Seatwork on Business Combination: Stock Acquisition

Problem 1
P Corporation issues 36,000 shares of its own P5 par common stock with a market value of P720,000
for all the outstanding stock of S Corporation on July 1, 20x8. On this date S’s balance sheet and related
fair value information is as follows:
Historical Records Fair value
Cash P 40,000 P 40,000
Inventories 80,000 100,000
Other current assets 100,000 120,000
Plant and equipment - net 300,000 500,000

Total assets P520,000 P760,000

Current liabilities P 50,000 P 50,000
Note payable 100,000 90,000
Capital stock 300,000
Retained earnings 70,000
Total equities P520,000
Additional out-of-pocket costs of the combination and stock issuance are as follows:
Legal fees for arranging the combination P 5,000
SEC registration costs 5,000
Accountant’s fees for SEC registration statements 8,000
Costs of printing new stock certificates 1,000
Finder’s fee for identifying S Corporation 10,000

Required:
1. Compute the goodwill or gain on bargain purchase

2. Prepare the journal entries necessary to record P Corporation’s investment in S Corporation.

Problem 2
On January 2, 20x8 P Corporation issues its own P10 par common stock for the outstanding stock of S
Corporation. In addition, P pays P20,000 for registering and issuing securities and P30,000 for other
costs of combination. The market price of P’s stock on January 2, 20x8 is P30 per share. Relevant
balance sheet information for P and S Corporation on January 1, 20x8 just before the business
combination, is as follows:

P Corp. S Corp. S Corp.

Book values Book values Fair values
Cash P 120,000 P 10,000 P 10,000
Inventories 50,000 30,000 40,000
Other current assets 100,000 90,000 100,000
Land 80,000 20,000 100,000
Plant and equipment - net 650,000 200,000 300,000
P1,000,000 P350,000 P550,000
Liabilities P 200,000 P 50,000 P 50,000
Capital stock - P10 par 500,000 100,000
Additional paid-in capital 200,000 50,000
Retained earnings 100,000 150,000
P1,000,000 P350,000

Part A: Assume that P issues 25,000 shares of its stock for 80% of S’s outstanding shares. Noncontrolling
interest is measured at fair value.
a. Prepare journal entries to record the business combination in the books of P
b. Prepare a balance sheet for P Corporation immediately after the business combination.

Part B: Assume that P issues 12,000 shares of its stock for all of S’s outstanding shares. Noncontrolling
interest in measured at proportionate share of the acquiree’s net assets.
c. Prepare journal entries to record the business combination in the books of P.
d. Prepare the balance sheet for P Corp. immediately after the business combination.