ACCOUNTING FOR BUSINESS COMBINATION

BUSINESS COMBINATION- CONSOLIDATION

PROBLEM I – Wholly and Partially-owned Subsidiary: Determination of Goodwill/Bargain Purchase Gain

and Working Paper Eliminating Entries
Assume the following independent cases:
Fair Value of Subsidiary / P5 par Paid-in capital Retained
Consideration Transferred plus % of earnings/
Contingent Performance Obligation Stock Common in excess of par
Owned Accumulated
Case Stock / or Share Profit & Loss
Premium
Ordinary Share

1 P300,000 cash + P15,000* 100 P90,000 P80,000 P20,000

2 80 FV of NCI Not Given

P237,500 cash
3 60 FV of NCI with Control Premium
P239,400 cash **
4 75 FV of Subsidiary Given
P322,525 cash ***
5 P205,200 cash **** 60 Step Acquisition:

Fair value of Non-controlling Interest of the

acquiree/subsidiary

Fair value of any previously held equity

interest in the acquiree/subsidiary

6 P205,000 cash ***** 80 Bargain Purchase Gain / Gain on Acquisition

*In connection with the acquisition, PP paid P10,000 in indirect combination costs and agreed to pay P50,000 to the
former owners of SS contingent on meeting certain revenue goals during 20x4. PP estimated the present value of its
probability adjusted expected payment for the contingency at P15,000.

**SS Company has 40% of its share publicly traded on an exchange. PP Company purchases the 60% non-publicly traded
shares in one transaction, paying P239,400. Based on the trading price of the shares of SS Company at the date of
gaining control a value of P152,000 assigned to the 40% non-controlling interest (or fair value of non-controlling interest),
indicating that Smart Company has paid a control premium of P11,400.

***PP Company acquires 75% (13,500 ordinary shares) of SS Company for P229,500 (P17 per share). In the period around
the acquisition date, SS Company’s shares are trading at about P13.60 per share. PP Company pays a premium over
market because of the synergies it believes it will get. It its therefore reasonable to conclude that the fair value of SS’s as
a whole may not be P332,500. In fact, an independent valuation shows that the value of SS Company is P322,525 (fair
value of SS Company).

****PP Company acquires 15 percent of SS Company’s common stock for P47,500 cash and carries the investment using
the cost model. A few months later, PP purchases another 60 percent of SS Company’s stock for P205,200. At that date,
SS Company reports identifiable assets with a book value of P370,500 and a fair value of P484,500, and it has liabilities

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 with a book value and fair value of P180,500. The fair value of the 25% non-controlling interest in SS Company is
P85,500.
*****PP Company acquires 75 percent of SS Company’s common stock for P205,000 cash. At that date, the non-controlling
interest in SS has a book value of P47,500 and a fair value of P74,200. Also on that date, SS reports identifiable assets
with a book value of P362,000 and a fair value of P462,000, and it has liabilities with a book value and fair value of
P172,000.

Additional information:

All other assets and liabilities of SS Company had book value approximated their fair market value except the
following:

Book value Fair value

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 30,000 P 20,000
Buildings and equipment . . . . . . . . . . . . . . . . . . . . . . . . 50,000 76,000

 It has developed a customer list appraised at P5,000, although it is not recorded in its financial records.
 Favorable lease agreements, valued at P3,000
 Signed customer contracts for product development, valued at P2,000
 It has research and development activity in process with an appraised fair value of P5,000. However, the
project has not yet reached technological feasibility and the assets used in the activity have no alternative
future use.

Required:
1. Under each of the above assumptions, prepare the entry to record the investment in subsidiary in books
of the Porter Company (the parent) on the date of acquisition.
2. Under each of the above assumptions, prepare schedule for determination (of goodwill and gain) and
allocated excess , using
a. Partial Goodwill (Proportionate Basis) Approach
b. Full-Goodwill (Fair Value Basis) Approach
3. Under each of the above assumptions, prepare working paper eliminating entry to eliminate the investment
in Sewell Company in preparation of a consolidated balance sheet at date of acquisition, using:
a. Partial Goodwill (Proportionate Basis) Approach
b. Full-Goodwill (Fair Value Basis) Approach

PROBLEM 2. Wholly and Partially-owned Subsidiary: Bargain Purchase Gain with FV of NCI
Pakistan Company issued 12,000 shares of its P1 par common stock for 80% interest in Syria Company.
The fair value of Pakistan Company stock is P25. Syria Company had been plagued by many troubles, including a
lawsuit from a competitor for patent infringement. In view of the uncertainty of the outcome of the lawsuit and its
impact on the future viability of Syria Company, the existing owner of Syria Company was willing to sell the
company at a discount to its net fair value. The fair value of the identifiable net assets, non-controlling interests
and the consideration transferred were reassessed and deemed to be reliably determined. Fair value of the non-
controlling interests as at acquisition date was P90,000.

The separate balance sheets of the two companies immediately before the consolidation with acquiree’s fair value
were presented as follows:
Syria Syria
Pakistan
Assets Book value Book value Fair value

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 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 334,800

Accounts receivable . . . . . . . . . . . . . . . . . . 86,400 P 24,000 P 24,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000 60,000 66,000

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 48,000 84,000

Buildings and equipment (net) . . . . . . . . . . 744,000 222,000 372,000

Copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . _________ -0- 60,000

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . P1,381,200 P 354,000 P 606,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . P 96,000 P 42,000 P 42,000

Estimated liability for contingencies . . . . . . - 6,000

Bonds payable . . . . . . . . . . . . . . . . . . . . . . 240,000 120,000 120,000

Common stock, P1 par . . . . . . . . . . . . . . . . . . . . 32,160 12,000

Paid in capital in excess of par . . . . . . . . . . 435,840 108,000

Retained earnings . . . . . . . . . . . . . . . . . . . . 577,200 72,000 ________

Stockholders’ Equity . . . . . . . . . . . . . . . . . . P1,381,200 P 354,000 P438,000

Required:
1. Prepare journal entry to record investment in the books of the acquirer company.
2. Prepare schedule for determination and allocated excess:
a. Proportionate Basis Approach
b. Fair Value Basis Approach
3. Determine the following:
a. Consolidated total assets
b. Consolidated total liabilities
c. Ordinary share/Common stock
d. Share premium/additional paid-in capital
e. Accumulated profit/loss (Retained earnings).
f. Consolidated stockholders’ equity
g. Non-controlling interests (if any)
4. Prepare the working paper eliminating entries for purposes of preparing consolidated balance sheet.
a. Proportionate Basis Approach
b. Fair Value Basis Approach
5. Prepare a consolidated working paper on January 1, 20x4.
a. Proportionate Basis Approach
b. Fair Value Basis Approach
6. Prepare the consolidated balance sheet immediately after acquisition.
a. Proportionate Basis Approach
b. Fair Value Basis Approach

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