For questions 6-7:

1P Company acquired all of the net assets of S Company. The balance sheet of S Company immediately
prior to the acquisition, along with market values of its assets and liabilities, is as follows:

Accounts S Company
book value market value
Current assets P 800,000 P 1,000,000
Plant & equipment (net) 28,000,000 35,000,000
Patents 100,000 2,000,000
Identifiable intangible: brand names 0 13,000,000
Skilled work force 0 4,000,000
Goodwill 200,000 700,000
Liabilities 21,000,000 20,000,000
Common stock, $10 par 2,000,000
Additional paid-in capital 3,000,000
Retained earnings 3,100,000

6. P Company pays P40,000,000 in cash for S Company, in an acquisition properly reported as a

statutory merger. P records goodwill of:

a. P18,000,000
b. P17,300,000
c. P 9,000,000
d. P 4,300,000

ANS:C
Rationale: P9,000,000 = P40,000,000 – (P1,000,000 + P35,000,000 + P2,000,000 + P13,000,000 -
P20,000,000).

7. Now assume P Company pays P30,000,000 in cash to acquire S Company, in an acquisition properly
reported as a statutory merger. P records a gain on acquisition of:

a. Zero
b. P1,000,000
c. P1,700,000
d. P 5,700,000

ANS: B
Rationale: P(1,000,000) = P30,000,000 – (P1,000,000 + P35,000,000 + P2,000,000 + P13,000,000 -
P20,000,000).

8.Bats Inc, a new corporation formed and organized because of the recent consolidation of II Inc, and JJ
Inc., shall issue 10% participating preferred stocks with a par value of P100 for II and JJ net assets
contribution, and common shares with a par value of P50 for the difference between the total shares to be
issued and the preferred shared issued. The total shares to be issued by Bats shall be equivalent to
average annual earnings capitalized at 10%. Relevant data on II and JJ follows:

II JJ
Total assets P720,000 P921,600
Total liabilities 432,000 345,600
Annual earnings(average) 46,080 69,120
 The total preferred shares to be issued and the amount of goodwill to be recognized by Bats are:

a. Preferred shares: 8,640 Goodwill: P288,000

b. Preferred shares: 5,760 Goodwill: P288,000
c. Preferred shares: 2,880 Goodwill: P864,000
d. Preferred shares: 7,280 Goodwill: P864,000

ANSWER: A

II JJ TOTAL
Average annual earnings P 46,080 P 69,120 P 115,200
Divided by: Capitalized at 10%
Total stock to be issued P1,152,000
Goodwill (for Common Stock) 864,000

Preferred stock (same with Net

Assets):
864,000/P100 par 8,640 shares

9.Companies A and B decide to consolidate. Asset and estimated annual earnings contributions are as
follows:

Co.A Co. B Co.C

Net asset contribution P300,000 P400,000 P700,000
Estimated annual earnings 50,000 80,000 130,000
contribution

Stockholders of the two companies agree that a single class of stock be issued, that their contributions be
measured by net assets plus allowances for goodwill, and that 10% be considered as a normal rate of
return. Earnings in excess of the normal rate of return shall be capitalized at 20% in calculating goodwill.
It was also agreed that authorizes capital stock of the new company shall be 20,000 shares with a par
value of P100 a share.

What is amount of goodwill credited to Co. A, and the total contribution of Co.B(net assets plus goodwill)”

a. P100,000; P400,000 c. P100,000; P600,000

b. P150,000;P500,000 d. P200,000; P600,000

ANSWER: C

Company A Company B
Net Asset Contribution P300,000 P400,000
Add: P50,000 P80,000
Goodwill Average/Annual
Earnings
Less: Normal Earnings (10%of 30,000 40,000
net asset)
Excess earnings P20,000 P40,000
Divided by: Capitalized at 20% 20%
 Goodwill P100,000 P200,000

Total contribution(stock to be P400,000 P600,000

issued

10. Malakas Company acquired all of Maganda Corporation's assets and liabilities on January 2,2013, in
a business combination. At that date, Maganda reported assets with a book value of P624,000 and
liabilities of P356,000. Malakas noted that Maganda had P40,000 of research and development costs on
its books at the acquistion date that did not appear to be of value. Malakas also determined that patents
developed by Maganda had a fair value of P120,000 but had not been recorded by Maganda. Except for
building and equipment, Malakas determined the fair value of all other assets and liabilities reported by
Maganda approximated Malakas recorded amounts. In recording the transfer of assets and liabilities to its
books, Malakas recorded goodwill of P93,000. Malakas paid P517,000 to acquire Maganda's asset and
liabilities.
If the book value of Maganda's buildings and equipment was P341,000 at the date of acquisition, what
was their fair value?
a. P441,000
b. P417,000
c. P341,000
d. P417,000
Answer: B.
Solution
Computation of Fair Value
Amount paid P517,000
Book Value of assets P624,000
Book Value of liabilities. (356,000)
Book Value of net assets. P268,000
Adjustment for RandD costs. (40,000)
Adjusted book value. P228,000
Fair value of patent. 120,000
Goodwill recorded. 93,000 (441,000)
Fair value increment of
building and equipment P76,000
Book value of building and Equipment. 341,000
Fair Value of buildings and equipment P417,000
11. Richard Ltd. and Liway Ltd. are two family owned ice cream producing companies in Pampanga.
Richard Ltd. is owned by the Melad family, while the Basilio family owns Liway Ltd. The Melad family has
only one son. and he is engaged to be married to the daughter of Basilio family. Because the son
currently managing Liway Ltd., it is