Business Combination – Merger

Problem 1
SM Corp. concluded that the fair value of Cherry Company was P80,000 and paid that amount to acquire all of its net
assets. Cherry reported assets with book value of P60,000 and fair value of P98,000 and liabilities with a book value
and fair value of P23,000. On the same date of combination, SM Corp. paid P3,000 to a search firm for finder’s fees
related to the acquisition.

Requirement: Compute for the amount of goodwill to be recorded by SM Corp.

Problem 2
On July 1, 20X4, Gateway Corp paid P800,000 cash for the assets and liabilities of Cubao Corp. The carrying values for
Cubao’s assets and liabilities on July 1, 20X4 follow:

Cash 150,000
Accounts Receivable 180,000
Capitalized Software Costs 320,000
Goodwill 100,000
Liabilities (130,000)
Net Assets 620,000

On July 1, 20X4, Cubao’s accounts receivable had a fair value of P140,000. Additionally, Renn’s in-process and
development costs was estimated to have a fair value of P200,000. All other items were stated at their fair values.

Requirement: How much is the reported goodwill or gain on bargain purchase on Gateway’s Balance Sheet?

Problem 3
Aspin Inc. is acquiring the Puspin Corp. which has the following Statement of Financial Position as of December 31,
20X4:

Cash 500,000 Current Liabilities 125,000

Marketable Securities 300,000 Bonds Payable 500,000
Inventory 500,000
Land 150,000 Common Stock 50,000
Building 1,000,000 APIC 700,000
Equipment 550,000 Retained Earnings 1,625,000
Total Assets 3,000,000 3,000,000

The fair value of the net assets of Puspin Corp. is P3,500,000 (including an unrecognized receivable of P300,000)
while the fair value of the assets of Aspin in is equal to P15,000,000.

Aspin Inc. issues 80,000 shares of its P10 par value common stock with a market value of P45 each for Puspin Corp.
net assets. Aspin Inc. pays professional fees of P50,000 to accomplish the acquisition and stock issuance cost of
P30,000.

Requirement:

1. Compute the goodwill or gain on bargain purchase resulting from the business combination
2. Prepare the necessary journal entries in the acquirer’s accounting books assuming the other increase in fair
value of net assets is attributable to Building.
3. Assuming Aspin Inc. issues 75,000 shares with P42 market value to acquire Puspin Corp., compute for the
goodwill or gain on bargain purchase resulting from the business combination and the necessary journal
entries.
 4. Assuming in addition to the 80,000 shares issued by Aspin Inc it agreed to pay an additional P200,000 on June
30, 20X5, if the average income for 20X3 and 20X4 of Puspin company exceeded P100,000 per year. The
expected value is estimated at P100,000 based on the probability of achieving the target average income.
a. How much is the goodwill or gain on bargain purchase option?
b. On May 31, 20X5, the contingent consideration indicates that it should have a value of P150,000,
prepare the necessary journal entries.
c. Assuming the contingent consideration is payable on March 1, 20X6 instead, and the contingent
consideration as of January 1, 20X6 indicates that it should have a value of P150,000, prepare the
necessary journal entries.

Problem 4

On January 1, 20X4, Senna Company and Sean Company decided to enter into a business combination. The balance
sheets of Senna Company and Sean Company just before they enter into business combination are shown below:

Senna Company Sean Company

Book Value Fair Value Book Value Fair Value
Cash and Receivable 560,000 560,000 100,000 100,000
Inventory 200,000 230,000 100,000 120,000
Land 325,000 445,000 200,000 230,000*
Accounts Payable 460,000 460,000 50,000 50,000
Notes payable 100,000 50,000 50,000 30,000
Common Stocks
P10 par 200,000
P5 par 100,000
Share Premium 105,000 50,000
Retained Earnings 220,000 150,000
*Provisional

Senna Company acquired the net assets of Sean Company by paying cash of P350,000. The direct and indirect cost
paid by Senna Company to effect the combination amounted to P45,000 and P15,000, respectively.

Required: Compute for the following:

1. How much is the result of the business combination on January 1, 20X4?

2. How much is the combined retained earnings on January 1, 20X4?
3. How much is the combined inventory on January 1, 20X4?
4. How much is the combined land on January 1, 20X4?
5. How much is the combined notes payable on January 1, 20X4?
6. How much is the total assets as the result of the business combination on January 1, 20X4?
7. How much is the total liabilities as the result of the business combination on January 1, 20X4?

CASE 1: On June 30, 20X4, the fair value of Sean Company’s land increased to P250,000 due to facts existing at the date
of acquisition.
1. How much is the result of the combination to be reported in 20X4?
2. How much shall be reported as the gain due to change in fair value in 20X4?
3. How much is the combined land to be reported in 20X4?

CASE 2: On March 1, 20X4, the fair value of Sean Company’s land decreased to P200,000 due to facts existing at the date
of acquisition but increased to P250,000 on June 30, 20X4 due to facts existing subsequent to the date of acquisition.
1. How much is the result of the combination to be reported in 20X4?
2. How much shall be reported as the gain due to change in fair value in 20X4?
3. How much is the combined land to be reported in 20X4?
Problem 5
The following are the condensed Statements of Financial Position of Bull and Dog on January 1, 20X4:

Bull Dog
Total Assets 10,250,000 3,057,500

Liabilities 2,775,000 800,000

Ordinary Shares 3,100,000 1,295,000
Share Premium 1,250,000 100,000
Retained Earnings 3,125,000 862,500

National U Corp. acquired the net assets of both Bull and Dog. Paying cash in the amount of P185,000 and by issuing
198,500 shares to Bull. Paying cash in the amount of P72,000 and by issuing 54,350 shares to Dog. The par value of
these shares is P30 per share and market value as of January 1, 20X4 is P40/share. National U Corp. also incurred the
following unpaid expenses:

Bull Dog
Indirect Costs 93,750 101,250
Finder's Fee 66,250 35,000
Printing and legal fees for SEC Registration 343,750 362,500
Printing costs of stock certificates 125,000 93,750

Below is the National U Corp.’s Condensed Statement of Financial Position Retained Earnings has a balance of
P10,750,000 on January 1, 20X4 immediately before the acquisition.

Total Assets 25,000,000

Liabilities 12,000,000
Ordinary Shares 2,000,000
Share Premium 250,000
Retained Earnings 10,750,000

Requirement: As a result of the merger, compute for the following:

a. Goodwill
b. Gain on Bargain Purchase
c. Net increase or decrease in Retained Earnings of National U Corp.
d. Net increase or decrease in the Stockholder’s Equity of National U Corp.
e. Net increase or decrease in the identifiable assets of National U Corp.
f. Total Assets to be reported by National U Corp.
g. Total Liabilities to be reported by National U Corp.
Problem 6
On June 30, 20X4, Mendiola Corporation purchased all the net assets of Jhocson Corporation by transferring cash of
P500,000 and issuing 60,000 ordinary shares with par value of P50 (current fair value is P60). The following are expenses
incurred and paid by Mendiola Corporation in connection with the business combination on the date of acquisition:

Underwriting Costs 10,000

Consultant's Fees 20,000
Newspaper Publication Fees 5,000
SEC Registration Fees 8,000
Stock Exchange Listing Fees 5,000
Indirect Acquisition Costs 12,000

Moreover, the book value and fair value of the assets of Jhocson Company are P5,000,000 and P7,500,000, respectively,
while the liabilities has a book value and fair value of P4,000,000. Also, the book value and fair value of Mendiola
Corporation own assets are P20,000,000 and P25,000,000 prior to the business combination.

Requirement:

a. Compute for the expense/s that will be capitalized

b. Compute for the expense/s that will be charged against APIC
c. Compute for the goodwill on the date of acquisition
d. Compute for the total asset of Mendiola Corporation after the business combination
e. What is the carrying value of the goodwill as of December 31, 20X5

Assuming both entities are SMEs

a. Compute for the expense/s that will be capitalized

b. Compute for the expense/s that will be charged against APIC
c. Compute for the goodwill on the date of acquisition
d. Compute for the total asset of Mendiola Corporation after the business combination
e. What is the carrying value of the goodwill as of December 31, 20X5

Problem 7
On February 1, 20X1, Pipe Corp. acquires the net assets of Solomon Corp. for P31,250,000. The financial posisition of
Solomon on the date of acquisition are as follows:

Book Value Fair Value

Inventory 1,562,500 2,187,500
Property, Plant and Equipment 18,750,000 25,000,000
Accounts Payable 12,500,000 12,812,500

Pipe Corp. Determines that Solomon has the following intangible assets that were not reported on its statement of
financial position:

Advertising Contracts 312,500

Trademark 3,125,000
Customer List 937,500
Non-contractual customer relationships 625,000
Potentially skilled workers 5,000,000
Potential profitable future contracts 2,812,500
Patented Technology 1,875,000
Solomon has not also recorded the expected liability from pending lawsuit which is currently estimated at P1,875,000.

a. How much is the total fair value of identifiable net assets of Solomon Corp.?
b. How much is the goodwill to be presented in the books of the Pipe Corp. after the date of combination?