gt CITY COLLEGE OF CALAMBA yas Dalubhasaan og Lungsod ng Calamba LEARNING MODUL! INFORMATION I. Course Code ‘ABC301 II. Course Title "ACCOUNTING FOR BUSINESS COMBINATIONS TH. Module Number TWO) TV. Module Title BUSINESS COMBINATION V. Overview of the Module ‘The module focuses on all concepts related to Business Combinations. Acquiring and acquired companies and its difference willbe discussed in this ‘module. End to end procedure of preparing the consolidated financial statement will be also presented. VI. Module Outcomes ‘At the end of the module, the students should be able to: a. Apply, practice, solve, analyze, and evaluate problems relating to business combinations. b. Prepare individual different financial statements and consolidated statements using different forms of business combination under cost model ©. Apply knowledge and skills to successfully respond to various types of assessments including professional licensure and certifications 1g Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba Lesson Number 1 BUSINESS COMBINATION Lesson Objectives: At the end of this lesson, the students should be able to: a. Apply, practice, solve, analyze, and evaluate problems relating to business combinations. , Prepare individual different financial statements and consolidated statements Using different forms of business combination under cost model. ©. Apply knowledge and skills to successfully respond to various types of assessments; and (including professional licensure and certifications)CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 61 1. CONTENT DISCUSSION ‘A business combination is the term applied to extemal expansion in which separate enterprises are brought together into ‘one economic entity as a result of one enterprise obtaining control over net assets and operations of another enterprise. IPRS 3 defines business combination as a transaction or event in which the acquirer obtains control of one or more businesses. An acquirer must be identified in all business combinations, Acquisition of Control a. Acquisition of assets All the company’s assets are acquired directly. In most cases, the existing liabilities of the acquired company are assumed by the acquirer. When the assets are acquired and the liabilities are assumed, the transaction is referred to as the acquisition of “net assets”. Business combinations may be achieved legally by either statutory consolidation or statutory ‘merger. Statutory consolidation refers to combining of two or more existing legal entities into one new legal entity. Statutory merger refers to the absorption of one or more existing legal entities by another existing company that continues as the sole surviving legal entity b. Stock acquisition A controlling interest (usually more than $0%) of another company’s voting common stock is acquired. The acquiring company is termed as the parent and the acquired company is termed as a subsidiary. Both the parent and subsidiary remain separate legal entities but for external financial reporting purposes, the companies will usually combine their individual financial statement into a consolidated financial statement. Acquisition Method of Accounting for Business Combinations IFRS 3 requires that all business combinations be accounted for by applying the acquisition method listed as follows: 1. Identify the acquirer 2. Determine the acquisition date 3. Determine the consideration given by the acquirer 4, Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire. Any resulting goodwill or gain from a bargain purchase should be recognized. For further understanding, let’s apply the acquisition method in the problems discussed below. Let us assume that the company to be acquired by the Acquirer, Ine. has the following Statement of Financial Position on June 30, 20x. J&J Company Statement of Financial position June 30, 20xx cash 200,000 Current Liabilities 125,000 Marketable Securities 300,000 Bonds payable 500,000 Inventory 500,000 Land 130,000 Common Stock (PI par) 50,000 Building (net) 750,000 Adgitional Paid in Capital ‘700,000 Equipment (net) 400,000 Retained Parnings 925,000 Total Assets 2,300,000 Total Liabilities and Equity 2,300,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe 62 Pair values for all accounts have been measured as of June 30, 20xx as follows: Cash, Marketable Securities Inventory Land Building Equipment Unrecognized receivables Current Liabilities Bonds Payable Premium on bonds payable Fair Value of Net Identifiable assets 100,000 00 550,000 360,000 300,000 700,000, 225,000 3,265,000 125,000 500;000 20,000 645,000 2,620,000 Before recording the acquisition, the acquirer should calculate the difference between the price paid and the fair value of the net assets acquired. Case 1. Price paid exceeds the fair value of net identifiable assets acquired Acquirer, Inc. issues 80,000 shares of its P10 par value common stock with a market value of P40 each for J&:J ‘Company's net assets. The acquirer pays professional fees of PS0,000 to accomplish the acquisition and stock issuance cost of P30,000, Price paid (consideration given), 80,000 shares x P40 market value 3,200,000 Fair Value of Net Identifiable Assets Acquired from 14} (2,620,000) Good 580,000 Professional Fees (expense) 50,000 Stock Issue Costs (reduction from additions paid in capital) 30,000 Entries recorded by the Acquirer, Ine. are as follows: I, To record the net assets acquired including the new goodwill: cash Marketable Securities Inventory Land Building Equipment Reccivables-tade Goodwill, ‘Current Liabilities Bonds Payable Premium on bonds payable Common Stock (P10 par, 80,000 shares) Additional Paid in Capital (P30 x 800,000) 2. To record acquisition related costs: ‘Acquisition expense ‘Additional Paid in Capital Cash, 200,000 330,000 550,000 360-000 500,000 700,000 225,000 0,000 125,000 500,000 20,000 800,000 2,400,000 50,000 30,000 80,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe 63 Case 2, Price paid is less than fair value of net identifiable assets acquired ‘Acquirer, Inc, issues 20,000 shares of its P115 par value common stock with a market value of P120 each for J&J Company's net assets. The acquirer pays professional fees of P50, 000 to accomplish the acquisition and stock issuance cost of P130, 000. Price paid (consideration given), 20,000 shares x P120 market value 2,400,000 Fair Value of Net Identifiable Assets Acquired from 18 (2.620.000) Gain on aequisition (220,000) Professional Fees (expense) 50,000 Stock Issue Costs (reduction from additional paid in capital) 30,000 Entries recorded by the Acquirer, Inc. to record thi 1. To record the acquisition of net assets: quisition and related costs are as follows Cash, 200,000 Marketable Securities, 330,000 Inventory 550,000 Land 360,000 Building 900;000 Equipment 700,000 Receivables-irade 225,000 ‘Cursent Liabilities 125,000, Bonds Payable 500,000 Premium on bonds payable 20,000 ‘Common Stock (20,000 x P115 par) 2,300,000 ‘Additional Paid in Capital (20,000 x PS) 100,000 Gain on acquisition 220000 2. To record acquisition related costs: Acquisition expense 50,000 Additional Paid in Capital 100,000 Stock Issuance Costs 30,000 ‘Cash 180,000 Recording Contingent Consideration Contingent consideration is an agreement to issue additional consideration (asset or stock) at a later date if specified events occur. It is measured at its acquisition date fair value, Using the data of J&J Company in Case I, assume the Acquirer, Inc. issued 80,000 shares with a market value of P3,200,000. In addition to the stock issued, the acquirer agreed to pay an additional P200, 000 on January 1, 2021, if the average income for the 2-year period of 2019 and 2020 exceeds 160,00 per year. The expected value is estimated as P100, 000 based on the 50% probability of achieving the target average income. Total Price Pai Stock issued at market value 3,200,000, [Estimated value of contingent consideration 100,000, 3,300,000 Fair Value of net assets acquired from J&J company 2,620,000) Goodwill 580,000 Acquisition related oosts: Professional fees (expense) 50,000 Stock issuance costs (reduction from APIC) 30,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calembe 64 Entries recorded by the Acquirer, Ine. to record the acquisition and related costs are as follows: 1, To record the net assets acquired including the new goodwill: Cash 200,000 Marketable Securities 330,000 Inventory 550,000 Land 50,000 Building 300,000 Equipment 700,000, Revcivables-tade 225,000 Goodwill 680,000 ‘Current Liabilities 125,000 Bonds Payable 500,000 Premium on bonds payable 720,000 Contingent Consideration Payable 100,000 ‘Common Stock (P10 pat, 80,000 shares) 800,000, Additional Paid in Capital (P30 x 800,000) 2,400,000 2, To record acquisition related costs: ‘Acquisition expense 50,000 ‘Additional Paid in Capital 30,000 Cash, 80,000 Recording Changes in Contingent Consideration If during the measurement period, the contingent consideration was revalued based on additional information, the estimated liability and the goodwill (or gain on acquisition) would be adjusted. For example, if within the measurement period, the estimate was revised to P160, 000, the P60, 000 increased would be adjusted as follows: Goodwill {60,000 ‘Contingent Consideration Peyale 60,000 Ifthe estimate is again revised after the measurement period, the adjustment is included in profit or loss of the later period. For example, if the estimate was revised to P200,000 after the measurement period, the P40,000 increase would be recorded as follows: Loss on contingent consideration payable 40,000 Contingent Consideration Payable 40,000 The above procedure only applies to any contingent consideration payable in cash or other assets other than issuing additional shares of stock. An agreement to issue additional stocks upon occurrence of future event is treated as changes in estimated value of the shares issued. No liability is recorded at the acquisition date. Using the example of the acquisition of J&J Company for P3, 200,000, assume that there was an agreement to issue 20,000 additional shares if the average income during the 2-year period of 2019 and 2020 exceeded P160, 000 per year. ‘There would be no change in the entry in Case 1 to record the acquisition of June 30, 2020, Assuming the contingent event occurs, the following entry would be made after December 2022, to issue additional 20,000 shares. AAdsitional paid in capital (20,000 shares x P10) 20,000 nmiiiiietalatioe 20,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 65 Dalubhasean ng Lungsod ng Calamba Accounting Procedures for the Acquisition by the Acquiree Using the example of the acquisition of J&J Company for P3, 200,00 in Case 1. The excess of the price received by the acquire (P3,200,000) over the sum of the book value of net assets of P1,675,000 (P2,300,000 assets -P625,000 liabilities) is recorded as a gain on sales. ‘The entries recorded by J&J Company are as follows: 1. To record sale of net assets: Investment in Acquirer, Ine 3,200,000 Current abilities 125,000, Bonds payable 500,000 Cash 200,000 Marketable sceurtes 300,000 Inventory $300,000 Land 150,000 Building 730,000 Equipment 400,000 Gain on sale of business 1,525,000, 2. To record the redistribution of Acquirer, Inc, shares received to its shareholders and the liquidation of J&J Company: ‘Common stock 50,000 Adkitional paid in capital 700,000 Retained earings 925,000 Gain on sale of business 1,525,000 Investment in Acquiter, Ine 200,000 Under the acquisition method, the Statement of Financial Position of Acquirer, Inc. after combination includes all the assets and liabilities of J&J Company at fair values. The Statement of Comprehensive Income of the acquirer for the accounting period in which business combination occurred includes the operating results of the acquiree after the date of acquisition only. Ina stock acquisition, the acquiring company deals only with existing shareholders of the acquired company not the company itself To illustrate, assume that on December 31, 2020, P Company acquired all 10,000 issued and outstanding shares of § Company’s P100 par value common stock for P2, 000,000 eash. In addition, P Company paid professional fees to accomplish the combination of P100, 000. To record the transaction: 1. To record the acquisition of stock from S$ Company Investment in subsidiary S Company 2,000,000 Cash 2,000,000 2. To record acquisition related costs: Acquistion expense 100,000 Cash, 100,000 The Investment in Subsidiary account would appear as a long-term investment on P Company's Statement of Financial Pasion, However such presenti is permited only ifconsliation were not require, Assuming consolidated Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 66 statements ate required, the Statement of Financial Position of the two companies must be combined into a single Consolidated Statement of Financial Position. The Accounting process in the preparation of consolidation statements will be discussed in the next lesson. Impairment of Goodwill Goodwill should be tested for impairment annually. The test for impairment to each of the acquirer's cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquire are assigned to those units or group of units. ‘A cash generating unit to which goodwill has been allocated shall be tested for impairment at least annually by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. Impairment Testing in Later Periods Goodwill is considered to be impaired if the carrying amount of the unit's net assets (including goodwill) exceeds the recoverable amount of the unit To illustrate, assume the following estimates were made at the end of the first year: Estimated Recoverable amount of the cash generating unit, based on projected cash flows (value in use) 650,000 Carrying amount of the cash generating unit (including goodwill) 680,000 Since the recorded carrying amount of the cash generating unit exceeds its recoverable amount, goodwill is considered to be impaired. If the recoverable amount exceeds the carrying amount, there is no impairment, and there is no need to proceed to calculate a goodwill impaitment loss. Goodwill impairment loss in later periods If the above test indicates impairment, the impairment loss must be estimated. The impairment loss for goodwill is the excess of the carrying amount of the cash generating unit's net assets (including goodwill) over the recoverable amount of the cash generating unit. These are the values that would be assigned to those accounts if the cash generating unit were purchased on the date of impairment measurement. ‘The following are the calculation of the impairment loss: ‘Carrying amount of the net assets on the date of measurement, (including goodwill of P90,000) 690,000 Estimated recoverable amount ofthe cash generating unit, based on projected cash flows (value in use) 680,000 Estimated impairment loss 40,000 The following entry would be made: Goodwill impsitmeat loss 40,000 Goodwill 40,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 67 A, SUMMARY ‘The lesson highlighted the whole general idea in business combination. It discussed the different process on how to do business combination and the accounting procedure in every transaction accordingly. The lesson also differentiated the acquirer or the parent and the acquiree or the subsidiary. In general, the lesson gave a gist on the accounting process of business combination AI. ENRICHMENT ACTIVITIES Complete the requisites of the following: Fill up the joumals, working papers, trial balances, and computations provided in each exercise, Exercise no. 1 Apple Corporation purchased the net assets of the Orange Corporation for P500, 000 cash. Prior to the combination, Orange Corporation has the following Statement of Financial Position, Orange Corporation Statement of Financial Postion January 1, 203% Assets Liabilities and Equity Curtent Asses: (Current Liabilities: 50,000 ‘Accounts receivable 120,000 Stockholders’ Equity Inventories 100,000 220,000 Common Stock P10 par 200,000 Property, plant and equipment 280,000 Retained Eamings 250,000 450,000 ‘Total Assets: 500,000 Total Li and Equit 500,000 Fair market values agree with book values except for inventories and property, plant and equipment, which have fair ‘market values of P140, 000 and P300, 000 respectively. To consummate the transaction, Apple incurs P5, 000 acquisition related costs, Required: 1. Prepare Journal Entries for the books of Apple Corporation to record the acquisition. 2. Prepare Journal Entries for the books of Orange Corporation to record the acquisition Learning Module on Accounting for Bu: ess CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 68 To record acquisition ofnet assets of Orange Computation of Income from Acquisition: ‘Acquistion cost a Lest: Fae vale of net identfable esses acquired 2 2 Income fom aequisition Books of Orange Corporation : 2 Te record sale of net ases to Apple. To record liquidation ofthe corporation. Exercise no. 2 Love Company acquired the net assets of Hate Corporation on January 3, 20x for P565, 000 cash. In addition, PS, 000 of professional fees were incurred in consummating the combination. At the time of acquisition, Hate Corporation reported the following book value and current market data: Book Value Fair Value Cash and Receivables 50,000 50,000 Inventory 100,000 0,000 Buildings and Equipment (net) 200,000 300,000 Patent 200,000 Total Assets 350,000 700,000 ‘Accounts Payable 30,000 30,000 ‘Common Stock 100,000 Aiton Paid in Capital 80,000 Retained Eamings 140,000, Total Liabilities and Equities Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 69 Required: Prepare the journal entries to record the Ta record acquisition ofthe net assets at fir values. Acquisition cos 2 Less: Fair value of net identifiable assets acquired Total assets 2 ‘Accounts payable 2 ? Exercise no. 3 On January 1, 20xx, Binibini Corporation issued 6,000 shares of its P10 par value common stock to acquire the assets and liabilities of Marikit Corporation. Binibini Corporation shares were selling at P90 on that date, Carrying value and fair value for Marikit Corporation at the time of acquisition were as follows: Carrying Value Pair Value Cash and Receivables 50,000 50,000 Inventory, 120,000 200,000, Buildings and Equipment 4400-000 300,000 Less: Accumulated Depreciation Total Assets 350000 ‘Accounts Payable 50,000 50,000 Common Stock 200,000 Retained Eamings 170,000 Total Liabilities and Equities 420,000 Binibini Corporation paid P25, 000 for SEC registration and issuance of its new shares and paid professional fess of P15, 000. Required: Prepare the journal entries to record the acquisition, To record acquisition ofnet asets acquired. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 70 Purchase price 2 Acquistion cost 2 [Less fair value of net identifiable assets acquired : 2 2 Exercise no. 4 On January 1, 20xx, Folk Corporation issues 12,000 shares of its P10 par value stock to acquire the net assets of Lore Company. Underlying books value and fair value information for the statement of financial position items of Lore Company at the time of acquisition are as follows: Carrying Value Fair Value cash 60,000 60,000 Accounts Receivable 100,000, 190,000 Inventory lito basis) 60,000 115,000 Land 50,000 70,000 Buildings and Equipment 400,000, 350,000, Less: Aecumulated Depreciation 150,000) Total Assets 520,000 COAT Accounts Payable 10.000 10,000 Bonds Payable 200,000, 180,000 Common Stock 150,000, Adalition Paid in Capital 70,000 Retained Eamings 90,000, Total Liabilities and Equities $20,000 Lore shares were selling at P18 and Folk shares were selling at P50 just before the merger announcement. Additional cash payments made by Folk Corporation in completing the acquisition were: Broker's fee paid to firm that located Lore 0,000 Audit fee for stock issued by Folk 12,000 Cost of SEC regist [Folk sh: 000, Required: 1. Prepare journal entries to record the acquisition. 2. Prepare journal entries to record the issuance of shares. 5. Prepare journal entries to record indirect costs in the acquisition o aa ie a Lr Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA n Dalubhasean ng Lungsod ng Calamba Purchase price ? Professional fees Acquisition co 2 Less: Fair value of net identifiable assets acquired Total asets 2 Total isiltes ? 2 a ? 2 To record costs of issuing and registering of shares issued Ta record indirect asqusition casts. Exercise no. § ‘The following Statement of Financial Position was prepared for Taylor and Swift Corporations on January 1, 20xx just before they entered into a business combination: Taylor Corporation Swift Comporation Book Value Fair Value Book Value_—_Faie Value Cash and Receivables 300,000 300,000 50,000 50,000 Inventory 400,000 600,000 100,000 215,000 Buildings and Equipment 800,000 870.000 300,000 20,000 ess: Accumulated Depreciation 200,000 (150,000) Total Assets 1,300,000 1,770,000 300.000 515,000 ‘Accounts Payable 100,000 100,000 40,000 40,000 Bonds Payable 400,000 440,000 60,000 85,000 Common Stock P10 par value 300,000 PS par value 100,000 Aiton Paid in Capital 100,000 20,000 Retained Eamings 400,000 80,000 Total Liabilities and Equities 130,000 300,000 Requried: Assume that Taylor acquires the net assets of Swift by issuing 15,000 shares of stock. Prepare a Statement of Financial Position for the combined company immediately after the acquisition if the market price of Taylor shares is P40 and P20 at the time the acquisition occurs. Learning Module on Accounting for Business Combinations2O CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 72 ‘Cash and Recevables Inventor Building and oquipment ‘Accumulated depreciation ‘Goodwill Total assets Based on Pél/share Based on P20share ‘Accounts payable ‘Bonds payable ‘Common stock PIO Par val Additional paidein capital Retained earings(including income for aoquiiion) [Gotal Tiabiities and stockholders" equity Computation of GoodwilliGain on Acquisition — Based on P40 per share: Acquisition cost Less: Fair value of net identifiable assets Computation of Goodwill/Gain on Acquisition — Based on P20 per share, ‘Acquisition cost (15,000 shares x P20) Less: Fur value of net identifiable assets Exercise no. 6 December Company and Avenue Company agreed to a combination on January 1, 20xx. On the date of combination, the companies report the following data: December Company ‘Avenue Company Book Value Pai Book Value Pair Value Cash and Receivables 90,000 20,000 20,000 Inventory 100:000 30,000 42,000 Land 100,000 10,000 15,000 Buildings and Equipment 400-000 200,000 140,000 Less: Accumulated Depreciation 130,000), (80,000) Total Assets 540,000, 0,000 180,000 27000 ‘Accounts Payable 80,000 80,000 20,000 20,000 ‘Common Stock 200,000 20,000 Addition Paid in Capital 20,000 5,000 Retained Eamings 240-000, 135,000, ‘Toal Liailtes and Equities 540.000, 180,000, December has 10,000 shares of its P20 par value shares outstanding on January 1, 20xx and Avenue has 4,000 shares of PS par values stock outstanding, the market values of the shares are P300 and P50 respectively. Required: a, December issues 700 shares of stock in exchange for all the net assets of Avenue, Prepare a Statement of Financial Position for the combined entity immediately following the acquisition. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 73 ASSETS Cash and receivables Inventory Land Plant and equipment Less: Accumulated depreciation Goodwill Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Capital stock, P20 par value apital in excess of par Retained earnings Total abilities and stockholders’ equity Acquisition cost Less: Fair value of net identifiable assets acquined With 1,100 shares issued Capital took Capital in excess of par Retained earnings Total 2) With 1,800 shares issued Capital took ‘apital in excess of par Retained earnings Total 8) With 3,000 shares issued Capital stock Capital in excess of par Retained earnings Total stockholders’ equity section of the combined company. Assuming December acquires all the net assets of issuing the following shares and stock issuance costs of P350, 000 was incurred: Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 74 Dalubhasean ng Lungsod ng Calamba Exercise no. 7 Mirror Company entered into @ business combination agreement with Ball Corporation. Under the terms of agreement, Mirror issued 180,000 shares of its PI par common stock in exchange for all the assets and liabilities of Ball. Mirror shares then were distributed to the shareholders of Ball, and Ball was liquidated. Immediately prior to the combination, Ball’s statement of financial position appeared as follows, with fair values also indicated: Book Values Fair Values Asses: Cash’ 28,000 28,000 ‘Accounts Receivable 258,000 251,500 Less Allowance for Bad Debts (6,500) Inventory 381,000, 395,000 Long term Investments 150,000, 175,000 Land 55,000 100,000 Rolling Stock 130,000 163,000 Plant and Equipment 2,425,000 2,500,000 Less: Accumulated Depreeiation (614,000) Patents 125,000 500,000 Special Licenses 95,800 190,000 Total Assets 3.027.300 E12,500 Liabilities: Curent Payables 137,200 137,200 Mortgages Payable 500,000, 520,000 Equipment Trust Notes 100,000, 95,000 Debentures Payable 1,000,000, 980,000 Less: Discount on Debentures 40,000 Total Liabilities 7,697,200 T7030, Stockholders Equity Common Stock (PS par) 600,000 Additional Paid in Capital from Common Stock 500,000, ‘Additional Paid in Capital from Resrement of Prefered Stock 2,000 Retained Eamings 220,100 Less: Treasury Stock (1,500 shares) (12,000) Total Liabilities and Equity 3,027,300 Immediately prior to the combination, Mirror common stock was selling for P14 per share. Mirror incurred professional fees of P135, 000 in arranging the business combination and P42, 000 of stock issue costs. Required: a, Prepare journal entries in the books of Mirror to record the acquisition. , Prepare journal entries in the book of Ball to record the acquisition. Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 15 Dalubhasean ng Lungsod ng Calamba 4. Books of Mirror To record acquisition ofasets and liabilities at fair values. Purchase price 2 Direct acquisition cost 2 ‘Acquisition cos ‘Less fair value of net identifiable asses acquired Total assets 2 Total liabilities ? 2 Ta record indirect cost. b. Books of Ball: To record retirement of treasury stock mum Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA % Dalubhasean ng Lungsod ng Calamba To record sale of assets and liablities to Mirror. To record retirement of Ball stock and distribution of Mirror stock ‘On May 6, 20x, Tears Corporation acquired all of Ricochet Company's assets and liabilities by issuing its PS par common stock, Ricochet’s P10 par value common shares had a market price of PSS each at the time of combination. Tears Corp Ricochet Company Book Value Book Value Fair Value Combined Cash, 50,000 20,000 20,000 70,000 ‘Accounts Receivable 2 55,000 55,000 145,000 Inventory 100,000 ? 110,000 210,000 uipment 330,000 140,000? 570,000 Goodwill 30,000 40,000 2 Total Assets 620.000 00 ‘Accounts Payable 70,000 30,000 30,000, 100,000 Bonds Payable 300,000 100,000? 400,000 Bonds Premium : : 5.000 Common Stock 129,000 0,000 190,000 apic 55,000 262,000 Retained Eamings 2 2 Total Liabilities and Equity 890,000 0 Complete the partial Statement of Financial Position for Tears and Ricochet prior to the business combination and immediately following the combination presented above. In addition to that, assume that prior to the time the business combination was completed, Teats paid professional fees of P8, 500 and P6, 300 for stock registration and transfer fees in connection with the combination Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 7 Dalubhasean ng Lungsod ng Calamba Required: 2, Prepare journal entries to record the acquisition and its related costs. 'b, Compute for the reported goodwill. ¢. Compute for the Additional Paid-In Capital to be reported. 1 Goodwill previously computed ? Merger costs added to investment account Total goodwill reported B Additional paid-in capital reported following combination Stock issue costs Total addtional paid-in capital reported ess Combinations Learning Module on Accounting for Bu:CITY COLLEGE OF CALAMBA Dalubhasean ng Lungsod ng Calamba 78 IV. ASSESSMENT Encircle the letter of the correct answer. Refrain from having erasures. Support your answer with a solution to the answer. Solution paper is provided in the last page of the lesson. 1. The net assets of Acquired Company have a book value of P150, 000 and a fair value of P180, 000, Acquiring Company paid P250, 000 cash for all the net assets of Acquired Company. Acquiring Company also paid PSO, 000 to an investment house as finder’s fee. At what amount should goodwill be recorded on Acquiring Company’s books? a. 120,000 b. — P-70,000 .— P80,000 d.—P100,000 2. On June 30, 20xx White Company issued 100,000 shares of its P20 par value common stock for the net assets of Black Company in a business combination accounted for by the acquisition method. The market value of White’s common stock ‘on June 30 was P36 per share, White paid a fee of P100, 000 to the broker who arranged this acquisition, Costs of SEC registration and issuance of the equity securities amounted to P50, 000, Contingent consideration determined to be paid to Black Company after acquisition amounts to P120, 000. What amount should White capitalize as the cost of acquiring Black’s net assets? a. 3,620,000 b, —P3,650,000 3,720,000 4. P3,750,000 3. Abel and Cain Corporations were combined on April 1, 2020 in a business combination, and Cain Corporation was dissolved and liquidated. For the year 2013, the companies had the following net income records: . Abel Corporation (Janl-Aprl) P80, 000 Abel Corporation (Aprl-Dec31) 1,320,000 © Cain Corporation (Jan! -Aprl) 200,000 * Cain Corporation (Apri-Dec31) 400,000 Abel Corporation, the surviving corporation, will report income for 2020 of: a. 1,320,000 b.-P1.400,000 c.—— P1,720,000 4. —-P'1,800,000 4. On April 27, 20xx, Peter, Inc. paid P800,000 for the assets of Ana Company. The recorded assets and liabilities of Ana Company on April 27, 20xx follow: Cash 160,000 Inventory 480,000 Property and Equipment (net of accumulated depreciation of P640,000) 960,000 Liabilities 360,000 ‘On April 27, 20xx, it was determined that the inventory of Ana had a fair value of P380, 000, and property and equipment (net) had a fair value of PI, 120,000. What is the amount of goodwill (income from acquisition) resulting from the business combination? Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 9 Dalubhasean ng Lungsod ng Calamba a (P500,000) b. —-P100,000 ©. 300,000 &——(P360,000) 5, On March 1, 20xx, SS Corporation acquired for P1, 400,000 all the net assets of MM Company. On the date of the combination, the carying value of MM’s identifiable net assets was PI, 150,000. The current fair value of MMs inventories was P200, 000 less than their carrying values, and the current fair value of MM’s plant assets was P400, 000 larger than their carrying amount. The current fair values of all identifiable net assets of MM were equal to their carrying value. The journal entry prepared by SS Corporation to record the business combination includes: a. A debit of P200,000 to Inventories b. A credit of P400,000 to Plant Assets (net) © A debit of P350,000 to Goodwill dA debit of P50,000 to Goodwill Statement of Financial Position reflecting uniform accounting procedures, as well as fair values that are to be used as basis of the combination are prepared on September 1, 20xx as follows: ACompany —_B Company _C Company Assets 5,250,000 __ 6,800,000 _ 900,000 Liabilities 3,950,000 2,650,000 530,000 Capital Stock, all P10 par 1,700,000 1,200,000 275,000 Additional Paid in Capital 500,000 140,000 Retained Earnings (deficit (400,000) __2,450,000__(45,000) ‘Total Liabilities and Equity 5,250,000 {680,000 __ 900,000 A Company shares have a market value of P22 per share, Market values is available for shares of B Company and C Company. On September 1, 20xx A Company acquires all of the assets and assumes the liabilities of B Company and C Company by issuing 200,000 shares of its stock to B Company and 29,000 shares of its stock to C Company. A Company pays P10, 000 for registering and issuing securities and P20, 000 for other acquisition costs of combination. 6. What is the goodwill to be recorded by A Company on September 1, 20xx? 518,000 250,000 268,000 500,000 7. What is the total asset of A Company after Combination? a P13,438,000 b. P12,920,000 © P12,730,000 éP13,248,000 Learning Module on Accounting for Business CombinationsCITY COLLEGE OF CALAMBA 80 Dalubhasean ng Lungsod ng Calamba 8 What is the total stockholders’ equity in the combined statement of financial position after combination on September 1, 20xx? a. P6,308,000 b. —-P7,148,000 c.— P6,728,000 4. P'1,300,000 Condensed Statement of Financial Position for Pablo and Siso Corporations at December 31, 20x are as follows: (in thousands) Pablo Siso Current assets 130 60 Noncurrent assets 570 440 Total Assets 700 300 Liabilities 50 60 Capital Stock, all P10 par 500 200 Additional Paid in Capital 50 140 Retained Earnings (deficit) 100 100 ‘otal Liabilities and Equity On January 2, 20xy, Pablo issues 30,000 shares of its stock with a market value of P20 per share for the assets and liabilities of Siso Corporation, Siso is dissolved. The book values reflect fair values, except noncurrent assets of Pablo, which have a fair value of P400, 000, and the current assets of Siso, which have a net realizable value of P100, 000. Pablo pays the following expenses in connection with the business combination + Cost of registering and issuing securities issued 15,000 + Other acquisition costs of combination 25,000 Contract of contingent consideration is to be paid to Siso, P75, 000. This is determined on the date of acquisition, 9. What is the total asset of Pablo Corporation after acquisition? a. 1,410,000 bd. —P1,265,000 c.— P1,395,000 4. —-P'1,385,000 10. What is the total stockholders’ equity of Pablo Corporation after acquisition? a. 1,210,000 b. 1,250,000 c. — P1,150,000 4. -P1,285,000 Write your solutions here: (use an extra sheet for your solution), Learning Module on Accounting for Business Combinations® CITY COLLEGE OF CALAMBA 81 y Dalubhasean ng Lungsod ng Calamba V. REFERENCES RERO, P. & PERALTA, J. (2016). Business Combination. Advanced Accounting Volume 2. GIC & Enterprises GUE! Co,, Ine, DAYAG, A. (2010). Business Combination. Practical Accounting 2. GIC & Enterprises Co., Inc. Learning Module on Accounting for Business Combinations