UNIT 4: BUSINESS COMBINATION

Case 1 – Computations of GW or IFA

NORTHPOINT COMPANY acquired the net assets of DOMINI0N ENTERPRISES on January 1, 2020 The carrying and fair values
of DOMINION at the date of acquisition follows:
Carrying
Value Fair Value
Cash P16,000 P16,000
Accounts receivable 32,000 32,000
Merchandise Inventory 48,000 56,000

Plant and Property 360,000 368,000

Patent 48,000 44.000
Total assets P 504,000 P 516,000

Accounts Payable P24,000 P24,000

Long-term debt 320,000 296,000
Capital stock
96,000

APIC 16,000
Retained Earnings 48,000
Total Equities P504f000

NORTHPOINT COMPANY issued the following considerations in exchange for the net assets of
DOMINION: 1. 40,000, P1 par shares of NORTHPOINT. Fair value- P2.75 at January 1, 2020.
2. NORTHPOINT agreed to pay additional cash consideration for the value of any decrease in the share price below P2.75 for
the 40,000 shares issued. The guarantee is for 90 days and is to expire on March 31, 2020. NORTHPOINT believes there
was only a 20% chance the price of the shares would fall to P2.60 during the guarantee period.
3. Cash of P72,000; P24,000 to be paid on date of exchange and the balance in one year's time. The incremental borrowing
rate of NORTHPOINT is 10% per annum.
4. DOMINION was currently being sued by an enraged client; the company's lawyers believe there's an 95% chance it will win
the case. The expected damages in the event DOMINION lost the case is P200,000.
5. An old-model KIA delivery van carried in the books of NORTHPOINT at P40,000, net of P8,000 accumulated depreciation.
The fair value at the date of the exchange is P28,000.
➢ In addition to the purchase consideration NORTHPOINT had an out-of-pocket costs of P6,816 for direct acquisition cost;
P1,600 for issuing and registering the shares; and P1,200 indirect cost.

Required:
1. Prepare a schedule for the determination of the cost of combination.
2. Prepare a schedule for the computation of the fair value of the net assets.
3. Determine goodwill or excess from the business combination, and
4. Prepare journal entries to record the acquisition of the net assets of DOMINION ENTERPRISES in the books of
NORTHPOINT COMPANY.

Case 2 – Merger Combination

The following balance sheets at December 31, 2020 are for PHILRABBIT Company and SUPERLINES Enterprises, respectively
just before the business combination.. On this date, PHILRABBIT acquires the net assets of SUPERLINES and issues 9,600
new shares in consideration thereof. . The issued shares have a market value of P35 each.

PHILRABBIT SUPERLINES
Cash P 112,000 P 40,000
Accounts receivable 96,000 28,000
Land 176,000 40,000
Buildings, net 280,000 168,000
Equipment, net 328,000 100,000
Total assets P 992,000 P 376,000

Accounts payable P 128,000 P 44,000

Bonds payable 160,000 80,000
Share capital, P10 par 320,000 144,000
Share premium - 20,000
Retained profit 384,000 88,000
Total liabilities and
equity P 992,000 P 376,000

The following market values have been agreed upon by the parties over some of SUPERLINES’s net asset items:
Accounts receivable, P24,000; Land, P48,000; Buildings, P200,000; Equipment, P120,000; and
Bonds payable, P88,000.

PHILRABBIT Company also paid out-of-pocket costs: P6,400 for direct acquisition costs; P12,000 for stock issuance and
registration; and P1,600 for indirect acquisition expenses.

Required:
(1) Prepare a schedule for the computation of goodwill or income from combination.
(2) Prepare the necessary journal entries in the books of PHILRABBIT Company. The journal entries in the books of
SUPERLINES Enterprises may be ignored.
(3) Prepare the balance sheet of PHILRABBIT Company just after the merger business combination.