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1.3 Merger - Contingent Consideration
1.3 Merger - Contingent Consideration
(Adapted)
● 30,000 unissued shares of its P10 par ordinary shares, with a market value of P25 per
share
● P180,000 in long term 8% notes payable and
● A contingent payment of P120,000 cash on January 1, 2023, if the average income of
the 2 year period of 2021 – 2022 exceeds P 300,000 per year. XANDER estimates
that there is a 30 percent chance or probability that the P120,000 payment will be
required.
XANDER FORD
Account Titles Book value Fair value Book value Fair value
Cash 24,000.00
276,000.00 276,000.00 24,000.00
Receivables – net 48,000.00
96,000.00 96,000.00 48,000.00
Inventories 120,000.00
288,000.00 360,000.00 72,000.00
Land 72,000.00
108,000.00 240,000.00 240,000.00
Buildings – net (10 year life) 240,000.00
480,000.00 720,000.00 360,000.00
Equipment – net (15 year life) 216,000.00
432,000.00 588,000.00 300,000.00
In process research and
- - -
development 60,000.00
Total Assets 720,000.00
1,680,000.00 2,280,000.00 1,104,000.00
Accounts payable
216,000.00 216,000.00 72,000.00 72,000.00
Other liabilities 144,000.00
240,000.00 216,000.00 168,000.00
Ordinary shares, P10 par 240,000.00
720,000.00
Share premium 192,000.00
240,000.00
Retained earnings 72,000.00
264,000.00
Total liabilities and equity 720,000.00
1,680,000.00
REQUIREMENTS:
1. Determine the amount of goodwill that will be recorded on December 31, 2020.
2. Determine the amount of adjusted goodwill (if any) that will be recorded as adjustment
on August 31, 2021.
3. Determine the amount of adjusted goodwill (if any) and journalize the adjustment on
November 1, 2021 if any.
C. As continuation of letter B, assume that on December 15, 2021, the expected value
of the contingent consideration amounted to P 78,000:
4. Prepare the required entry to reflect the adjustment, if any. Determine the amount of
adjusted goodwill (if any)
5. Prepare the required entry to reflect the adjustment, if any. Determine the amount of
adjusted goodwill (if any)
1. Compute the amount of goodwill that will be recognized on December 31, 2020
Consideration transferred;
Ordinary shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash
contingency): 36,000
P120,000 x 30% probability
Total Consideration P 966,000
Less: Fair value of identifiable assets
acquired and liabilities assumed:
Cash P 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess – Goodwill P 102,000
#2
Determine the amount of adjusted goodwill (if any) that will be recorded as adjustment
on August 31, 2021.
The goodwill to be reported then on the acquisition should be P126,000 (P102,000 +
P24,000).
The adjustment is still within the measurement period, the entry to adjust the liability would
be:
Goodwill 24,000
Estimated liability for contingent 24,000
consideration
Adjustment to goodwill due to measurement
date.
#3
#4
The goodwill remains at P126,000, since it was not expressly stated that the change is
due to improved information on facts and circumstances already existing on the date
of acquisition.
#5
On January 1, 2023, FORD’s average income in 2021 is P324,000 and 2022 is P312,000,
which means that the target was met, XANDER Corporation will make the following
entry:
A.
1. Compute the amount of goodwill that will be recognized on December 31, 2020
Consideration transferred;
Ordinary shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385
B.
2. The entry for XANDER Corporation on December 31, 2021 to record such occurrence
would be:
Since the contingent event does not happen, the position taken by IFRS 3 is that the
conditions that prevent the target from being met occurred in a subsequent period and that
XANDER had the information to measure the liability at the acquisition date based on
circumstances that existed at that time. Thus the adjustment will flow through income
statement in the subsequent period.
-END of PROBLEM-