DEPARTMENT OF ACCOUNTANCY

BUSINESS COMBINATION – SITUATIONAL PROBLEMS

ACQUISITION OF NET ASSETS

Case 1: Plata Corporation paid P100,000 cash for the net assets of Oro Company, which consisted of the
following:
Book Value Fair Value
Current assets P20,000 P 28,000
Property and equipment 80,000 110,000
Liabilities assumed 20,000 18,000

Step 1: Determine the goodwill or gain on bargain purchase:

Consideration Paid 100,000

Less: book value of the net assets of acquiree 80,000
Excess of Cost over Book value 20,000
Accounted for as:
Increase in the value of current assets (8,000)
Increase in the value of property and equipment (30,000)
Decrease in the value of the liabilities assumed (2,000)
Gain on Bargain Purchase (20,000)

Note 1: If the answer is negative: Gain on Bargain Purchase but the answer is positive: Goodwill.

Note 2: The amount of goodwill or gain on bargain purchase can also be determined by just looking the fair
value of the net assets of the acquiree:

Consideration Paid 100,000

Less: fair value of the net assets of acquiree 120,000
Gain on Bargain Purchase (20,000)

Note 3: Net assets mean equity

Journal entry of acquisition:

Current Assets 28,000

Property and Equipment 110,000
Liabilities assumed 18,000
Cash 100,000
Gain on bargain purchase 20,000

Case 2: Pool Company issued 120,000 shares of P10 par common stock with a fair value of P3,550,000 for
the net assets of Spot Company. In addition, Pool incurred the following acquisition-related costs:

Legal fees to arrange the business combination P25,000

Costs of SEC registration, including accounting
And legal fees 12,000
Cost of issuing stock certificates 3,000
General administrative costs 20,000

Immediately before the business combination in which Spot Company was dissolved, Spot’s assets and
equities were as follows (in thousands):

Book Value Fair Value

Current assets P2,000 P1,100
Plant assets 1,500 2,200
Liabilities 300 300
Common stock 3,000
Retained earnings 200

BSA – A.Y. 2020-2021 Page 1 of 6

Step 1: Determine the amount of costs to be charged to Retained Earnings account:

Legal fees to arranged the business combination 25,000

Costs of SEC registration, including accounting and legal fees 12,000
General administrative costs 20,000
Total 57,000

Journal entry:

Retained Earnings 57,000

Cash 57,000

Step 2: Determine the amount of costs to be charged to Share Premium:

Cost of issuing stock certificates 3,000

Journal entry:

Share Premium 3,000

Cash 3,000

Step 3: Determine the goodwill or gain on bargain purchase.

Consideration Paid – Shares at Fair value 3,550,000

Less: book value of the net assets of acquiree 3,200,000
Excess of Cost over Book value 350,000
Accounted for as:
Decrease in the value of current assets 900,000
Increase in the value of plant assets (700,000)
Goodwill 550,000

Step 4: Determine the share premium from the issuance of shares of stock.

Fair value of shares issued 3,550,000

Less: par value of shares issued (120,000 x P10) 1,200,000
Share Premium 2,350,000

Journal entry:

Current assets 1,100,000

Plant assets 2,200,000
Goodwill 550,000
Liabilities 300,000
Share Capital 1.200,000
Share Premium 2,350,000

INVESTMENT IN SUBSIDIARY

Case 1: On the day of acquisition Pall and Mall had the following assets and liabilities:

Pall Company Mall Company

Book Value Fair Value Book Value Fair Value
Current assets 140,000 140,000 10,000 10,000
Plant assets, net 220,000 340,000 130,000 180,000
Liabilities 100,000 100,000 50,000 50,000

Pall Company paid P140,000 in cash for 80% of the outstanding stock of Mall Company.

Note 1: Pall Company is the acquirer while, Mall Company is the acquiree.

BSA – A.Y. 2020-2021 Page 2 of 6

Note 2: 80% constitute the Controlling Interest (CI) of Pall Company to Mall Company while 20% constitute the
Non-controlling interest (NCI) in Mall Company.

Note 3: No fair value of Non-controlling interest was given so, use proportionate basis approach.

Step 1: Determine the goodwill or gain on bargain purchase. To get the value of NCI: P140,000 / 80% then
multiply by 20%.

80% 20%
Total CI NCI
Consideration paid 175,000 140,000 35,000
Less: Book value of net assets of the acquiree 90,000 72,000 18,000
Excess of consideration over book value 85,000 68,000 17,000
Accounted for as:
Increase in the value of plant assets (50,000) (40,000) (10,000)
Goodwill 35,000 28,000 7,000

Full Goodwill
Partial Goodwill

If Accounted for Using Full Goodwill (When the problem is silent use this method):

Journal Entry upon investment:

Investment in Subsidiary 140,000

Cash 140,000

Journal Entry in the elimination:

1. To eliminate the net asset of the acquiree:

Net Assets 90,000

Investment in Subsidiary 72,000
Non-Controlling Interest 18,000

2. To recognize the increase or decrease in the value of the assets and liabilities of the acquiree, to eliminate
the remaining value of investment in subsidiary and to recognize the remaining non-controlling interest:

Plant Assets 50,000

Goodwill 35.000
Investment in Subsidiary 68,000
Non-Controlling Interest 17,000

3. Consolidation Process:

Mall
Pall Elimination
Company At Consolidation
Company Entries
Book Value
DEBIT:
Current Assets - 10,000 - 10,000
Plant Assets, net 220,000 130,000 50,000 400,000
Investment in Subsidiary 140,000 - (140,000) -
Goodwill - - 35,000 35,000
Total 360,000 140,000 445,000

CREDIT
Liabilities 100,000 50,000 - 150,000
Net Assets 260,000 90,000 (90,000) 260,000
NCI - - 35,000 35,000
Total 360,000 140,000 445,000

BSA – A.Y. 2020-2021 Page 3 of 6

Note 1: Investment in Subsidiary is eliminated for consolidation process, you should not see an investment in
subsidiary in a consolidation financial statement.

Note 2: When combining the assets and liabilities of the acquirer and the acquiree, the assets and the
liabilities of the acquiree are stated at FAIR VALUE while the assets and the liabilities of the acquirer are stated
at BOOK VALUE.

Note 3: The value of the goodwill or gain on bargain purchase must be shown in the consolidated financial
statement. The value of the non-controlling interest must also be shown in the consolidated financial
statement.

Note 4: The equity section of the consolidated statement of financial position SHOULD ONLY SHOW the
equity accounts of the ACQUIRER.

If Accounted for Using Partial Goodwill:

Journal Entry upon investment:

Investment in Subsidiary 140,000

Cash 140,000

Journal Entry in the elimination:

1. To eliminate the net asset of the acquiree:

Net Assets 90,000

Investment in Subsidiary 72,000
Non-Controlling Interest 18,000

2. To recognize the increase or decrease in the value of the assets and liabilities of the acquiree, to eliminate
the remaining value of investment in subsidiary and to recognize the remaining non-controlling interest:

Plant Assets 50,000

Goodwill 28.000
Investment in Subsidiary 68,000
Non-Controlling Interest 10,000

Note 1: The value of NCI must be equal to its share in the fair value of the net assets of the acquiree meaning
(P140,000 fair value of net assets of acquiree multiply by 20%) = P28,000. The first eliminating entry has
already recognized an amount of P18,000 therefore, only P10,000 will be needed in order to meet the P28,000
value of NCI.

3. Consolidation Process:

Mall
Pall Elimination
Company At Consolidation
Company Entries
Book Value
DEBIT:
Current Assets - 10,000 - 10,000
Plant Assets, net 220,000 130,000 50,000 400,000
Investment in Subsidiary 140,000 - (140,000) -
Goodwill - - 28,000 28,000
Total 360,000 140,000 438,000

CREDIT
Liabilities 100,000 50,000 - 150,000
Net Assets 260,000 90,000 (90,000) 260,000
NCI - - 28,000 28,000
Total 360,000 140,000 438,000

BSA – A.Y. 2020-2021 Page 4 of 6

Case 2: PB Corporation acquired 90 percent of SS Corporation’s common stock on December 31, 2015.
Balance sheet data for the two companies immediately following the acquisition follow:

PB Corporation SS Corporation
Cash P 44,000 P 30,000
Account Receivables 110,000 45,000
Inventory 130,000 70,000
Land 80,000 25,000
Buildings and equipment 500,000 400,000
Less: Accumulated Dep. 223,000 165,000
Investment in SS Corp. Stock 150,500

Total Assets P791,500 P405,000

Accounts payable P 61,500 P 28,000

Taxes payable 95,000 37,000
Bonds payable 280,000 200,000
Common stock 150,000 50,000
Retained earnings 205,000 90,000

Total Liab. And SHE P791,500 P405,000

At the date of business combination, the book values of SS’s net assets and liabilities approximated fair value
except for inventory which had a fair value of P85,000 and land, which had a fair value of P45,000. The fair
value of the non-controlling interest was P64,500 on December 31, 2015.

Total PB Corp. SS Corp.

Consideration paid 215,000 150,500 64,500
Book Value of SS 140,000 126,000 14,000
Excess 75,000 24,500 50,500
Allocated to:
Increase in inventory 15,000 13,500 1,500
Increase in Land 20,000 18,000 2,000
Goodwill 40,000 (7,000) 47,000

Consolidation Process (Under Full Goodwill):

Step 1: To eliminate the equity accounts of the Subsidiary (SS Corp.)

Common Stock 50,000

Retained Earnings 90,000
Investment in SS Corp. Stock 126,000
Non-Controlling Interest 14,000

Step 2: To recognize the increase or decrease in the value of the assets and the liabilities of SS Corp.,
eliminate the remaining value of investment in subsidiary account, and recognize the remaining value for non -
controlling interest.

Inventory 15,000
Land 20,000
Goodwill 40,000
Investment in SS Corp. Stock 24,500
Non-Controlling Interest 50,500

Step 3: Consolidate the values: For assets and liabilities – Book Value for Parent plus Fair value for
Subsidiary; For equity – Book value for Parent and Non-Controlling Interest.

BSA – A.Y. 2020-2021 Page 5 of 6

 SS Corp. At Elimination
PB Corp. Consolidation
Book Value Entries
DEBIT:
Cash 44,000 30,000 - 74,000
Accounts Receivable 110,000 45,000 - 155,000
Inventory 130,000 70,000 15,000 215,000
Land 80,000 25,000 20,000 125,000
Building and equipment, net 277,000 235,000 - 512,000
Investment in SS Corp. Stock 150,500 - (150,500) -
Goodwill - - 40,000 40,000
Total 791,500 140,000 1,121,000

CREDIT
Accounts Payable 61,500 28,000 - 89,500
Taxes Payable 95,000 37,000 - 132,000
Bonds Payable 280,000 200,000 - 480,000
Common Stock 150,000 50,000 (50,000) 150,000
Retained Earnings 205,000 90,000 (90,000) 205,000
NCI - - 64,500 64,500
Total 791,500 140,000 1,121,000

BSA – A.Y. 2020-2021 Page 6 of 6