Problems Week 1 2

APC 304: Accounting for Business Combinations
Week 1-2
Statutory Merger: Valuation of Assets and

Liabilities, Consideration Transferred, Goodwill
and Bargain Purchase
Tony Inc. acquires all of Jaramillo Co.’s assets and liabilities on January 1, 20x5. Tony incurs the
following costs for the acquisition:
Consideration transferred:
Cash paid to former stockholders of Jaramillo: there
were 200,000 shares of Jaramillo outstanding, and
Tony agreed to pay P90 in cash for each share of
outstanding Jaramillo stock P18,000,000 Cash payment
50,000shares of new Tony common stock, par value
P2/share, market value P80/share, issued to the
former stockholders of Jaramillo P4,000,000 Fair value of stock issued
Acquisition-related costs:
Registration fees connected with issuing the new shares, paid in
cash 300,000 Cash payment
Costs of issuing and printing shares/stock certificate 200,000 Cash payment
Consulting/professional fees paid to broker 1,000,000 Cash payment
Legal fees, audit fees, and finder’s fees for acquisition 100,000 Cash payment
The balance sheets of both companies immediately prior to the acquisition are as follows:
Tony, Inc. Jaramillo Co.
Assets Book Value Book Value Fair Value
Cash P 25,000,000 P90,000 P 90,000
Receivables 2,000,000 200,000 190,000
Inventories 20,000,000 8,110,000 7,000,000
Plant & equipment, net 99,500,000 50,000,000 40,000,000
Trademarks 5,000,000 1,000,000 4,000,000
Goodwill ____________ ____600,000
Total Assets P151,500,000 P 60,000,000
Liabilities &Equity Book Value Book Value Fair Value
Current liabilities P 500,000 P 400,000 P 400,000
Long-term liabilities 70,000,000 45,000,000 47,000,000
Ordinary share/Common stock, par 2,000,000 1,000,000
Share premium/APIC 55,000,000 10,000,000
Accumulated P&L/Retained earnings 25,000,000 6,600,000
Treasury shares (1,000,000) (3,000,000)
Total Liabilities &Equity P151,500,000 P 60,000,000
In addition to the assets and liabilities already reported, Jaramillo has the following previously
unrecorded intangible assets at fair value that meet the requirements for capitalization:
Brand names P 5,000,000

Secret formulas 7,000,000
Tony, Inc. will pay an additional cash consideration of P1,000,000 on January 1, 20x5 if average income
for the two (2) year period of 20x5 and 20x6 will be equal or greater than P5,000,000 per year. At
acquisition, there is a high probability of reaching the target average income and the fair value of the
additional consideration was determined to be at an expected value of the contingency at P400,000
based on a 40% probability of achieving the target average income.
© Dayag, A. J. (2021). Advanced Financial Accounting: A Comprehensive: Conceptual & Procedural Approach
Week 1-2
Required:
1. Goodwill. Prepare the journal entry or entries to record the acquisition on Tonys’ books (the
acquirer/acquiring company).
2. Bargain Purchase Gain/Gain on Acquisition. Assume the same information as above, but
Jaramillo has an additional previously unreported intangible that meets the requirements for
capitalization: a noncompetition agreement with a fair value of P10,000,000. All fair value
calculations have been double checked for accuracy and found to be correct. Prepare the journal
entry or entries to record the acquisition on Tonys’ books.
3. Prepare Tony’s balance sheet for (1) and (2) above immediately following the merger.
4. Determine the following amounts immediately following the merger for requirement (1) and (2):
(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;
Week 1-2
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 balance sheet on 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 balance sheet:
• 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
worth P1,500,000 less than previously estimated. Make the entry to record this new information.
Week 1-2
Consideration Transferred: Cash plus Contingent

Consideration
Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on
January 1, 20x4, paying P 720,000 cash. Senn Company’s December 31,20x3, balance sheet,
reflecting both book values and fair values, showed:
Book Value Fair Value

Accounts receivable (net) P 72,000 P 65,000
Inventory 86,000 99,000
Land 110,000 162,000
Buildings (net) 369,000 450,000
Equipment (net) 237,000 288,000
Total P 874,000 P1,064,000
Accounts payable P 83,000 P 83,000
Note payable 180,000 180,000
Common stock, P2 par value 153,000
Other contributed capital 229,000
Retained earnings 229,000
Total P 874,000
As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company P
135,000 cash if the post combination earnings of the combined company (Pham) reached certain levels
during 20x4 and 20x5.
Required:
1. Determine the amount of goodwill/gain on acquisition on January 1, 20x4 if it is expected that the
earnings target is likely to be met.
2. Assuming the earnings contingent is met, prepare the journal entry on Pham Company’s books to
settle the contingency on January 2, 20x6.
3. Assuming the earnings contingency is not met, prepare the necessary journal entry on Pham
Company’s books on January 2, 20x6.
Week 1-2
Allocation of Purchase Price to Various Assets

and Liabilities
Company S has no long-term marketable securities. Assume the following scenarios:
Case A: Assume that P Company paid P130,000 cash for 100% of the net assets of S Company.
S Company
Current Assets Long-lived Assets Liabilities Net Assets
Book Value P 15,000 P 85,000 P 20,000 P 80,000
Fair Value 20,000 130,000 30,000 120,000
Case B: Assume that P Company paid P110,000 cash for 100%of the net assets of S Company.
S Company
Book Value P 15,000 P 85,000 P 20,000 P 80,000
Fair Value 30,000 80,000 20,000 90,000
Case C: Assume that P Company paid P15,000 cash for 100% of the net assets of S Company.
S Company
Book Value P 15,000 P 85,000 P 20,000 P 80,000
Fair Value 40,000 40,000 40,000 20,000
Required:
Complete the following schedule by the listing the amount that would be recorded on P’s books.
Retained Earnings
Current Long-lived (Gain in Income
Goodwill Assets Assets Liabilities statement)
Case A
Case B
Case C
Week 1-2
Acquisition Entry, Deferred Taxes

Patel Company issued 100,000 shares of P1 par value common stock (market value of P6/share) for the
net assets of Seely Company on January 1, 20x4, in a statutory merger, Seely Company had the following
assets, liabilities, and owners’ equity at that time:
Book Value Tax Basis Fair Value Difference

Cash P 20,000 P 20,000 P 0
Accounts receivable 112,000 112,000 0
Inventory 82,000 134,000 52,000
Land 30,000 55,000 25,000
Plant assets (net) 392,000 463,000 71,000
Total assets P 636,000 P 784,000 P 636,000
Allowance for uncollectible accounts P 10,000 P 10,000 P 0

Accounts payable 54,000 54,000 0
Bonds payable 200,000 180,000 20,000
Common stock, P1 par value 80,000
Other contributed capital 132,000
Retained earnings 160,000
Total equities P 636,000
Required:
Prepare the journal entry to record the assets acquired and liabilities assumed. Assume an income tax
rate of 40%.

Problems Week 1 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Problems Week 1 2

Uploaded by

Copyright:

Available Formats

APC 304: Accounting for Business Combinations

Statutory Merger: Valuation of Assets and

Brand names P 5,000,000

Valuation of Assets acquired, and Liabilities

Consideration Transferred: Cash plus Contingent

Book Value Fair Value

Allocation of Purchase Price to Various Assets

Acquisition Entry, Deferred Taxes

Book Value Tax Basis Fair Value Difference

Allowance for uncollectible accounts P 10,000 P 10,000 P 0

You might also like