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Chapter 1 - Business Combination

Sample problems for chapter 1

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50 views2 pages

Chapter 1 - Business Combination

Sample problems for chapter 1

Uploaded by

Kyla Alap-ap
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Business Combination: Statutory Merger and Statutory Combination

TRUE or FALSE
__________1. Greenmail exists when a company is encouraged to buy a potential acquiree.
__________2. A poison pill is the term used to describe the issuance of a special kind of convertible preferred
stock to deter the acquisition of the company.
__________3. The sale of the crown jewels defensive maneuver involves the sale of more assets than does the
scorched earth defense.
__________4. Golden parachutes give a bonus to all employees if the company is acquired.
__________5. A business combination occurs when one entity gains control over the net assets of another
entity.
__________6. The only way to attain control over the net assets of another entity is to purchase the net assets.
__________7. In an acquisition where the acquirer pays cash for the acquiree assets, the book value of the
acquirer increases.
__________8. In an acquisition of assets for assets, the ownership structure of the acquiree does not change.
__________9. In an acquisition of assets for assets, the ownership structure of the acquirer changes.
__________10. There is an increase in the total capitalization of an acquirer when the acquirer issues stock
for acquiree assets.
__________11. In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
acquiree does not change.
__________12. In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders become
acquirer stockholders.
__________13. Control over the acquiree assets is directly achieved in an asset for asset exchange but
indirectly achieved in an asset (acquirer) for stock (acquiree) exchange.
__________14. A business combination that occurs where only one of the original entities in existence after
the combination is called a statutory consolidation.
__________15. The acquiree entity is liquidated in a statutory merger.

Problem Solving
Presented below are the financial balances for the Atwood Company and the Franz Company as of
December 31, 20x4, immediately before Atwood acquired Franz. Also included are the fair
values for Franz Company's net assets at that date.

Atwood Franz Co. Franz Co.


Book Values Book Values Fair Values
December 31, December 31, December 31,
20x4 20x4 20x4
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . P 870,000 P 240,000 P 240,000
Receivables . . . . . . . . . . . . . . . . . . . . 660,000 600,000 600,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 1,230,000 420,000 580,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 260,000 250,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . 1,800,000 540,000 650,000
Equipment (net) . . . . . . . . . . . . . . . . 660,000 380,000 400,000
Accounts payable . . . . . . . . . . . . . . ( 570,000) ( 240,000) ( 240,000)
Accrued expenses . . . . . . . . . . . . . . ( 270,000) ( 60,000) ( 60,000)
Long-term liabilities . . . . . . . . . . . . . . . . (2,700,000) (1,020,000) (1,120,000)
Common stock, P20 par . . . . . . . . . . (1,980,000)
Common stock, P 5 par . . . . . . . . . . ( 420,000)
Additional paid-in capital . . . . . . . . ( 210,000) ( 180,000)
Retained earnings . . . . . . . . . . . . . . (1,170,000) ( 480,000)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . (2,880,000) ( 660,000)
Expenses . . . . . . . . . . . . . . . . . . . . . . 2,760,000 620,000
Note: Parenthesis indicate a credit balance

Assume a business combination took place at December 31, 20x4. Atwood issued 50,000 shares of its
common stock with a fair value of P35 per share for all of the outstanding common shares of Franz. Stock
issuance costs of P15.000 and direct costs of P10,000 were paid. Atwood is applying the acquisition method
in accounting for Franz. To settle a difference of opinion regarding Franz's fair value, Atwood promises to
pay an additional P5,200 to the former owners if Franz's earnings exceed a certain sum during the next
year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the
expected present value of the contingency is P5,000.
1. If the transaction is accounted for as an acquisition, what is the amount of consideration transferred?
2. Compute the amount of inventory after combination:
3. Compute the amount of land after combination:
4. Compute the amount of buildings (net) after combination:
5. Compute the amount of goodwill after combination:
6. Compute the amount of equipment (net) after combination:
7. Compute the amount of retained earnings after combination:
8. Compute the amount of revenues after combination:
9. Compute consolidated expenses at date of acquisition.
10. Compute the consolidated cash upon completion of the acquisition.

Parent and Sub Inc had the following balance sheets on December 31, 20x4:

Parent Sub
Current Assets P 60,000 P10,000
Fixed Assets (net) 100,000 60,000
Total Assets P160,000 P70,000
Current Liabilities P 42,000 P35,000
Bonds Payable 20,000 12,000
Common Shares 90,000 12,000
Retained Earnings ___8,000 11,000
Total Liabilities and Equity P160,000 P70,000

On January 1, 20x5 Parent purchased all of Sub Inc’s Common Shares for P40,000 in cash. On that date,
Sub’s Current Assets and Fixed Assets were worth P26,000 and P54,000, respectively. Assuming that
Consolidated Financial Statements were prepared on that date, answer the following:
11. The Current Assets of the combined entity should be valued at:
12. The Fixed Assets of the combined entity should be valued at:
13. The Goodwill arising from this Business Combination would be:
14. The Shareholder’s Equity section of the Consolidated Balance Sheet would show what amount?

15. CC Inc., DD Inc., and EE Inc. are parties to a consolidation agreement. Their respective assets and
estimated earnings (based on pre-consolidation statements) as of January 1, 20x4, the date agreement
is to take effect, are as follows:
CC DD EE
Assets at appraised value . . . . . . . . . . . . . . . . P375,000 P750,000 P 375,000
Estimated annual earnings contribution . . . . 41,250 75,000 33,750
A new corporation, FF Inc., shall issue a single class of shares for the assets. Earnings in excess of 6% are
to be capitalized at 20% in determining goodwill contribution of the partners. FF Inc. shall issue shares at
P10 par value equal to total assets transferred plus goodwill. Assuming that after consolidation, dividends
are to be distributed to the former shareholders of CC, DD, and EE in terms of percentage.

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