ACTIVITY 2.
1 – DO IT YOURSELF
Apply the 4 Steps of the acquisition method, record the transactions and present the statement
of financial position immediately after the business combination.
On December 1, 2020 P and S Corporation come to an agreement where P will acquire all the
net assets of S by issuing 1,000,000 ordinary shares with P1 par. The shares have a fair value of 1.20 per
share on the date of agreement.
On December 31, 2020, P Corporation issued the 1,000,000 ordinary shares to S corporation to
acquire all of latter’s net assets. On such date, the shares have a fair value of 1.50 per share.
P corporation also paid acquisition related costs of 30,000 (professional fees). Moreover, P
corporation paid 50,000 in stock issuance costs.
P Corporation’s December 31, 2020 statement of financial position presents the following:
Assets
Cash 2,500,000
Accounts Receivable 1,050,000
Inventory 1,200,000
Land 3,000,000
Building (net) 2,500,000
Total Assets 10,250,000
Liabilities and Equity
Accounts Payable 2,000,000
Bonds Payable 2,000,000
Common Stock (P1 par) 4,500,000
Additional paid in capital 1,200,000
Retained Earnings 550,000
Total Liabilities and Equity 10,250,000
The assets and liabilities of A at December 31, 2020 are properly valued, except:
1. Inventory should have a fair value of 1,100,000
2. Land should be fairly valued at 2,500,000
B Corporation’s December 31, 2020 statement of financial position presents the following:
Assets
Cash 100,000
Accounts Receivable 250,000
Inventory 200,000
Trademark 50,000
Land 500,000
Building (net) 350,000
Total Assets 1,450,000
Liabilities and Equity
Accounts Payable 100,000
Bonds Payable 400,000
Common Stock (P1 par) 500,000
Additional paid in capital 200,000
Retained Earnings 250,000
Total Liabilities and Equity 1,450,000
The assets and liabilities of B at December 31, 2020 are properly valued, except:
1. Inventory should have a fair value of 150,000
2. An unrecognized intangible asset (franchise) fairly valued at 40,000
3. Land should be fairly valued at 600,000
Answer:
Step 1. Identify the acquirer. Acquirer: P Corporation
Step 2. Determine the Acquisition Date Acquisition date: December 31, 2020
Step 3. Determine the consideration transferred Consideration transferred: ₱1,500,000
FV of the 1,000,000 ordinary shares (1.50 per
share.)
The related acquisition cost and stock acquisition
cost shall not form part of the consideration
transferred.
Step 4. Recognize and measure the identifiable
assets and liabilities and recognize goodwill or
gain on bargain purchase
Comparison of Book Value and Acquisition date fair value of S Corporation:
Assets Book Value Acquisition date Fair Values
Cash 100,000 100,000
Accounts Receivable 250,000 250,000
Inventory 200,000 150,000
Trademark 50,000 50,000
Franchise - 40,000
Land 500,000 600,000
Building (net) 350,000 350,000
Total Assets 1,450,000 1,540,000
Liabilities
Accounts Payable 100,000 100,000
Bonds Payable 400,000 400,000
Total Liabilities 500,000
Equity
Common stock (P1 par) 500,000
Additional paid in capital 200,000
Retained earnings 250,000
Total Equity 1,040,000
Goodwill or gain from bargain purchase
Computation of Goodwill
Total consideration transferred 1,500,000
Less: Acquisition date fair value of net assets acquired (1,040,000)
Goodwill 460,000
Note:
The total consideration transferred is higher than the
acquisition date fair values of net assets acquired, thus there is
a goodwill arising from the business combination.
Journal entries in relation to the business combination: P Corporations’ Book
Cash 100,000
Accounts Receivable 250,000
Inventory 150,000
Trademark 50,000
Franchise 40,000
Land 600,000
Building (net) 350,000
Goodwill 460,000
Accounts Payable 100,000
Bonds Payable 400,000
Common Stock @par consideration transferred 1,000,000
( 1M x ₱1 )
Additional paid in capital in excess of par value 500,000
(1.5M – 1M)
To record the identifiable assets and liabilities of acquiree and recognize goodwill
Professional fees 30,000
Cash 30,000
To record acquisition related cost
Additional paid in capital 50,000
Cash 50,000
To record stock issuance cost
The statement of financial position of P Corporation on December 31, 2020 (at the date of acquisition)
after the business combination:
Assets
Cash (2.5M +100K – 30K – 50K) 2,520,000
Accounts Receivable (1,050,000+ 250K) 1,300,000
Inventory (1.2M + 150K) 1,350,000
Trademark 50,000
Franchise 40,000
Land (3M + 600K) 3,600,000
Building (net) (2.5M + 350K) 2,850,000
Goodwill 460,000
Total Assets 12,170,000
Liabilities
Accounts Payable (2M + 100K) 2,100,000
Bonds Payable (2M + 400K) 2,400,000
Total Liabilities 4,500,000
Equity
Common stock P1 par (1M + 4.5M) 5,500,000
Additional paid in capital 1,650,000
Retained earnings (550,000 – 30,000) 520,000
Total Equity 7,670,000
Total Liabilities and Equity 12,170,000
Computation of Additional paid in capital (APIC):
APIC of P Corp. 1,200,000
APIC in excess of par 500,000
1,700,000
Less: Stock issuance cost 50,000
APIC 1,650,000
