ACCOUNTING FOR BUSINESS COMBINATION

10. Malakas Company acquired all of Maganda Corporation's assets and liabilities on January 2,2013, in
a business combination. At that date, Maganda reported assets with a book value of P624,000 and
liabilities of P356,000. Malakas noted that Maganda had P40,000 of research and development costs on
its books at the acquistion date that did not appear to be of value. Malakas also determined that patents
developed by Maganda had a fair value of P120,000 but had not been recorded by Maganda. Except for
building and equipment, Malakas determined the fair value of all other assets and liabilities reported by
Maganda approximated Malakas recorded amounts. In recording the transfer of assets and liabilities to
its books, Malakas recorded goodwill of P93,000. Malakas paid P517,000 to acquire Maganda's asset
and liabilities.
If the book value of Maganda's buildings and equipment was P341,000 at the date of acquisition, what
was their fair value?
a. P441,000
b. P417,000
c. P341,000
d. P417,000
Answer: B.
Solution
Computation of Fair Value
Amount paid P517,000
Book Value of assets P624,000
Book Value of liabilities. (356,000)
Book Value of net assets. P268,000
Adjustment for RandD costs. (40,000)
Adjusted book value. P228,000
Fair value of patent. 120,000
Goodwill recorded. 93,000 (441,000)
Fair value increment of
building and equipment P76,000
Book value of building and Equipment. 341,000
Fair Value of buildings and equipment P417,000
11. Richard Ltd. and Liway Ltd. are two family owned ice cream producing companies in Pampanga.
Richard Ltd. is owned by the Melad family, while the Basilio family owns Liway Ltd. The Melad family
has only one son. and he is engaged to be married to the daughter of Basilio family. Because the son
currently managing Liway Ltd., it is proposed that he be allowed to manage both companies after the
wedding. As a result, it is agreed by the two families that Richard and Ltd. should take over the net
assets of Liway Ltd.

The balance sheet at Liway Ltd. immediately prior to the takeover is as follows:
 Carrying Amount Fair Value

Accounts receivable P20,000 P 20,000

Inventory 140,000 125,000
Land 620,000 840,000
Buildings (net) 530,000 550,000
Farm equipment (net) 360,000 364,000
Irrigation equipment (net) 220,000 225,000
Vehicles (net) 160,000 172,000
Total assets P2,050,000

Accounts payable P80,000 P 80,000

Loan-Metrobank 480,000 480,000
Share capital 670,000
Retained earnings 820,000
Total P2,050,000

The takeover agreement specified the following details:

* Richard Ltd. is to acquire all the assets of Liway Ltd. and except one of the vehicles (having a carrying
amount of P45,000 and of fair value of P48,000) and assume all the liabilities except for the loan from
Metrobank. Liway Ltd. is then to go, into liquidation.
* Cash at P20,000, half to be paid on date of exchange and half in one year's time. The incremental
borrowing rate is 10% per annum (present value for P1 at 10% for 1 period is 0.909091).
* Supply of a patent relating to the manufacture of ice cream. This has a fair value of P60,000 but has
not been recognized in the records of Liway Ltd. because it resulted from an internally generated
research project.
* Richard Ltd. is to supply sufficient cash to enable the debt to Metrobank to be paid for and to cover the
liquidation costs of P5,500. it will also give P150. 000 to be distributed to Mr. an Mrs. Melad to assists
in paying the wedding costs.
* Richard Ltd. is also to give a piece of its own prime land to Liway Ltd. to be distributed to Mr and
Mrs. Melad, this eventually being available to be given to any offspring of the forthcoming marriage.
The piece of land in question has a carrying amount of P80,000 and a fair value of P220,000.
* Richard Ltd. is to issue 90,000 shares, these having a fair value of P14 per share, to be distributed via
Liway Ltd. to the soon to-be-married-daughter of Mr. and Mrs. Melad, who is currently a shareholder in
Liway Ltd.

The takeover proceeded as per the agreement with Richard Ltd. incurring incidental acquisition costs of
P25,000, while there were P 18,000 share issue costs.
The amount of goodwill or (bargain purchase gain):

a. P45.682
b. 70,682
c. 118,682
d. P(109,818)
Answer: A
Solution
Consideration transferred:
Shares: (90.000 x P14 per share) P1,260,000
Cash: Payable Now 20,000
Deferred (P20,000 x 0.909091) 18,182
Patent 60,000
Cash (to Metrobank) 480,000
Liquidation costs 5,500
Wedding costs 150,000
Land 220,000 P2,213,682
Less: Fair value of net identifiable assets acquired.
Accounts receivable P20,000
Inventory 125,000
Land 840,000
Buildings 550,000
Farm equipment 364,000
Irrigation equipment 225,000
Vehicles ( P172,000 - P480,000) 124,000
Accounts payable (80,000) 2,168,000
Goodwill P45,682

12. The Boy George, Company acquired the net assets of the Girl Conrad Company on January 1, 2015,
and made the following entry to record the purchase:
Current Assets100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common stock,P1 par 100.000
Paid in capital in excess at par 520,000

Assuming that additional shares on January 1, 2017 would be issued on that date to compensate for any
fall in the value at Boy George common stock below P16 per share. The settlement would be to cure the
deficiency by issuing added shares based on their fair value on January 1,2017. The fair price of the
shares on January 1, 2017 was P10.

What is the additional number of shares issued on January 1, 2017 to compensate for any fall in the
value at the stock?

a. 160,000
b. 100,000
c. 60,000
d. 10,000
Answer: C
Solution
Deficiency: (P16 - P10) x100,000 shares issued to acquire P600,000
Divided by: fair value of share P 10
Additional number of shares to issued 60,000

Another example at contingencies is where the acquirer issues to the acquiree and the acquiree is
concerned that the issue of these shares may make the market price at the acquirer ’s shares decline over
time.

Therefore the acquirer may offer additional cash or shares if the market price falls below specified
amount over a specific period of time.

13. Fay acquires assets and liabilities of May Company on January 1,2016. To obtain these shares, Fay
pays P400,000 and issues 10,000 shares of P20 par value common stock on this date. Fay's stock had a
fair value of P36 per share on that date. Fay also pays P15,000 to a local investment firm for arranging
the transaction. An additional P10,000 was paid by Fay in stock issuance costs.
The book values for both Fay and May as of January 1,2016 follow. The fair value of each of Fay and
May accoubts is also included. In addition, May holds a fully amortized trademark that still retains
P40,000 value. The figures below are in thousands. Any related questions also in thousands.
May Company
Fay, Inc. Book Value Fair Value
Cash P900 P80 P80
Receivables 480 180 160
Inventory 660 260 300
Land 300 120 130
Buildings(net) 1,200 220 280
Equipment(net) 360 100 75
Accounts Payable 480 60 60
Long-term liabilities 1,140 340 300
Common Stock 1,200 80
Retained earnings 1,080 480
Assuming the combination is accounted for as an acqusition, immediately after the acquisition, in the
balance sheet of Fay:
What amount will be reported for goodwill?
a. P55 c. P70
b. 65 d. 135

Answer: A.
Consideration Transferred:
Cash P400
Shares (10,000x36) 360
Total P760
Less: Fair value of net iden. assets acquired
Cash P80
Receivables 160
Inventory 300
Land 130
Buildings(net) 280
Equipment(net) 75
Trademark 40
Accounts Payable (60)
Long-term liabilities (300) 705
Goodwill P 55

14. Using the same information in No. 1, what amount will be reported for retained earnings?
a. P1,065 c. P1,525
b. 1,080 d. 1,560

Answer: A.
Acquirer - Fay (at book value) P1,080
Less: Acquisition-related costs 15
Acquiree - May (not acquired) 0
Retained Earnings P1,065

15. Using the same information in No. 1, what amount will be reported for cash after the purchase
transaction?
a. P980 c. P875
b. P900 d. P555

Answer: D.
Acquirer - Fay (at book value) P900
Less: Cash paid to acquire net assets of May 400
Acquisition-related costs 15
Stock issuance costs 10
Acquiree - May (fair value) 80
Cash P555