Illustrative Problem on Acquisition of Net Assets

Entity XY acquired the net assets of Entity AB by issuing 25,000 ordinary

shares with par value of P10 and bonds payable with a face amount of
P1,250,000. The bonds are classified as financial liability at amortized cost.
At the time of acquisition, the ordinary shares are publicly quoted at P20
per share. On the other hand, the bonds payable, classified as financial
liability at amortized cost, are trading at 110.

Entity XY paid P25,000 share issuance costs and P50,000 bond issue costs.
Entity XY also paid P100,000 acquisition related costs and P75,000 indirect
costs of business combination. Before the date of acquisition, Entity XY and
Entity AB reported the following data:

Entity XY Entity AB
Current assets P2,500,000 P1,250,000
Noncurrent assets 5,000,000 2,500,000
Current liabilities 500,000 1,000,000
Noncurrent liabilities 750,000 1,250,000
Ordinary shares 1,250,000 500,000
Share premium 3,000,000 750,000
Retained earnings 2,000,000 250,000

At the time of acquisition, the current assets of Entity XY have fair value of
P3,000,000 while the noncurrent assets of Entity AB have fair value of
P3,250,000. On the same date, the current liabilities of Entity AB have a fair
value of P1,500,000 while the noncurrent liabilities of Entity XY have fair
value of P1,250,000.

Immediately after the merger, compute for the following:

1. Total assets
2. Total liabilities
3. Components of shareholders’ equity

-end of problem-

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Solution to the Problem

Cost of Investment by XY Identifiable Net Assets at FV of AB

Shares issued at FV (25,000 x P20) P 500,000 Current Assets P1,250,000

Bonds issued at quoted price Non-current Assets 3,250,000 4,500,000
(P1,250,000 x 110) 1,375,000 Current Liabilities P1,500,000
Non-current Liabilities 1,250,000 (2,750,000)
P1,875,000 > P1,750,000
P125,000 Goodwill

Total Assets after the Merger

Total Assets of Acquirer (XY) at BV P7,500,000

Add: Total Assets of Acquired (AB) at FV 4,500,000
Add: Resulting Goodwill 125,000
Less: Cash Payments (250,000) P11,875,000
==========
Total Liabilities after the Merger

Total Liabilities of Surviving (XY) at BV P1,250,000

Add: Total Liabilities of Dissolved (AB) at FV 2,750,000
Add: Bonds issued at quoted price P1,375,000
Less: Bond issue cost ( 50,000) 1,325,000 P 5,325,000

Total SHE after the Merger

Ordinary Shares of XY P1,250,000

Add: issuance at par 250,000 P1,500,000

Share Premium of XY P3,000,000

Add: resulting share premium
From issuance of shares 250,000
Less: Stock issuance cost ( 25,000) 3,225,000

Retained Earnings of XY P2,000,000

Less: Acquisition related cost ( 175,000) 1,825,000 P 6,550,000

P11,875,000
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