 0 20,000 40,000 40,000 5,000
Problem IX
1.
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
 144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000
289,700
Bargain Purchase Gain 29,700

Homer Ltd
Accounts Receivable 34,700
Inventory 39,000
Freehold Land 130,000
Buildings 40,000
Plant and Equipment 46,000
Payable to Tan Ltd 132,000
Common stock, P1 par x 40,000 shares 40,000
Additional paid-in capital 88,000
Gain on acquisition 29,700
(Acquisition of net assets of
Tan Ltd and shares issued)
Payable to Tan Ltd 132,000
Cash 132,000
(Being payment of cash consideration)
Paid-in capital in excess of par 1,200
Cash 1,200
(Being costs of issuing shares)
2.
Tan LTD
General Ledger
Liquidation
P P
Accounts Receivable 34,700 Additional paid in capital 26,800
Inventory 27,600 Retained earnings 32,000
Freehold Land 100,000 Receivable from Homer Ltd 260,000
Buildings 30,000
Plant and Equipment 46,000
Goodwill 2,000
Interest Payable 4,000
Liquidation Expenses 2,400
Premium on Debentures 2,500
Accounts Payable 1,600
Shareholders’ Distribution 68,000
318,800 318,800
Liquidator’s Cash
P P
Opening Balance 12,000 Liquidation Expenses 2,400
 Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000
Debentures and Premium 52,500
Accounts Payable 45,100
144,000 144,000
Shareholders’ Distribution
P P
Shares in Homer Ltd 128,000 Common stock 60,000
Liquidation 68,0000
128,000 128,000

Problem X
Cash 20,000
Accounts Receivable 112,000
Inventory 134,000
Land 55,000
Plant Assets 463,000
Discount on Bonds Payable 20,000
Goodwill* 127,200
Allowance for Uncollectible Accounts 10,000
Accounts Payable 54,000
Bonds Payable 200,000
Deferred Income Tax Liability 67,200
Cash 600,000

Consideration transferred P600,000

Less: Fair value of net assets acquired
(P784,000 – P10,000 – P54,000 – P180,000 - P67,200*)
472,800
Goodwill
P127,200

* Increase in net assets

Increase inventory, land, and plantassets to fair value
P52,000 + P25,000 + P71,000)
P148,000
Decrease bonds payable to fair value(20,000)
Increase in net assets
P168,000
Establish deferred income tax liability(P168,000 x 40%)P67,200

Multiple choice problem

27. B 42. C 66. D

28. C 43. B 67. B

29. D 44. B 68. C

30. D 45. B 69. C