BUSINESS COMBINATION

 Occurs when a corporation and one or more other businesses are combined as a single entity.
 It results when one company acquires control of one or more entities

TYPES OF BUSINESS COMBINATION:

 Acquisition of Assets
o Acquirer purchase net assets of the acquiree
o Acquiree ceases to exist
o Results to automatic consolidation as assets and liabilities are transferred in the books
of the acquirer
o Statutory merger = A Corp + B Corp = A Corp or B Corp
o Statutory consolidation = A Corp + B Corp = Z Corp

 Stock Acquisition
o Acquisition of the majority of the voting stocks of a corporation (51% +)
o Creates a Parent (acquirer) – Subsidiary (acquiree) relationship
o Acquirer and Acquiree continue to operate as a separate entity
o For financial reporting purposes, the two companies is viewed as a single reporting
entity through consolidate financial statements
o Financial statements (Parent) + Financial statements (Subsidiary ) = Consolidated
Financial Statements

METHOD OF BUSINESS COMBINATION

 Pooling of interest method (Prior to PFRS 3) - acquired assets and liabilities are recorded at
their book value
 Purchase method - acquired assets are recorded at their fair values

ACQUISITION METHOD OF ACCOUNTING FOR BUSINESS COMBINATION

 Identify the acquirer:

o The company transferring cash or other assets and/ or assuming liabilities
o Issuing its own stocks in exchange of the net assets or voting stocks of the acquired
compay
 Determine the acquisition date:
o The date on which the acquirer obtains control of the acquiree.
o The date on which the fair value of the assets and liabilities of the acquiree are
determined
 Determine the consideration given - the sum of the acquisition-date fair values of:
o The assets transferred by the acquirer
o The liabilities incurred by the acquirer to former owners of the acquiree
o The equity interests issued by the acquirer
 Acquisition-related costs
o Business combination costs, such as, broker’s fees, accounting, legal, and other
professional fees - Outright expense
 o Stock issuance costs – SEC registration fees, documentary stamp tax, newspaper
publication fees, printing costs of stock certificates - CHARGED TO SHARE PREMIUM OR
ADDITIONAL PAID IN CAPITAL

COMPUTATION OF GOODWILL:

FV of consideration given Pxxx

FV of NCI Pxxx
FV of previously held shares Pxxx
Total value of the entity Pxxx
Less: FV of the net assets Pxxx
Goodwill or gain on bargain purchase Pxxx

MEASURING NCI:

 It can be measured at its Fair Value or

 At the proportionate share of the FV of net assets

On January 1, 2020, ABC Co. acquired XYZ Co. As of December 31, 2019, XYZ statement of financial
position is as follows:

Cash 200,000
Accounts receivable 300,000
Inventory 250,000
Equipment 300,000
TOTAL ASSETS 1,050,000

Accounts payable 200,000

Notes payable 150,000
Capital stock 500,000
Share premium( 150,000
Retained earnings 50,000
TOTAL LIAB AND SHE 1,050,000

Case 1 : ABC Co acquired the net assets of XYZ Co for P800,000. All the assets and liabilities book
values approximates its fair values, except for inventory whose stated book value is more
than its fair value by P10,000, and the equipment’s fair value is more than the book value by
P20,000.

Compute for the goodwill and journal entries both in the books of ABC Co. and XYZ Co.

Consideration transferred P800,000

Fair value of net assets:
Unadjusted P700,000
Overvaluation of inventory (10,000)
Undervaluation of equipment 20,000 710,000
Goodwill P 90,000
ABC Books: XYZ Books

Cash 200,000 Cash 800,000

Accounts receivable 300,000 Accounts payable 200,000
Inventory 240,000 Notes payable 150,000
Equipment 320,000 Cash 200,000
Goodwill 90,000 Accts receivable 300,000
Accounts payable 200,000 Inventory 250,000
Notes payable 150,000 Equipment 300,000
Cash 800,000 Gain on sale 100,000

Gain on sale 100,000

Capital stock 500,000
Share premium 150,000
Retained earnings 50,000
Cash 800,000
To distribute cash to shareholders
Case 2: Using the same information in Case 1 as to the valuation of net assets, ABC acquired
80% equity interest in XYZ for P800,000. ABC opt to value NCI at its fair value.

Compute for the goodwill or bargain purchase

Consideration transferred P800,000

NCI (800,000 / 80% x 20%) 200,000
TOTAL P1,000,000
Less: FV of net assets 710,000
Goodwill 290,000

….alternative computation method:

Consideration transferred P800,000

NCI 200,000
Total P1,000,000
Less: BV of equity acquired:
Capital stock P500,000
Share premium 150,000
Retained earnings 50,000 700,000
Excess P300,000
Adjusments of assets:
Inventory 10,000
Equipmet (20,000)
 Goodwill P290,000

Case 3: Using the same information in Case 2, except that ABC opt to value NCI at its proportionate
share of the net assets.
Compute for the goodwill or gain on bargain purchase

Consideration transferred P800,000

NCI ( 20% x P710,000- FV of net assets) 142,000
TOTAL P942,000
FV of net assets 710,000
Goodwill P232,000

Case 4: ABC acquired 80% of the XYZ’s interest by issuing its own 200,000, P3 par value shares. At
the time of acquisition, ABC’s stock is trading at P5 per share, while XYZ share is trading at
P2 per share. ABC opt to value NCI at fair value. Also, ABC incurred the following business
combination costs:
Broker’s fees 10,000
Legal and auditing fees 15,000
SEC registration fees for the new shares 25,000
Documentary stamp tax for the new shares 2,000

Compute for the goodwill and prepare journal entries. Assume the same valuation of net
assets in Case 1

Consideration transferred (200,000 x P5) 1,000,000

NCI (200,000 x P2 x 20%) 80,000
TOTAL VALUE OF THE WHOLE COMPANY 1,800,000
FV of net assets 710,000
Goodwill 1,090,000

Journal entries:

Investment in XYZ Co 1,000,000

Share capital (200,000 x P3) 600,000
Share premium (200,000 x (P5-P3)) 400,000

Acquisition expense 25,000

Share premium 27,000
Cash 52,000

MULTIPLE CHOICE:

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 and for all the net assets of Acquired
 Company. Acquiring Company also paid P50,000 to an investment house as finder’s fees. At
what amount should goodwill be recorded on Acquiring Company books?

a) P100,000 b) P150,000 c) P120,000 d) P70,000

2. Red Corporation will issue shares with a par value of P10 for the net assets of Blue Company.
Red’s common stock has a current market value of P40 per share. Blue’s statement of financial
position on the date of acquisition follow:

Current assets 320,000 Common stock, P5 par 80,000

Property & Eqpt 880,000 APIC 320,000
Liabilities 400,000 Retained earnings 400,000

Blue’s current assets are appraised at P400,000 and the property and equipment was also
appraised at P1,600,000. Its liabilities are fairly valued. Accordingly, Red Corp issued shares of
its common stock with a total market value equal to that of Blue’s net assets including goodwill.

To recognize goodwill of P200,000, how many shares were to be issued by Red?

a) 45,000 b) 40,000 c) 50,000 d) 55,000

3. Pete Corp and Sol Company agreed to combine their businesses with Pete Corp. as the
surviving entity. Pete will issue 48,000 shares of its capital stock, with a par value of P100 and a
fair market value of P175 per share. Pete incurred the following additional acquisition-related
costs:
Professional fees 120,000
Brokers fees 80,000
Costs to register and issue stock 50,000

Before combination, their respective statement of financial position showed stockholders’

equity accounts as follows:
Pete Sol
Capital stock 7,200,000 3,600,000
Additional paid in capital 3,120,000 360,000
Retained earnings 6,000,000 2,040,000

The total stockholders’ equity of Pete Corp after the combination is:

a) P24,720,000 b) P24,470,000 c) P24,670,000 d) P24,890,000

4. Chico Company acquired Atis Corporation on January 2, 2019, by issuing common shares. All of
Atis’ assets and liabilities were immediately transferred to Chico, which reported a total par
value of shares outstanding of P218,400 and P327,600 and additional paid in capital of
P370,000 and P650,800 immediately before and after the business combination, respectively.

Assuming that Chico’s common stock had a market value of P25 per share at the time of
acquisition, what number of shares was issued?
 a) 15,000 b) 10,500 c) 15,600 d) 10,000

5. Using the same information above, what is the par value per share of Chico’s common stock?

a) P10 b) P7 c) P8 d) P9

6. Silent Company acquires 80% controlling interest in Peaceful Company for P1,200,000.
Peaceful Co’s identifiable assets and liabilities have fair values of P3,300,000 and P1,700,000,
respectively. Included in Peaceful’s assets is a web press machine with fair value of P900,000
which silent Co intends to sell immediately. The machine qualifies for classification as “held for
sale”. The cost to sell are P150,000. Silent Co. opts to measure the non-controlling interest at
fair value.

How much is the goodwill? (Assume the fair value of NCI is equal to the grossed-up value of the
consideration transferred multiplied by the NCI percentage?)

a) 60,000 b) 40,000 c) 50,000 d) 20,000

7. Mason Co. acquired all the assets and liabilities of Hammer Co for P2,600,000. On acquisition
date, Hammer’s identifiable assets and liabilities have fair values of P5,900,000 and P3,500,000
respectively. Relevant information follows:

 Mason is renting out a building to Hammer Co on an operating lease. The terms of the
lease compared market terms are favorable. The fair value of the differential is P90,000.
 Hammer is a defendant on a pending lawsuit. No provision was recognized because
Hammer’s legal counsel believes they will successfully defend the case. The fair value
of settling the lawsuit is P10,000

How much is the goodwill (gain on bargain purchase)

a) 120,000 b) 140,000 c) 200,000 d) 180,000

8. On January 1, 2019, Narra Corporation acquired all of Yakal Corporation’s assets and liabilities
by issuing shares of its common stock. Partial statement of financial position data for companies
prior to the business combination and immediately after the combination are as follows:
Narra Corp Yakal Corp Combined
Book Value Book Value Entitty
Cash 40,000 10,000 50,000
Accounts receivable 60,000 30,000 88,000
Inventory 50,000 35,000 96,000
Bldg and Eqpt 300,000 110,000 430,000
Goodwill ?
TOTAL ASSETS 450,000 185,000 ?

Accounts payable 188,000 84,000 272,000

Common stock, P5par 100,000 40,000 126,000
 Additional Paid In Capital 65,000 28,000 247,000
Retained Earnings 97,000 33,000 ?
TOTAL LIABILITIES AND EQUITIES 450,000 185,000 ?

What number of shares did Narra issue to acquire Yakal’s assets and liabilities?
a) 5,000 b) 5,200 c) 4,500 d) 2,500

9. What was the market value of the shares issued by Narra?

a) P208,000 b) P200,000 c) P250,000 d) P208,500

10. What was the fair value of the inventory held by Yakal at the date of combination?
a) P40,000 b) P46,000 c) P35,000 d) P64,000

11. What was the fair value of the net assets held by Yakal at the date of combination?
a) P130,000 b) P135,000 c) P140,000 d) P125,000

12. What amount of goodwill, if any, will be reported by the combined entity immediately following
the combination?
a) P88,000 b) P78,000 c) P87,000 d) P75,000

13. If the depreciable assets held by Yakal had an average remaining life of 10 years at the date of
acquisition, what amount of depreciation expense will be reported on those assets on
December 31, 2019?
a) P15,000 b) P14,000 c) P13,000 d) P12,000

14. Angry Co. acquired 20% interest in Misery Co. many years ago. On January 1, 2020, Angry
acquired additional 40% interest in Misery for P300,000. On this date, Misery’s net identifiable
assets have a fair value of P690,000, and Angry ‘s previous investment in Misery has a carrying
amount of P128,000 and fair value of P138,000. Angry opted to measure the NCI at
proportionate share .

How much is the goodwill?

a) P24,000 b) (P52,000) c) P14,000 d) P34,000

15. ABC Co. acquired 40% of XYZ 40% of XYZ voting stocks by issuing its own 40,000 , P10 par
common shares. Three years ago, ABC had already purchased 20% interest in XYZ Corp. At the
time of business combination, ABC Co. shares is trading at P25 per share. Also, XYZ Co shares
with a book value of P5 is trading at P15 and has 60,000 shares outstanding ABC opt to value
NCI at its FV. XYZ has fair value of its net assets at P1,500,000.

Compute for the goodwill