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Module 2 Business Combination Proportionate

Pasta Corp acquired 90% of Shasta Corp for $60,000 cash. To determine goodwill, the fair value of Shasta's net assets was calculated as $60,000. The excess of the consideration transferred over the fair value of net assets was $6,000, which was allocated as 40% ($6,000) to goodwill. The non-controlling interest was measured as 10% of Shasta's fair value net assets of $6,000. The consolidated statement of financial position reported total assets of $236,000, total liabilities of $150,000, total shareholders' equity of $86,000 including non-controlling interest of $6,000.

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171 views3 pages

Module 2 Business Combination Proportionate

Pasta Corp acquired 90% of Shasta Corp for $60,000 cash. To determine goodwill, the fair value of Shasta's net assets was calculated as $60,000. The excess of the consideration transferred over the fair value of net assets was $6,000, which was allocated as 40% ($6,000) to goodwill. The non-controlling interest was measured as 10% of Shasta's fair value net assets of $6,000. The consolidated statement of financial position reported total assets of $236,000, total liabilities of $150,000, total shareholders' equity of $86,000 including non-controlling interest of $6,000.

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BUSINESS COMBINATION

PROBLEM ON DETERMINATION OF GOODWILL


USING PROPORTIONATE AMOUNT/PARTIAL GOODWILL METHOD

On January 1, 2020, Pasta Corp. and Shasta Corp. had condensed Statement of Financial
Position immediately before the acquisition as follows:

Pasta Shasta
Current Assets P 70,000 P 20,000
Non-Current Assets 90,000 40,000
Total Assets P160,000 P 60,000
======= =======

Current Liabilities P 30,000 P 10,000


Long-term Debt 50,000 -
Shareholders’ Equity 80,000 50,000
Total Liabilities and Shareholders’ Equity P160,000 P 60,000
======= =======

On January 1, 2020, Pasta borrowed P60,000 and used the proceeds to purchase 90% of the
outstanding ordinary shares of Shasta Corp. This debt is payable in 10 equal annual principal
payments, plus interest, beginning December 31, 2020. The excess cost of the investment over
Shasta’s book value of acquired net assets should be allocated 60% to inventory and 40% to
goodwill.

On Pasta and Subsidiary’s January 2, 2020 consolidated statement of financial position,


assuming the non-controlling interest is measured at its proportionate share of the identifiable
net assets, compute for the following (resulting to the preparation of Consolidated Statement
of Financial Position and the corresponding eliminating entries).

1. Total Assets
2. Total Liabilities
3. Total Shareholders’ Equity
4. Non-Controlling Interest

Computation of Goodwill
Consideration Transferred:
Cash P60,000
NCI (10% of P60,000, see below) 6,000
Total P66,000
Less: FV of net assets of Shasta Co. (60,000)
Goodwill P 6,000
=======
Or

Excess of cost over book value:


(see below computation of net assets of Shasta Co.) P15,000 x 40% = P6,000

Computation of fair value of the net assets of the subsidiary company:


Current Assets of Shasta P20,000
Consideration Transferred: P 60,000
BV of SHE of Shasta
(50,000 x 90%) (45,000)
Excess of Cost over BV P 15,000

15,000 x 60% = 9,000/90% = 10,000


Fair Value of current assets of Shasta P30,000
Non-Current Assets of Shasta 40,000
Total Assets of Shasta Co. P70,000
Less Total Liabilities of Shasta Co. (10,000)
FV of Net Assets of Shasta Co. P60,000
=======
Computation of Consolidated Statement of Financial Position on January 2, 2020:

Current Assets: (P70,000 (P) + P60,000 Cash proceeds - P60,000 (Price Paid) + P20,000 (S) +
P10,000 WP FV adjustment) P 100,000
Non-Current Assets: (P90,000 (P) + P40,000 (S)) 130,000
Goodwill (WP entry) 6,000
Total Assets P 236,000
========
Current Liabilities (P30,000 (P) + P10,000 (S)) P 40,000
Non-Current Liabilities (P50,000 (P) + P60,000 (borrowing on Jan. 2) 110,000
Total Liabilities
P150,000
========

Shareholders’ Equity (without NCI) P 80,000


Non-Controlling Interest 6,000
Total SHE P 86,000
Total Liabilities and SHE P236,000
========
Eliminating Entries

1. Eliminate SHE of the Subsidiary:

SHE of Subsidiary 50,000


Investment in Shasta 45,000
NCI 5,000

2. Allocate fv and bv difference of Subsidiary Inventory:

Inventory 10,000
Investment in Shasta 9,000
NCI 1,000

3. Set-up of Goodwill

Goodwill 6,000
Investment in Shasta 6,000

Answers:
1. Consolidated Assets: P236,000
2. Consolidated Liabilities: 150,000
3. Consolidated SHE 86,000
4. NCI 6,000

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