lOMoARcPSD|9718145

Additional Problems on Merger

Accounting for Business Combinations (Pontifical and Royal University of Santo Tomas,
The Catholic University of the Philippines)

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 lOMoARcPSD|9718145

Valuation of assets and liabilities acquired, goodwill and stock price

contingency

Below is the condensed Statement of Financial Position of Sons, Inc., along with
estimates of fair values. Pop, Inc. is planning to acquire Sons by issuing 100,000
shares of its P1 par value ordinary shares (market value P8/share) in exchange for
all the assets and liabilities of Sons. Pop also guarantees the value of its shares
issued. The expected present value of this stock price contingency is P200,000.

Pre-Combination Condensed Statement of Financial Position of Sons, Inc.

Book value Fair value

Current assets P 380,000 P 350,000
Plant assets 740,000 810,000
Total assets P1,120,000
Liabilities P 500,000 450,000
Ordinary shares 50,000
Share premium 170,000
Retained earnings 400,000
Total liabilities and equity P1,120,000

Required:
Prepare Pops’ (acquirer/acquiring) entry(ies) to record the acquisition.

Solution:

Books of Acquirer/Acquiring
Acquisition of Assets and Liabilities:
Current assets 350,000
Plant assets 810,000
Goodwill 290,000
Liabilities 450,000
Ordinary shares P1 par (100,000 shares) 100,000
Share premium
(P8 – P1, par) x 100,000 700,000
Share premium – Stock Contingent Consideration 200,000

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 Consideration transferred:
Ordinary shares (100,000 shares x P8) P 800,000
Expected/Probability PV of Stock Price Contingency 200,000
Consideration transferred P1,000,000
Less: FMV of Assets and Liabilities Acquired:
Current Assets P350,000
Plant Assets 810,000
Liabilities ( 450,000 710,000
Positive excess: Goodwill P 290,000

Valuation of Assets acquired and Liabilities assumed, Measurement of

Consideration Transferred, Change in value of Assets acquired, Pre-
acquisition Contingency, In-process R&D

Sandy Corporation’s Statement of Financial Position at January 2, 20x5 is as

follows:
Sandy-Dr(Cr)
Cash and receivables………………………………………………………….. P200,000,000
Inventories………………………………………………………………………… 600,000,000
Property, plant and equipment, net…………………………………………. 7,500,000,000
Current liabilities………………………………………………………………….. (400,000,000)
Long-term debt…………………………………………………………………… (7,200,000,000)
Capital stock………………………………………………………………………. (7,200,000)
Retained earnings……………………………………………………………….. ( 25,000,000)
Accumulated other comprehensive income……………………………… (5,000,000)

An analysis of Sandy’s assets and liabilities reveals that book values of some
reported items do not reflect their market values at the date of acquisition:

 Inventories are overvalued by P200,000,000

 Property, plant and equipment is overvalued by P2,000,000,000
 Long-term debt is undervalued by P100,000,000
In addition, the following items are not currently reported on Sandy’s Statement
of Financial Position:

 Customer contracts, valued at P25,000,000

 Skilled work force, valued at P45,000,000
 In-process research and development, valued at P300,000,000
 Potential contracts with prospective customers, valued at
P15,000,000
 Sandy has not recorded expected future warranty liabilities with
a present value of P10,000,000

On January 2, 20x5, Velasco issues new stock with a market value of P700,000,000
to acquire the assets and liabilities of Sandy. Stock registration fees are
P100,000,000, paid in cash. Consulting, accounting, and legal fees connected
with the merger are P150,000,000, paid in cash. In addition, Velasco enters into
an earnings contingency agreement, whereby Velasco will pay the former
shareholders of Sandy an additional amount if Sandy’s performance meets certain
minimum levels. The present value of the contingency is estimated at
P50,000,000.

Required:
1. Determine the amount of goodwill.
2. Assume that during March, 20x5, new information comes in regarding the
value of Sandy’s property, plant and equipment at the date of acquisition.
It is determined that the property was actually worth P1,500,000 less than
previously estimated. Make the entry to record this new information.
 Solution:

(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
Ordinary shares 700

Note: “Skilled (assembled) workforce” are not identifiable at the date of acquisition and
“Potential Contracts” 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

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