Accounting for Business Combination

1. John Corporation concluded that the fair value of Carlo Company was P80,000 and paid
that amount to acquire all of its net assets. Carlo reported assets with a book value of
P60,000 and a fair value of P98,000 and liabilities with a book value and a fair value of
P23,000 on the date of combination. John also paid P3,000 to a search firm for finder’s
fees related to the acquisition. What amount will be recorded as goodwill by John
Corp.?

2. On April 1, 20x4, Carlo Corp. paid cash of P620,000 for all of the net assets of John
Company appropriately accounted for as a merger. The recorded assets and liabilities of
John Corporation on April 5, 20x4 follow:
Cash P60,000
Inventory 180,000
Property, plant, and equipment (net) 320,000
Goodwill (net of accumulated amortization of P50,000) 100,000
Liabilities (120,000)
Net assets P540,000

On April 1, 20x4, John’s inventory had a fair value of P150,000, and the property, plant,
and equipment (net) had a fair value of P380,000. The amount of goodwill recorded in
the books of Carlo as a result of the business combination should be:

3. The Marc Company had these accounts at the time it was acquired by Francis Co.:
Cash 72,000
Accounts receivable 914,000
Inventories 240,000
Plant, property and equipment 1,392,800
Accounts payable 701,600

Francis Co. paid P2,800,000 for the net assets of Marc Company. It was determined that
fair market values of inventories and plant, property, and equipment were P266,000
and P1,800,000, respectively. An assumed contingent liability arising from past events
with a fair value amounting to P20,000 and as such amount is considered a reliable
measurement. In the books of Francis Co., this transaction resulted in goodwill of:
4. On December 1, 20x4. Darlene Ltd. acquired all assets and liabilities of Shyndelle Ltd
with Darlene Ltd. issuing 100,000 shares to acquire these net assets. The fair value of
Shyndelles Ltd. assets and liabilities at this date were:

Cash P 50,000
Furniture and fittings 20,000
Accounts receivable 5,000
Plant 125,000
Accounts payable 15,000
Current tax liability 8,000
Provision for annual leave 2,000

The financial year for Darlene Ltd. is January- December. The fair value of each Darlene
Ltd. Share at the acquisition date is P1.90. At the acquisition date, the acquirer could
only determine a provisional fair value for the plant. On March 1, 20x5, Darlene Ltd.
received the final value from the independent appraisal, the fair value at the acquisition
date being P131,000. Assuming the plant had a further five-year life from the acquisition
date. The amount of goodwill arising from the business combination on December 1,
20x4.
 FACT PATTERN
Francis acquires assets and liabilities of Marc Company on January 1, 20x5. To obtain
these shares, Francis pays P800 (in thousands) and issues 20,000 shares of P20 par value
common stock on this date. Francis’s stock had a fair value of P36 per share on that
date. Francis also pays P30 (in thousands) to a local investment firm for arranging the
transaction. An additional P20 (in thousands) was paid by Francis in stock issuance costs.
The book values for both Francis and Marc as of January 1, 20x5 follow. The fair value of
each of Francis and Marc’s accounts is also included. In addition, Marc holds a fully
amortized trademark that still retains a P80 (in thousands) value. The figures below are
in thousands. Any related questions also in thousands.

Francis, Inc. Marc Company

Book Value Fair Value

Cash P1,800 P160 P160

Receivables 960 360 320
Inventory 1,320 520 600
Land 600 240 260
Buildings (net) 2,400 440 560
Equipment (net) 720 200 150
Accounts payable 960 120 120
Long-term liabilities 2,280 680 600
Common stock 2,400 160
Retained earnings 2,160 960

5. What amount will be reported for goodwill?

6. Using the same information above, what amount will be reported for receivables?

7. Using the same information above, what amount will be reported for inventory?

8. Using the same information above, what amount will be reported for buildings (net)?

9. Using the same information above, what amount will be reported for equipment (net)?

10. Using the same information above, what amount will be reported for long-term
liabilities?

11. Using the same information above, what amount will be reported for common stock?

12. Using the same information above, what amount will be reported for retained earnings?
13. Using the same information above, what amount will be reported for additional paid-in
capital?

14. Using the same information above, what amount will be reported for cash after the
purchase transaction?

FACT PATTERN
On January 1, 20x5, the fair values of Pia’s net assets were as follows:

Current Asset P200,000

Equipment 300,000
Land 100,000
Buildings 600,000
Liabilities 160,000

On January 1, 20x5, Ruth Company purchased the net assets of Pia Company by issuing
200,000 shares of its P1 par value stock when the fair value of the stock was P6.20. It
was further agreed that Ruth’s would pay an additional amount on January 1, 20x7, if
the average income during the 2-year period of 20x5-20x6 exceeded P160,000 per year.
The expected value of this consideration was calculated as P268,000; the measurement
period is one year.

15. What amount will be recorded as goodwill on January 1, 20x5?

16. Using the same information above, assuming that on August 1, 20x5 the contingent
consideration happens to be P340,000, what amount will then be recorded as goodwill
on the said date?

17. Using the same information above, assuming that on January 1, 20x7, the date of
settlement of the contingent consideration clause agreement for P350,000, the entry
should be:
FACT PATTERN
DG Inc., a new corporation formed and organized because of the recent consolidation of R
Inc. and G Inc., shall issue 10% participating preferred stocks with a par value of P100 for D
Inc and G Inc. net assets contributions, and common shares with a par value of P50 for the
difference between the total shares to be issued and the preferred shares to be issued. The
total shares to be issued by DG shall be equivalent to average annual earnings capitalized at
10%. Relevant data on D Inc. and G Inc. follows:
D Inc. G Inc.
Total Assets P720,000 P921,600
Total Liabilities 432,000 345,600
Annual earnings (average) 46,080 69,120

18. The total preferred shares to be issued by D Inc.

19. The total preferred shares to be issued by G Inc.

20. The amount of goodwill to be recognized by D Inc.

21. The amount of goodwill to be recognized by G Inc.