ADVANCED FINANCIAL ACCOUNTING AND REPORTING

FAR EASTERN UNIVERSITY – INTEGRATED REVIEW

AFAR-06 BUSINESS COMBINATIONS

Problem 1:
On January 1, 2022, Parent Company acquired the net assets of Subsidiary Company. The statement of
financial position of Parent and Subsidiary immediately before the acquisition is as follows:
Parent Subsidiary
Book value Fair value Book value Fair value
Cash P 2,140,000 P 2,140,000 P 45,000 P 45,000
Accounts receivable 360,000 335,000 70,000 54,000
Inventories 475,000 390,000 87,000 78,000
Prepaid expenses 25,000 - 13,500 5,000
Land 500,000 900,000 900,000 1,550,000
Building, net 800,000 900,000 723,000 768,000
Equipment, net 700,000 585,000 361,500 360,000
Goodwill - - 300,000 ?
Accounts payable 312,500 312,500 200,000 200,000
Notes payable 937,500 980,000 700,000 765,000
Share capital, P50 par 2,000,000 850,000
Share premium 1,000,000 400,000
Retained earnings 750,000 350,000

Case A: Parent paid P2,000,000 cash which excludes a contingent consideration to pay P500,000 if Subsidiary
will be able to report net income of at least P2,500,000 for the year 2022. It was estimated that there is only a
40% probability that the Subsidiary will be able to generate at least P2,500,000. The fair value of the
contingent consideration on date of acquisition was P150,000. Parent paid the following acquisition-related
costs:
Legal fees P55,600
Broker’s fee 49,000
Other direct cost of acquisition 50,000

Case B: Parent paid P1,000,000 cash which excludes a contingent consideration to pay P500,000 if Subsidiary
will be able to report net income of at least P2,500,000 for the year 2022. It was estimated that there is only a
40% probability that the Subsidiary will be able to generate at least P2,500,000. The fair value of the
contingent consideration on date of acquisition was P150,000. Parent paid the following acquisition-related
costs:
Legal fees P55,600
Broker’s fee 49,000
Other direct cost of acquisition 50,000

Case C: Parent issued 20,000 shares with a fair value of P67.50. The purchase agreement also included a
contingent consideration to pay P500,000 if Subsidiary will be able to report net income of at least P2,500,000
for the year 2022. It was estimated that there is only a 40% probability that the Subsidiary will be able to
generate at least P2,500,000. The fair value of the contingent consideration on date of acquisition was
P150,000. Parent paid the following acquisition-related costs:
Legal fees P 55,600 Expense
 SEC registration of stock issue 320,400 Share Issuance Cost
Costs of stock certificate 35,000 Share Issuance Cost
Broker’s fee 49,000 Expense
Other direct cost of acquisition 50,000 Expense

Problem 2:
Parent Company acquired 85% of the outstanding shares (15% non-controlling interest) that carrying voting
rights of Subsidiary on January 1, 2022 for P2,580,000. Acquisition expenses, direct and indirect, amounted to
P83,000 and P42,000, (expensed in the consolidated POV) respectively. The statements of financial position
of Parent and Subsidiary immediately before the acquisition are as follows:
Parent Subsidiary FV subsidiary
Cash P3,541,500 P 128,000 128,000
Accounts receivable 300,000 325,000 300,000
Inventories 550,000 360,000 436,000
Prepaid expenses 148,500 125,000 125,000
Land 2,350,000 879,000 1,350,000
Building 1,560,000 558,000 665,000
Equipment 200,000 185,000 171,000
Goodwill 100,000 300,000 0
Total assets P8,750,000 P2,860,000 P3,175,000

Accounts payable P 675,000 P 253,000 280,000

Notes payable 1,400,000 730,000 738,000
Share capital, P50 par 3,400,000 800,000 X
Share premium 1,575,000 600,000 X
Retained earnings 1,700,000 477,000 X
Total Equities P8,750,000 P2,860,000 P1,018,000

The following information was ascertained on the date of acquisition:

a. The value of the receivables and equipment of S has decreased by P25,000 and P14,000, respectively.
b. The fair value of S’ inventories was P436,000, whereas the value of land and building has increased
by P471,000 and P107,000, respectively.
c. There was an unrecorded accounts payable amounting to P27,000 and the fair value of the notes
payable is P738,000.

FVNIA = 2,157,000

Case A: Assume that the Parent did not pay any control premium and that non-controlling interests are
measured at its fair value of P480,000.

Total Parent NCI

Purchase price P3,060,000 P2,580,000 P480,000
FVNIA (2,157,000) (1,833,450) (323,550)
GW (Gain) P903,000 P746,550 P156,450
 Assets
Beginning P8,750,000
Identifiable assets – S 3,175,000 Payments
Goodwill 903,000 Purchase price 2,580,000
Costs 125,000
Consolidated P10,123,000

Liabilities
Beginning P2,075,000
Liabilities – S 1,018,000
Unpaid PP 0
Unpaid costs 0
Consolidated P3,093,000

SHE
Beginning P6,675,000
Expenses 125,000 Shares issued 0
Gain on bargain purchase 0
Gain on PHI 0
NCI* 480,000
Consolidated P7,030,000

Case B: Assume that the Parent did not pay any control premium and that non-controlling interests are
measured at its proportionate share in net identifiable assets, NCI fair value is P480,000.

Total Parent NCI

Purchase price P2,903,550 P2,580,000 P323,550
FVNIA (2,157,000) (1,833,450) (323,550)
GW (Gain) P746,550 P746,550 P0

Assets
Beginning P8,750,000
Identifiable assets – S 3,175,000 Payments
Goodwill 746,550 Purchase price 2,580,000
Costs 125,000
Consolidated P9,966,550

Liabilities
Beginning P2,075,000
Liabilities – S 1,018,000
Unpaid PP 0
Unpaid costs 0
Consolidated P3,093,000

SHE
Beginning P6,675,000
Expenses 125,000 Shares issued 0
Gain on bargain purchase 0
Gain on PHI 0
NCI* 323,550
Consolidated P6,873,550
Case C: Assume that the Parent did not pay any control premium. FV of NCI is not given (assumed FV)

Total Parent NCI

Purchase price P3,035,294 P2,580,000 P455,294
FVNIA (2,157,000) (1,833,450) (323,550)
GW (Gain) P878,294 P746,550 P131,744

Assets
Beginning P8,750,000
Identifiable assets – S 3,175,000 Payments
Goodwill 878,294 Purchase price 2,580,000
Costs 125,000
Consolidated P10,098,294

Liabilities
Beginning P2,075,000
Liabilities – S 1,018,000
Unpaid PP 0
Unpaid costs 0
Consolidated P3,093,000

SHE
Beginning P6,675,000
Expenses 125,000 Shares issued 0
Gain on bargain purchase 0
Gain on PHI 0
NCI* 455,294
Consolidated P7,005,294

Case D: Assume that the purchase price paid by the parent included control premium of P30,000.

Total Parent NCI

Purchase price – excluding control premium P3,000,000 P2,550,000 P450,000
Purchase price – control premium 30,000 30,000
FVNIA (2,157,000) (1,833,450) (323,550)
GW (Gain) P873,000 P746,550 P126,450

Assets
Beginning P8,750,000
Identifiable assets – S 3,175,000 Payments
Goodwill 873,000 Purchase price 2,580,000
Costs 125,000
Consolidated P10,093,000

Liabilities
Beginning P2,075,000
Liabilities – S 1,018,000
 Unpaid PP 0
Unpaid costs 0
Consolidated P3,093,000

SHE
Beginning P6,675,000
Expenses 125,000 Shares issued 0
Gain on bargain purchase 0
Gain on PHI 0
NCI* 450,000
Consolidated P7,000,000

Case E: Assume that the purchase price paid by the parent was P1,000,000.
Total Parent NCI
Purchase price P1,323,550 P1,000,000 P323,550
FVNIA (2,157,000) (1,833,450) (323,550)
GW (Gain) (P833,450) (P833,450) P0

Assets
Beginning P8,750,000
Identifiable assets – S 3,175,000 Payments
Goodwill 0 Purchase price 1,000,000
Costs 125,000
Consolidated P10,800,000

Liabilities
Beginning P2,075,000
Liabilities – S 1,018,000
Unpaid PP 0
Unpaid costs 0
Consolidated P3,093,000

SHE
Beginning P6,675,000
Expenses 125,000 Shares issued 0
Gain on bargain purchase 833,450
Gain on PHI 0
NCI* 323,550
Consolidated P7,707,000

Case F: Assume that the purchase price paid by the parent was P1,000,000. FV of NCI is P350,000
Total Parent NCI
Purchase price P1,350,000 P1,000,000 P350,000
FVNIA (2,157,000) (1,833,450) (323,550)
GW (Gain) (P807,000) (P833,450) P26,450

Assets
Beginning P8,750,000
Identifiable assets – S 3,175,000 Payments
Goodwill 26,450 Purchase price 1,000,000
 Costs 125,000
Consolidated P10,826,450

Liabilities
Beginning P2,075,000
Liabilities – S 1,018,000
Unpaid PP 0
Unpaid costs 0
Consolidated P3,093,000

SHE
Beginning P6,675,000
Expenses 125,000 Shares issued 0
Gain on bargain purchase 833,450
Gain on PHI 0
NCI* 350,000
Consolidated P7,733,450

Problem 3:
On January 1, 2022, Parent Company purchased the net assets of Subsidiary Company by issuing 100,000
shares of its P1 par value ordinary shares when the fair value of the share was P6.20. it was further agreed that
the Parent Company would pay an additional amount of P300,000 on January 1, 2017 if the average income
during the two-year period 2022-2023 exceeded P80,000 per year. The expected value of this consideration
was calculated as P184,000 on date of acquisition. As a result, a goodwill of P284,000 was appropriately
recorded.

On August 1, 2022, the expected value of the contingent consideration was revised to P170,000. On February
1, 2023, the expected value was further revised to P175,000.

Provisional fair values (values which are not yet final)

Accounting for changes in fair value:
1. Retrospectively (GW/gain on bargain purchase)
• If both conditions are met:
i. Within measurement period (maximum of 1 year from date of acquisition; and stops
once you have finalized the fair value or when you obtained the additional information
to finalize the fair value)
ii. Change in fair value must be due to information that is existing as of date of acquisition

2. P/L

1/1/2022 8/1/2022
Purchase price
Shares 620,000 620,000
Contingent consideration 184,000 170,000
804,000 790,000
FVNIA (520,000) (520,000)
GW 284,000 270,000
Journal entry:
8/1/2022 Estimated Liability – Contingent 14,000
Goodwill 14,000

2/1/2023 Loss 5,000

Estimated Liability – Contingent 5,000