BC

A business eantbination is the term applied to external exparzsion inwhich separate
enterprises are brougltt together into orze economic entity as a result af ane
enterprise abtainingcontrul svsr llle net assets and operations afanother entepyise.
/,4'fiS-t defines basiness combination as a transaction ar event itt which an acquirer
obtains cantrol of bne or more businesses. A business is defined as aru integrated
set of activittes and assets that is capable of being conducted and managed for
the purpose of providing a return directllt to investors or other owners, members
or participants. An acquirer ntust be identifiedfor all business combinations.
Tircre are increasing trend to expand operations rhrough business cotttbinations
ratlter than thraugh internal expansion. This developrnent is laryely due to the
eJ.fects of recession, iifiation, and continued uncertainty over the abili4t of the
Sovernment to control economic ills. llith business cannbination, both campanies
will utilize cammon facilities cnd share fixed costs. In addition, a bisiness
combtns.tion may be undertakenfor tlrc possible tax advantages available ta one
or tlore parties to the combination.
Howeven business cantbinations involve certain linritations and risks;. Corporate

obiectives must be taken into consideration. Only those companies which have
the same'or compatible sets of objectives should combine. bn the other hand,
successfulfirms are usually not willing to combine. The acquiring enterprise may
also-inherit the acquired firmb ineficiencies and problems together with iis
inadequate resources.
89
Lhupter i 4
9A
ACQLIISTUON OFCONTROL
CIl
tOge*
coi
assets of the
pfpnother comp?ny maybe achieved by either acquiringthe
in the target
u controlling interest (usually over 50%)
or
rfipany
""quiArg
pdnYs uoting common stock'
assets are acquired directly from the

tiuUititiei of ihe acquired bompany also are assumed'
ities are assumea, tUe tralsaction is referred to as an
lnanacquisition af assets,atr ol$r9.-c9fPany's
"
company. fo *ort.irgr,
*A fiiUif
u"q"i..O"*itting
When ass"tr
;"[;irfi*
issuance
*.
of ,,net
property' or
assels'". Payrnentmaybe qade in cash, exchanged
of"itn.ri$io*q"ltr.""rdtieS.
Business combinations maybe a9lrieyed
Sratutoryconsolidaiion
i"g?iiirrf,ne;;#;&"int6riOutionorstatutoivmerger' into
one newlegal entity"
;;il't",h"""*Ui*ingoftwo-ormore existinglegal entilies bythe new continuing
'it * i.".,ui""r
-t" ai.if""d and ul*tt rdplaced
"o*p*i"t
absorption of one or more existing legal
company. A statut'ofi i"igrrr"f"rs.to the
entities by another
;;f.d
absorbed
"o*p""-v
company'
;.*pany
n";;?;il;i;t
the sole surviving legal entity' The

but may continue as a division of the surviving
that continues
as
(typically,'more than 50%) of another

stock acqwisition, a ccntrolling interest
asthe
companfsvotirrg"o*;onstockis a"q"u.g. ftre acquiringcompanyistermed
(also
a
subsidiary
as
is.termdd
parent (also ttre acquire4, and the.acqlired company
and
entities
legal
andthe subsidiary remain separate
the acquire").
financial
However, for extemal
maintain tfr"i, o*rr.dnancial records and statements.
individual financial statements
theil
wrll usually cornbine
,qp"nirrg prrp.r*, tt
"
into a siigie set ofconscllidated staternents'
ln
B.ttlth;;;;t
**p*"l
METI{ODS OF BUSINESS CGMBIN ATIONS

were used to account for business
Prior to the issuance sf IFRS 3, two methods
method'
rlru** *"."ttre purctrase method and the pooling of interests
ofthe icquired companyarcusually
Underthepurctraseleethod', all assets andliabilities
primery method in use' Horvever'
the
*as
f-U rui"*" ffr* pu:ehase methud
;;Li;r;ik.
,;;;;a;;
ofinterests methodwas allowed. Thepooling_of interest

recordedth. uu*"iu *rrh:l"Uiiti*t ofthe acquired companyattheirbookvalues'
undersome,*d,t;il;i'ing
IFRS 3 elindnatec! the pooling of interest rnethod'
91
Business Con*inalions
ACQUISITION METHOD OF ACCOUNTING ,FOR BUS/NESS

COMBINATIONS
tI'
IFRS 3 requires that all-business combinations be accounted for by lqPulq
u.[uirition method (called the ]'purchase method!' in the 2004 version of IFRS 3). To
in
detlrmine whether a transactionbr other event is a business combination, four steps
follows:
the applicationoftheacquisition method are tobe usedas
(1) Identifl'theacquirer.
(2) Determinetheacquisitiondate.
(3i Determine the consideration given (price paid) bythe-agQuirer ,

(4i Recognize andmeasrrre the idEntifia6le asses acquired, the liabilities6ssumed 3d
interest) in the acquree. Any
,
n[n-contolling interest (formerly called rninority

reiulting goodwill or gain from a bargain purchase should be recogniz-ed.
any
iI
Identify theAcquirer.In an asset acquisition, the companytransfening cashor other

assets and/or assuming liabiiities is the acquiring company. In a stock acquisitiori, the
acquirer is, in most cases, thq company tansferring cash or other.assets for a controlling
interestinthevotin!,common stockof the acquiree(companybeingacquired). Some
stock acquisitions maybe accomplished by exchanging voting common stock. Usually,
the company issuing the voting common stock is the acquirer. ln sbme cases, the acquiree
may issue the stock in the acquisition. This "reverse acquisition" may occur when a
publicly traded company is acquired by a privately traded company. The appendix at
the end of Chapter l5 considers this case and provides the applicable accounting
procedures.
Determine the Acquisition Date. This is the date on wtrich thc acquirer obtains
control of the acquiree. IFRS 3 explains that the date on which the acquirer obtains
c*ntrol ofthe acquiree is generally the date on which the acquirer legally transfers the
cansideration, acquires the assets and assumes the liabilities ofthe acquiree the closing
date. However, the acquirer should consider all pertinent facts and circumstances in
identi&ing the acquisition date, and it might be that control is achieved on a date that is
earlier or laterthan the closing date. for example, the acquisition date prerledes the
closing date if a written agreement provides tiratthe u.quir"r obtain clntrol of the
acquiree on a date before the closing date
Theacquisition date iscritical because itisthedateusedto establishthe fairvalue ofthe
'dompany acquired, and it is usually the date that fair values are established for the
accounts of&e acquired company.
t ttaptct'l4
92
gaven (price paid)

Deteiininethe Coilsideration Given" Generally, the consideration
an entity.IFRS 3
as
the
acquiree
of
r,'alue
fair
U" the
at fair value.
measured
to
be
combination
gr"** in u u"uin"ss
ffi#;;ii.ii"usu*eJto
I#ir*iiffffi"ftffi;;
il;;l;t?l;"t*i"o
astt es,rirr oftlre acquisition-date fairvalues
of
, ,
. the a.ssets transferredbythe acquirer'
. the equiry interests issued by the acquirer'
conside,ration,
*"*.*ofconsideration include cast5 other assets, contingent
Usual
-ordrnary.
"* forms
ipterests of mutual
and
member
rvarrants
*quityi;;;;ils, options,
./
e,retities.
exchange for
Cantinsent Consideratior. The eonsideration the acquirertransfers in
a
contingentconsi<ieration
from
resulting
f"gi,66iffi;;;iffi; *v: ur*t or liabiliS,
Ccntingent-consideration is an agreement to issue addlfional consloerauon

uiu iu'i.r aate if specified er.ents occur. The most colrlmon agreements
oii"*o'i,* perforinance lythe.acquiree cornpanv' Contingent
measured at its acquisition-date fair value'
"r**"i**t.
il;;il;;t";f.J
ffi;;;ffi;*;;;i;;
;;id;*ti"."is
additional information about facts

Changes that arethe result ofthe acquirerto obtain
and
the
circum*tu*."Jiitut uiiui*a at?he acquisitio-n date, and that occur within
acquisitiondate),
**r*i-i*tp**.fitifrirfr*uyUi u*urinrum-ofonqyearfromthe
(and so
acquisition
f<rr
the
accounting
the
origihat
;,i;;S*"i * u6Jrirr""nts a[ainst
mayaffectgoodwiil).
date (e
Changes resulting from evgn-t1 a$gr the acguisition
F
suctr change Oepenos on
tbr.T?."^ti'Ffl111'l9l-fft4
Accounting
adjustments'
period
are not measurement
il;#H";a;iii;;;i;orria**iionis
anequityinstrurientorcashorotherassetsiraid
is not.remeasured. If the-*9lTld
,i.*"Olff t i* "quit,, ito oiiginul.amolnf
the changed amoturt is reccgnized in
paid
or
owed,
usJt
consideration ir **i oi'"Gr
profit or loss.
a business
Acquisitien-yel*ted cgsls"^T!re costs t[:e.acquirer incurs to effect
fees;general
andgtherprofessional
le.g{,
accountln&
.oti,6Urtiun, *rr.i,,JtU*[*iif*"t;
aamioisu"auie
*o.a i*foing
-il*ii..U;;J;itrStack
the costs
ofmahtaining an intemal acquisition deparfrnent
priee-of the cornpany acqgiied and are expensed
issilsrirc' C#sts
tr[r]eit the aeqi:ir*r imued s]rares of stock furtJre net assets actqiredr-th:1?:11:::3t9
pubilcafloli
cosrs such as i r.C regisuirtion fees, tiocumentary-stalHp lali flg 9:I'!P3t}cr
f*.* *" &'eate<i as a Eeduetlor, frorn additional paid in caPttal (APlLl) trom prevtous
is
,Gr* iS*""*u, l""ni"XfiC is reduced to zero,th* rernaining stoek issuance co"sts
lteiTl'
ltne
a separate
treated as & i:oritre acc&utie f"rom retained earnings presented as
piiiippt*r
eei'
Cantmttt
*ti*x
ilrlterpref
f
busrness Lomotnaup,ls
ltecord and Measure the Acquirer's Assets and Liabilities that are Assunred.
The fair values of all identifiable assets and liabilities of the acqu iree are nteasured and
recorded. Fair value is the amount that the asset or liability rvould be bouglit or sold for
in a c'urrent, nonnal sale between wi I ling parti es.
The total of all identifiable assets,less liabilities recorded; is r-eferred to as thc tair valtrc
ofthenet assets. The identifiable assets shouid ncr.'er include goodrvill tlratrtayexist otr
the acquiree's books. Tlrc onlygoodwill recorded in an acquisition is "new" goodrvrll
based on the price paidtiz rhe acquirer. The fair valuc of the net assets recorded is not
likely to be equal to the price paid by tlie acquircr.
Price paid exceer{s thefair values ensigneil to net flssels. The excess of the pricc
rr,"1gq,'t
goodwill. The goodw,ill recordcrJ is
paid overtlie values assigned to net assets i,
periods.
accounting
tested
in
futrre
is
irrpainnent
not amortized, but
Price poitl is tress tltan fair values assigned to net as.sets. Where thc pricepaid is
actually less than the fair value assigned to the net'asscts, a "bargain.purchasc" ltas
oiourredl The excess of the fair value assigred to the net asscts ovcr tlrc pricc paid is
recorded as a "gain" on the acquisttion by the acqttirer.
YALUATTON OF IDENTIFIABLE ASSETS AND LIABILITtrES

As a general rule, assets and liabilities aequired arc recorded at thcir individually
determined values. The prefened rnethod is quotcd market valuc, where an activc
market for the item exists. Where tl.rere is no activc market, indcpendcnt appraisals,
discounted cash tlorv analvsrs, and otlicr types of analysis are uscd to cstimatc- fhir
values.
Thc acquinng company is not rcquircd to establish valucs immediatelyon the acquisitiori
date. A measurement period ofup to one year is allowed fcir measurcment. Temporary
values would be use<i in turancial statements prepared prior to the end ofthe measuremcnt
period. A note to the financial statements would explain the use of temporary values.
Any ehange inthe recorded values is adjusted rctroactively to the date of acquisition.
Prior-period statemerits are revised to reflect the final values and any relatcd anrortiz,ttions.
Assets
with Uncertain Cash Florvs lvaluation aliowances)
a separate valuatian allowance as of the

for
acquisition date
assets acquireC in a busincss combinatiorl that are rlleasurcd at tireir
acquisitiondate flairvaiues because the effects of uncerLainry* about future casli llows
An acquirer is n*t permitted to recagnize
Chapter
9+
l4
are included in the fair Value measured. For example, because IFRS 3 requires the.
acquirerto measure acquiredreceivables, including loans, attheir acquisitiondate fair
va|ues, the acquirerdoes notrecognize a separatevaluationallowanceforthe contactual
cash flg{vs that are deemed to be uncollectible at that date. [IFRS 3 (2008)]
The principle of "no valuation allowance" also applies to property, plant and equipncent
suctrtha! followingabusiness combination, suchassets are statedatasinglefairvalue
amo-unt, and not a gross "deemed cost" and.accumulated depreciation.
Unrgcognized Assets and Liabilities

The acquirermayrecognizesome assets and liabiiitiesttratthe acquireehadnotpreviously
recognized in its financial statemienB.
aPPLYING THE ACQUISITION METHOD

As mentigned earlier, control of another company may be achieved either by tlrle
acquisition ofnet assets or by acquisition of stock. Illustration 14-1 will illustate the
accounting procedures in the acquisition ofnet assets while Illuqiration l4-2 wrttr iltustate
the accountingprocedures in the acquisition ofstock.
Illustration I4-I
Acquisition of Net Assets
Let us assume that the company to be acquired by Acquirer, Inc., has the foilowing
Statement of Financial Position on June 30, 2013:
J&JCompany
:l*Hlfi
p 125,000
P 200,000 Current liabilities
securities 300,000 Bonds payable
500,{}|0
Inventory
500,000
Land
150,000 Comr-nonstock(pl par)
50,A*0
Building (net)
750,000 Additional pqid in capital
?00,000
Equipment (net)
400.000 Retained earnings
.*_2zi1t,00.
pZ.fOO.OOg
Total,assets
Total
liabilities
and equity.
tangg
Cash
Marketable
Position
iFinanciar
Business Combinations
e5
Fair values for all accounts have bben measured
as
of June 3o,z0l3 as follows:
Cash
P200,000
Marketable securities
330,000
550,000
360.000
900,000
700.000
225.000
Inventory
Building
Equipment
Unrecognizid rcceivables
Current liabilitics
Bonds payable
Premium on bonfs payable
P-1,265.t)00
P125,000
500,000
20.000
Fair value ofnct idcntifiable asscts
()'15-{XX)
Pl.(r20.(Xl()
Acc*unting Procedures in Reqording the Acquisitions

The basic accounting procedures to record the acquisitiori ol'rrct assct lrrc ,,, lirli,,rr
.'
'
All accounts identified
"
If the total consideration given for a conrpany excecds thc lnir valuc ol'its rrc{
identifiable assets (P2,620,000), the excess price paid is rccorclttl as go<xhvill.
Ifthe total consicieration given for a company is less than thc {airvaluc o{-its nci
identiiiable assets (P2,620,A00), the excess of net asscls ovcr thc plicc pirirl is
recorded as gain on acquisition in the pcriod o'f the purchlisc.
All acquisition-related costs are expcnsed in the pcriocl in which thc cosrs uic
incurred, with one exception. The costs to issue equity sccuritics ar-c rccogniz.c as
lair valuc. '1'his is alr,vays tlrr.

case even ifthe consideration givcn lor a conlpany is lcss lhrur tlrc strrn ol'tlrr' lirrr'
values ofthe net assets acquired (assets lcss liabilitics assunlcrl, I)1.(r2t),0tt0 irr tlrcr
are measured at estinrated
illustration).
'
'
i
reduction from the value assigned to additional paid in capital account.
I
F
b
Before recordingthe acquisition,.the acquircr slrould calculatc thc tlillercncc bctwccrr
f,
the price paid and the fair value of the net assets acquired.
[I
!
E
Case 1: Price paid e-uceeds the
fair
value of net, identifiahle assets acquirccl.
Acquirer,Inc., issues 80,000 sharcs of its P l0 par value common stock witfi a markct
value of P40 each for J & J Compant's net a-ssets. Acquirer, inc. pays profcssional lbes
'ofP50,000 to accornplish the acquisition and stock issuance costs of P30,000.
Chopter
Analysis:
Price paid (considerdtion given), 80,000 shares x P40 market

Fair value.of net identifiable assets acquired from J &
value
P3200,0q0
(2,620,000)
Goodwilt
Profess ional fees (expense)
Stock issue costs (reduction from additional paid-in capital)
58o,ooo
50p00
30,000
Entrigs recordedbytheAcquirer, Inc. are as follows:
(1)
To record the net assets acquiredincluding the new goodwill:
Cash
200,000
330,000
securities
lnventory
lrand
. Buitding
Equipment
Receivablis-tade
Goodwitt
Marketable
J 50,A0A
j60,000
g00,00A
700,00A
225,000
580,000
Current liabilities
Bonds payable
Premium on bonds payable
Common stock (Pl| par 80,000 shares issued)
'
Additional paid in capital (P30 x 800,000
Q)
To
rcord acquisition-related
expense
capital
Cash
Acquisition
Additional paid in
shares)
r 25,00a
50a,0a0
2A,000
800,000
2,400,000
cgsts:
50,000
30.A00
S0,0AO
l4
Case 2: Price paid is /ess
97
thrnfair
value of net identifiabteassers acquired:
Acquired, Inc. issues 20,000 shares of its Pl 15 parvalue common stock with a market
value of P 120 each for J & J company's net aisets. Acquirer, Inc. pays
fees of P50,000 to accomplislr the acquisition and stockissuan.r .'orir ,irp r jo"ooo.
d;i;;;i;;;i
Analysis:
Price paid (cbnsideration given), 20,000 shares x p 120 market v4lue
Fair value of net identifiable assets acquired from J & J Company
P2,400,000
(2,620,000)
Goin on acquisition
I Jro,ry
Professional fees (expense)

Stock issuance costs (reduction from additional paid in capital)
50,000
130,000
Entries recorded byAcquiret Inc.'to record the acquisition and related costs are as
follows:
(1)
"
To record the acquisition
ofnet as$ets:
Cash
Inventory
Lond
;l:
t'
$1.
r:
b
F
6
F.
F
tr
200,000
330,000
550,000
Building
360,00a
900,000
Equipntent
.700,000
Receivables* trade
Current liabilities
225,400
I 25,000
s00,000
20,000
2,300,000
Bonds payable
B-
C,ammon stock QA,A00 shares x plIS par)

Additional paid in capital (20,000 shares x pS)
Goin on acqulsition
To
t00,000
220,0(N
rccordrr[trisition-relatd costs:
Acquisition esprse
Additiorul poitl in capital
&or* isruazr,c.xrt,it
Cash
50,000
100,000
30,000
|80,000
98
The
ftllowing should
be aotod frorn the errtries of the acquirer'
The.stock issuance costs exceed'the additional paid in capital recorded at

hquisitioru the excess is debited to " Stoek Issuance Costs" . This account should
{L l*,"a * aconha account from retained earnings under the equity section of
the staternent of financial position.
Thegainmustberportedasaseparatline iteminthestatementofcomprehe,nsive
income ofthe acquirer in the period of the acquisition.
Recording Contingent Consideration

Using the data in 5 & J Company (Case 1), assume that 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 F200,000 on January I , 20 14, if the average income for the
2-yearperiod of 2012 and 2013 exceeds P150,000 peryear. The expected value is
estimated as P 100,000 based on the 50% probability of achieving the target average
income.
The revised analpis ofthe difference between the price paid rind the fair value ofthe net
assets acqu-ired and the entries to record the acquisition are presented below and on the
nevJpage.
Analysis
Total price paid:
Stock issued at rnarket valute
Estirnated vaiue of contingent consideration
Fair value of net assets acquired from J & J Company
Goodwii!
Acquisition-reiated cr:sts:
Professional fees (expense)
Stcck issuance costs {r*:duction from APtrCi
L.
P320o,oo0
100,000
P3,300,000
2,620,000)
680,000
50,000
30,000
Businex Combinatians
99
Entries to record the acquisition ofnet assets and the acquisition-related costs
are as
follows:
(l)
To record the net assers acquired at fair value including the new
Cash
Inventory
Land
Building
Equipment
Receivables
trade
Goodwill
Current tiabitities
20,000
330,000
550,000
360,000
940,000
700.000
22 5,000
680,000
125,00a
s00.000
20,00a
Bonds payable
Contingent consideration payable

Common stock,
Pl| par
00,i00 -
80a,000
2,400,a00
Additional poid in iapital
goodwill:
To record acquisition+elated cosfs:

Acquisition expense
-
Additional paid in capital
s0,000
30,000
Cash
80,000
Recording Changes in Contingent Consideration

Ifduringthemeasurementperiod, thecontingentconsideration was revaluedbased on
additional information, the estimated liability and the goodwill (or gain on urqriritionj
would be adjusted. For example, if within tle measuiement perioi, the estimate was
revised to?160,000, the P60,000 increased would.be adjustLd as follows:
Goodwill
64,000
Contingent consideration payable
60,000
fftheegiryteisagainrevisedafterthemeasurementperiod, the adjustment is included

in profit or loss ofthe laterperiod. For example, if the'estimate wasievised to p200,000
after the measurement period" the P40,000lncrease would be fecorded as follows: '
Loss on contingent consideration payable
Contiigent consideration payable
40,000
40.000
ta0
aSlcooti-ne1"',t"::1q*onpa;7able
Tns lfiustatsdprocedure upeli::Jo
incashbr
odrqaswtsorurr**riilriifi'JaltrJrrr**ofstockAnagryemen'$toissueadditional
acha*ge inthe estimated
istreated to be
H;;ff;1#;;;;;;"{tuTI.:u"nt
entry
recorded the acquisition date' The only
value.of$e shlyes issgt. X"ii-Uffray is
il; iltilaut *i"*aaitio"al shares are issued.
at
assumethat
of J & J ComPqly for P3 ;200;000'
Using the example of the acquisition
during the
additional sharis ifthe average income
there was agreern.";r*;10,000
P160'000 per vear There rvould be no
!-yearperiod
2013 .'
"f
r to reeord the acquisition on June 30,
, change in the enfi,y io-cuu.
20;;Jfrii;5ryaed
l
Assumingthecantingenteventoccrrrs,thefollowingentywouldbemadeafterDecembsr
shares'
20 I 5, toi-ssue the additional 20,000
Additiona! paid in capilal (20'000
Common stock, PIA Par
shates x
PI\)
20'0AA
200,000
Measurement Period
Recording Changes in Value During
assigned to acounts redordedasapartofthe
-**+^-*iaz{
period, values
"alrreqes
During the measurement
asofthe acquisition
accuisitibnmayb-*dira;betterrefrectdvalueoftheaccounts
the acquisition date
are not a
by events that occur afrer
to income in the period they occur'
pa* of this adjustments. They rvould be adjusted
;Hffi;i;;;d;;aused
must be
are considered "provisional"' They
The values recorded on the acquisitiondale
The
#th dates priorto the qnd ofthe measurementperiod"
informati.n is availabtre or it is obvious
..'rUi"ir.r".t-i*t*.*"rn
improved
measurement penoJends when thg

In no casg can the measurement period exceed
that no be$er infcnnaticn is available'
one year fromthe acqulsition date'
trllustration
Lestusret$filtotheacquisitionofthgJ&J.Cornpany{l|P3,200,000inCase1.
The 201 3 titranclal
tc tlie lruildings :'i provisio*al'

Assurne now tirat tt * ..'aiue assi'pred
income accounts fortlre acquired' J &
yearwill inclurietUe s#;;;cornprehensive
date, June 30' The values assigtreel"to buildings
J Cornpany, ururtlng u, of the acquisitio;r
fcr 20
and r+sutrting adjustnre*ts te income
i3
and projected for 2014 are as follorvs:
Srsraes-s Co mbinalio* s
{r}
t
Provisioaal thlue
Depreciation method;
2O-year straight"line rrith t1660,U00 resiriuai valuc.
F240,00G/20 y-ears * F I 2,t00 per 3rear, p 1,00G per month.
P900,000
Recorded in 20 I 3 {6 rn*rrths)
Projected in
6,000
20la
12.000
Better estirnates of -uaiues lbr the bu id in g becc:'ne available in early 20 l 4. The new
r
llalEes and revised deprr:,;ietion are as foliows:

RevisedVajue
Depreciation rrethod:
950,000
?G-year straight-line wth P590,000 residuai vaiue

F360,0t G i:CI years = F i 8,000 per year, p 1,500 per month.
Adusted asrcuxi fcr 2013 (6 roontlrs)
9,000
t8"000
Arnor-mt to be recorded in 2014
The recordedvalues ae
adju*ted*:ring20i4
as
foilows:
Goodwill
50,000
Goodwilt u'suld absorb the impact ofthe adjustrnent. Hari tirere been a gain on the
otigitat acquisition da'ie, *le gain would be idjusted at the e nd of the me-asuremcnt
period. Since the gain was recorded in the prior periods, the entry to adjust the gain
wouldbe made to retained earnings
The depreciation for the periodmust also be adjusted retroactively. The entry made in
Rerained earnings
,Accumulated delreciction
3,;*):
Buitdi*gs
3,000
Chapre,'14
"102
AecomntingProcedure$fortheAcquisitfonbytheAcquiree
UsingtheexanrpleoftheacquisitignofSaJC,:1qry1forP3,200;*00inCasei.The
ofthe book
;** of theprice receivr'Cubytu T9l1t"3 !f^'ZOA'!O0) over the sum
is reeorded a! a
P625,000)
net assets of F t,5?5,000 41,100,000 assets p
entnes recorded by J
The
gain on the saie" ii:,this case, the gain' iu t "SZS.Ofr*'
.
,u$Of,fr"
--
&
ComPanY are as foilows;
(1)
To record'':<i the sale cf ihe net assets:

Investment in Acquirer, lnc'
Current liabilities
Bonds paYable
Cash
3,200,000
12
5,0G0
.5AA,0A0
2A0,004
30a,a00
5A0,000
15a,000
Markerable securiiies
Inventory
Land
75A,400
Building {net}
400.004
EquiPment (net)
Gain on ssle af business
(2)
t,525,00a
shares receivbd to its sh*r'eli*lders and

To record the distribution ofAcquirer, Inc"
the liquidation of J & J ComPanv-'
Common stock
Additionat Paid in caPital

Retained earnings
Gain on sale of business
Investment in Acquirer Inc'
s0,004
7AA,000
925,004
1,525,AG$
3,200,000
FinancialStatementsFollowingthe,AcqadsitionofNetAssets"
the acquisition method' the Statement of
Statement of Financial Positiom" Under
comlinatiop includes all the assets and
Financial position ofAequirerr lnc. aftertlie
liabilities ofthe J & J Company at fair vaiues'
sateruent of comprehensive lncometf

stotement of comprekerasirefrecar*e, Ttre
which business cornbination occurred includes
the acquirer for tne accounting periorS in
only'
res,tts of the acquiree alte r tke.date of acquisitioru
il.
"pii*rl"g
8rs:*ess Combinatians
103
Iltustration 14-2
Acquisiticn of Steck
In a stobk acquisitron, the acquiring compariy deals only with existing shareholders
ro illusdate, assume tilat on
'the acquired
company not the company irseii.
of
o"..*t",
31,2013, PCompanyacquiredall l0,00Cissue{i aniioutstandingsharesofS Company's

Pl00 par va!';e comr:rcn rtock for P?,c0fi.ciiO ::ash. tn aridition, p companv puia
professional fees to aceoniplisb the combination of P1G0,000. Thejournaientriis to
rec*rd the acquisiticr:
*f
C+r.:rpany on lJecen,.iiur
(l
stock and the acquis.tion-related'cost in the books of p
"] I, 20 i 3 are as foliorvs:
To record'r?ie acqriisrtion of stock from S ('ompany:

lnvestnwnt in subsitliary S Company
t-
(2j
2,000,000
ast;
2,000,000
To record the acquisition-related ccsts:
Acquisiiiatt expense
Cash
00.ta?
t 00,d00
The above entfies do nct record the individryl und$rl3,,ing assets and liabilities over
rvhich control is achievexl. tnstead, .Jre acquisition is rpcorded in an Invesknent account
that represents the c{,nfolling interest in the net assers oft}ie su'usidiary. On the date
of
acquisition of stock no goodwill or income jiom gcquisitiort is recorded by the

acquirer After the acquisition S Companywill not be dissoived. Arelationship now
exists that of parcnt,/su'osidiary relatronship. p Company is now thepcrerrrind S
Company is norv the subsidiary:.
If no fuither action is taken, the Investrnent in Subsidiary account would appear as a

long-terrn investment on P Company's Statentent of Financial P;sirisr:. However, sucir
presentation is pemritted oniy if consolidation were nct rerril ;ud i: e when control
,
does not exist).
Assurning consciidated stateme*ts ar* leq*ired {i e.,'"vlier: contror cioes exist), the
Stalement ofFinancial Pcsitir:n ofttrr tu *r *ompanies rnustbe combined into a single
Consolidated Siaternent ofFinanciai Positian. The accounting process in the prepnratiin
ofconscH<tration statements wii! b,* tiiscussed in the *hapier* ** rolt6*.. '
104
Cizt;ptet i 4
IMPAIR}TENT SFASSETS
The followingkyterms are used in ihe impalrrnenE of assets @A.S -i5):
.
.
Impairment
amourt
ar. assrt rs rnprired u'hen rts carrying
Carryimg rrarcuErL The ainouxt ai.,"ali;ch xn
arnowt excee<is its recoverable
is.sset is
recognized in the balance
streetafter,ro.iucting aiu'r.uriu'ateddcpred:,i:*n r.rd accuneulated impairment lossx.
Recoyerabie :irn+umt. the uigh;r .]i-;r1ei'=ci'$ fairvalr:e iess costs tc sell (net
sellingprice) and its vafue in use.
Fair value. the arnount c,btainal,lc fr+m
\,rg ilue
tJTe sale of an asset in a bargaincd

tansaction betrveen knorvledgeabie, rvtllir:g parties.
in use. The dirco'rurted present vi,lu* ofestimated future cash frows expectsd
to arise from:
a.
b.
I
r-
the ecntinultguse ofa* ass*t, and from

its disp*sal atfhe mdofitsuseful life
Cash generating uud. The smailet i.J*ntifiable grcup
a.
b.
fr*rr continuing
*f ass*{r:
ani
that are largely independent of the *ash in{iows {iom o$:er asseffi or
that generates cash int-Icin's
use,
groups ofassets.
IMPAIRMENT OF COSE1VTLL
Goodwill should be tested for impai*raent annuai$r The test for impainnentto each of
the acquireds cash-genratrng +nr :1" ai gru.ps ofcash-ggneiating uniis, that are expected
tobenifitfromtheqynqies*fth*c.cmbi*atio*.
irrespertivecf*tethet'otherassetsor
Aca$g9n@tingu:itm +'ixcirg.>oriv,iliirasbeenaiiocdedshailbetested fcrimpairrnent

at least annually&y con:paring th* *arryiag arm>uat of,the rxdt, inetuding ihe geodwi[,
withthereovmbleamori$tef,fiteanit"
105
Busihess Cambinations
Impairment Testing in Later Periods

Goodwill is considered to be impaired dthe carrying an ount o{the utrit's rrct
(includkg goodwill) exceeds the recoverable ar?rount of the uni|
.xssrs
To illustrate, aszumethe followingestimates weremade atthe end

Estimated Recoverable arnount of the cash-generating uniq based
on projected cash flows (value in use)
Carrying amount of the cash-generating unit (includiirg goodwill)
ofthe firstyear:
P650,000
680,000
Since the recorded carrying amount ofthe cash-generating unit exceeds its recoverable
amoun! goodwill is considered to be impaired, Ifthe recoverable amount exceeds the

carrying amorm! there is no impairmen! and there is no need to proced to calculate a
goodwi[ impairmnt loss.
Goodwill Impairment Loss in Later Periods

If the above test indicates impairmen! the impairment loss must be estimated. TIre
impairment tossfor goodwill is the *aess of the carrying amaunt of the cashgenerating unit's net assds (including goodwill) over the recoverable amount
of the cash-generating znit these are the values that would be asigned to those
accounts if the cash-generating unit were purchased on the date of impairment
measurement
The following are the calculation
offte impairmart loss:
Carrying amount ofthe net asseb on the date of measuremenl

(including goodwill of P90,000)
Estimated recoverable amount of the cash-generating unit, based
on project cash flows (value in use)
P690,000
650,000
P 4.000
Estimated irnpainnent loss
Thc following entrywould be made:
Mwill
irynirzwnt
Goodwill
loss
40,00040,040
r06
Chapter
l4
Disclosure sf Busiraess Combinations in a Note to Financial Statements

Bmuseof,tfucorpleerafiireofbusinesscombinationandtheireffectsonthefinancial
pmitiomT(rdapenatingffind{softhecombinedcompanies,extensivedisclosureisrgquired
fortheperiods in which theyoccur.
Followingarc&Eextensivedisclosurbrquironents forbusinesscombinationestablished
byIFRS 3:
(a)
(b)
(c)
(d)
(e)
The names and, descriptions of the combining entities.
Method cfaccounting forbusiness combination.

The effec"ti'r,e date ofcombination foraccounting purposes.
The cost cf acquisition and the form of the consideration given, including any
delbrrd a*d ccntingent consideration
Operations to be disposed of.
The 96r ofvoting shares acquired.
(0
G) Goodwill
(h)
Goodrrill - impairment charge.

Reconciliation of&e goodwill between opening and closing amount.
G)
0) Summaryoffairvalue ofassets and liabilities acquired with separate disclosure of
cashequivalent
(k) Provisions forterminating orreducing activities ofacquiree.
0) Effectofacquisitionon the financial position at thebalance sheetdate and on the
results since the acquisition.
(rn) More details fornegative goodwill (income from acquisition). The reasons why
each acquisition price was higher than the fair value of the net assets acquired,
Ieading to the recognition ofgoodrvill.
(n)
Details
oft\e
annual impairment test
ftey assun.ption used to determine recoverable
'amount, a sensitivity anallsis on the key assumptions).

(o) Disclosure of infonnation for evaluation of the nature and./or financial effect of
business con:binations occurred during the reporting period, those occurred after
the balance sheet date but before the financial itate,rients are authoriz"a fo. irru.;
(certain business cornbinations ihat occured in previous reporting periods).
(p) h:fonn,ttion for evaluating changes in the carrying amount of gooa*ilt during the
reportingperiod.
Business Combinalions
1.
107
Two methods ofarranging business combinations:
a.
b.
c.
d.
Mergerandconsolidation
Mergerandacquisitionofstock
Acquisition and uniting ofinterests
Consolidation and acquisition ofstock
2. A businesS
a.
b.
c.
d.
combination must be accounted for as:

Anacquisition
Apooling
Amerger
Aconsolidation
3- ]he 9x9ess ofthe pricepaid overthe fairvalqeofnet identifiable assets acquired

should be recognized as:
a.
b.
c.
d.
4-
Goodwill to be amortizedperiodicallyfor20 years.

Expensesimmediately.
Goodwill not subject to amortization but subject to impairment.
Goodwill to be amortized for 40 years.
In an acquisition-gpe combination, the appropriate accounting forthe excess of

fair values ofnet assets acquired over the price paid is to:
Recognize as income in the books ofthe acquirer
Recognizeas additionalpaid-incapital inthebooksoftheacquirer
Reduce proportionately current fair values assigned to the acquiree's noncurrent assets and recognize any remaining excess as a deferred credit
Reduce proportionatelycurrent fair values assigned to the acquiree's noncurrent assets other investrnents in marketable securities and recogni ze arry
remainingexcess as a deferred credit
a.
b'c.
d.
I
t
5-
The cost ofregistoing equity securities in
business combination slrculd be
as:
a.
Anincomeoftheperiod
b.'Anexpenseoftheperiod
I
t
c..
d.
Deduction from additional paid in capital

Part ofthe costofthe stock acquired
recordd
t0E
Chapter
l4
6. tlnder the rcquisitian method'the retained earnings of the acquirer after the
conrbinatiop is 6qlial tc:
The su.n c'fili* r+tained eamings ofthe acquiree andthe acquirer.
'
b. , Thg retaiiled ear:rings ofthe acq:uirer plus any incom" to*
""quirition.
The retarned eamings ofthe acquirer only-
a.
c.
d.
Th'e
retaind *r,n:linp oftne acquirer
less anyamortization
qfgoodwill.
1 Which sfthe fotl*wirig is included as part ofthe consideration grvpn?

a.
Dirrct and indirect acquisition costs atributable to the acquidition-
.
b. Indirectccstsaadcontingentconsideration
Coatingentconsideration.
:.
d. Allexpensesandliabilitiesrelatingtotheacquisition
i
:
which of ttrre foilowing is not included in the price paid in an acquisition type
businesscombination?
a.
,
b. Fair value of shares iszued
c.
Invesfineat banker?s finder's fee forthe combination
d.
Curtingent considaation
eashpaid
9. Whichofthefollowingisnottnreofabrrsinesscombinationclmsifiedasacquisition?
The acquirer continues to exist as a separate legal entity
The acquiree ceases to oristas a separatelefal entity
Bothcompaniescontinuetheirlegal existorce
a.
b.
c.
d.
one company acquires the assets and liabilities of one or more other
cornpanies in exchange for stoclg cas[, or other consideration
-
10. Shares issued as consideration in an acquisition are recordd at

Their fair value as at the date when the acquirer obhins conhol over the net
assets and operations of the acquiree.
a.
b.
c.
d.
Atcost.
Atcostorfairvalueurhicheverislower.
^Atcostorfairvaluewhicheveris higher.
Bus ines.s C o m.b ittat io ns
14'l:
t 0'9
Man Inc. purchased all of the net assets of woman cornpany

on January 2,
20t3 by issuing B^,0q9 shares of its p r 0 pu. .o**on ,toi,r..
at tn. iirr.,irr"
stock was sel tring for P30 per share. Direct co.tr us*iutlo
*irr, consummati n rr
the combi nation.totaled P4,000. under IFRS 1,
iii:
net assets acquired be recorded by Ma, [nc. Assumi"g
iil;;-;;rru"-e";,
considerition of p5,000 is determined ?
;il;;;i ;,r-#;il f
o.
b.
c.
d.
l4'2:
P249,000
P271,000
P244,000
P245,000
Jlre n9t assets of l:curred cornpany have a book value of p r 50,000 a,d a
fair value of p I 80,c00. Acquiring c"*p*rypriJ pisorooo
.rrn r"i ririr,"'r"i
assets ofAcquired Cjryplny Aiquiring i6"r;;ry;iso
paiO p50,000 to a.
investment house as finder's fbe.Aiwhat*a*ornt
srrrvqrrtrrruurLr
rlrlulJ goodwill be rccordcd
onAcquiringco*f*y;rilili
a. P120,A00
b. P 70,000
c. P|20,000
d. P 70,000
i
i
I
I
I
i
t
i
tI
I
t
I
t4-3:
on June 30,20tr3 yh*. corporation issued I00,000 shares

of its p20 par
value common stock for the net assets of Black Company
in a busircss
combination accounted forbythe r*q;;,i;;'*"irrii.
rrre marker vaIuc of
white's common stock on June 30 was pi6
; f.;;i"
f"i,r,r." whii"
d;
F I 00,000 to the broker
who arransed this acqui iiti"r. E"rt orsnc

and issuance oftrre equity securitl., u*ounied
to p50,0b0i
i.giiffi
contingent consideration determined to be paid to Black

company aftcr
acquisition amounts to p120,000.
rr
whatamountshould white capitalize
a.
b.
c.
d
P3,620,000
P3,650,000
pi,zzti,ooo
P3,750,000
as the
costofacquiringBlack,s netassets.
Chapter
tla
144:
l4
Rex,
neJ assets -of

R"=by
on January 1 , 20 1 3 , CJ Corporation acquired the
stock. Subsequently, Rex
p*
uuffi
*.r;fii;Fig
issuing 600,066.t
"o*mon
CJ Corporation. CJ's
was fquiaatei"aniltl"ass"tS *aiiuUilities *giq"^gin*
oj Soodwill
i; i0 pe. st af" on i*ra"y t ;i0 t 3 .{he amogqt
stock was seliid
*itr,tr,i"o*uiiationya*16,120,000'CJincurred
6; ;**irt"d with thl combination and P30'000
' p300,000
il
i}i;i#bycJli;;;ffi
ofi;s;i;fi;i;
of stock issuance costs'
theincrease in cJ's
fair value ofRex's net assets q4 th.. *ount of
stockhold.*';ilrty as a rlsult of the cornbination, respective$
what
i3 the
P23.880,000 and P30,000,000

P2i.180.000 and P30,000,0a0
pzi. I s ti.o o 0 and P29,9 7 0,a00
12 i,8 8 {i,000 and P29,9 7 0,000
&
b.
c.
d.
14.5:PoolCompanyissued120,000shareso|P-l0parComlnonstockwithafair
addition, Pool
value orrz,sdopiid;;r1i;;;t;sets gf spo't cornpanv.In
i*"oJtn. fotto*iog u"qoisition-related costs:
P25,000
Legal fees to arrange the business combination

Coits of SEC registration, inclttding accounting
and legal fees
Cost of issuing stock certificates
Documentary stamP tax
12,000
3,m0
20,000
Immediatelybef,orethebusinesscombinationinwhichSpotCompanywas
dissoIve4Spofsassetsandequitieswereasfollows(inthousands):
Fair Yalue
Boak Value
Current assets
Plant assets
Liabilities
Common stock
Retained earnings
P2,000
Pl,l00
1,500
2200
300
2,000
200
300
acquisition) and APIC to be

what is the amount of goodwill (income from
recognized bY Pool ComPanf
P(450,$00) and P 1,3 3 5,000
b. PU 1 0,00q and PI,200,A00
c iflz i,oog) and P 1,1 I 5,000
d. P(450,000) and Pl,3 I 5,000
a-
Businesi Combinations
14-6:
Plata corporation paid P100,000 cash for the net assets of

which consisted of the following:
Book
Current
assets
Property and equipmenl
Liabilities assumed
tl
oro Company,
Fair
Value
Value
P20,000
80,000
P29,000
20,000
18,000
I10,000
The property and equipment aiquired in this business combination should be

recorded at:
a. P110,000
b. P10A,000
Lr
d.
l4-7
P
P
91,666
90,000
Abel and Cain Corporations were combined on April l, 20 I 3 in a busiricss

combination, and Cain Cor-poration was dissolved and liquidated. For the year
2013,the companies hadthe following net income records:
Abel Corporations (January 1l-April l)
Abel Corporation (April l-December 31)
Cain Corporation (Jantrary l-April I )
Cain Corporation (April l-December 3l)
80,000
1,320.000
200,000
400,000
Abel corporation, the surviving corporation, will report income for 2013 of:
i
r
i
a.
P1,320,000
b.
P1,40q000
c.
P1,720,000
P1,900,000
d.
14-8: onApril
27,2013,Peter, Inc paid p800,000 for the assets ofAna company.

The recorded assets and liabiliiies ofAnacompanyonA pilzl,20l3 follo;;
Cash
Inventory
4g0,000
Property and equiprnent (nct of accumulated

depreciation
Liabilities
ofp640,000)
960,000
360,000
t.!-/
Chapter 14
i4-8, Continued
27 ,2013 it was determined that the inventory ciAna had a fair value
P3-80,000, and the property and equipment (nat) had a fair vaiue of
P1,120,000. Whatisthe amountofgoodwill (income f;ou,scquisition)resulting
-&om
the business combination?
OnAprii
of
a" P(500,000)
&e.
P 100,A00
P(350,A00)
c. P i00,040
l4-g.
Avon Corporatron issued comrnon stock with a par vr;irr of P450,000 and a
market value of P700,000 to acquire the net assets u'f, i,;il Corporation in a
business combination. Avon reported assets sfFZ,***.*0S andliabilities of
P542,000 immediately before the business combination. Beil Corporation's
assets andliabilities hadabookvalues ofP450,000 a:idFi87,000, respectively.
The fairvalues ofBell'$ assets and liabilities were p$*0,t00 and Pi88,000,
respectively.
What amount should be reported as total assqts of the combined entity

imrnediately folioning dre buiiriess c,.:mbination?
E. P2,888,004
b.
c.
d"
P2,6(N,004
P2,1.58,040
P1,870,000
14.10: When White Company acquired Black Company's iret assets by issuing its
own capital stock, it had the following acquisition-relate.d costs:
Broker's f,ee
Pre-acquisition audit fee
General administrattve costs
Legal fees for the eombination
Audit fee for SEC registratien of stock issue
SEC registration fe* for stock issue
Other acquisition eosts
P50,000
40,000
15,q00
32,000
46,000
5,000
q000
The acquisition-reiatd eosts shouldbe debited to the follerving accouilts:
Additianal
Ebpers6s
eb.
c.
d.
paW
ta cupital
Ptr4s,(ffi$
P7*,*0*
P2l,{r&8
?143,&W
P5l,&#G
PSI,S6S
Pll,$lNl
s,s{.3#
I t3.
l4-lI: ,9,_1r*rp,.1,2013,
polo Compan
VpfWp2ry0,000 cash and also issue 1g,000
shares
parcommon stock ,{i,thamarket value of p330,000 forthe
net
9t_rtO
polo
of
Sure
p30,000
In
addit{on
pays
for
iegisteringanJ
lsse!
-company.
issuing the 18,000
shares and P70,000 for profesiional fees"ro effeJt tne
combination- Summary balances immediateiy before the conrbinrii",
ir
follows (in thousands):
",
Polo
Book Volue
Cash
P350
Sure
Book
Value
Sure
Fair
Value
P40
P40
BO
100
260
r80
r80
Total assets
P760
P320
P340
Current liabilities
Other liabilities
Common stock, PlO par
Retained eainings
Pl60
P30
50
420
200
100
40
Total liabilities and equity
P760
P320
Inventories
Other current assets
Plant assets - net
t20
30.
30
What is the total asset df Polo Company after the acquisition?

ab.
c.
PI,090,0q0
Pl,090,000
P1,260,0a0
P1,060,000
l4-l2z on March l,20l3,SS corporation acquired fcr pI,400,000 all the net assets
ofMM Company. On the date ofthe combination, the carrying uulu. oiUlutl,
identifiable net assets was p1,150,000. The current rii. irrr" oiMM,;
inventories was p200,000 less than tir.ir
rh;;";";;
value ofMM's plant assets was pa!!,!00""r.1ring,"il;;;d
h!;r"th*;eir carrying
The current fair valuis of all identifiable net alsets of MM werelqrial
to tfr.ii
carryingvalue. The journal entryprepared by SS corporation torecord the
business conrbination includes :
;;;.
.'
a.
b.
e
d"
A
A
A
A
debit of p200,000 tu fnventories.

creditblrtoo,ooo to ptiii )ss'is (nal.
debit af p350,000 to Goodwill
d&it of p5A,000 to Goodwitl
i;;
I4
Chapter
l4
14-13: Astro Corporation purchased the net zusets of Bisto Corporation for P 160,000.
On the date of the purchase, Bistro Corporation had no long-term investments
,in marketable securities. The liabilities ofthe corporation amounted to P20,000.
' The marketvalues of its assets were:
I
Current assets
Noncurrent assets
Total
P200,000
80,000
120,000
The noncurrent assets and goodwill (income from acquisition) acquired should
be recorded at:
Noncurrent
a.
b.
c.
d.
(Income from acquisitian)

sssets
P120,000
P100,000
P140,000
P150,000
Goodwill
P(20,000)
PO
PO
Ptr00,000
14-14: On April 1,2013, the Rolex Company paid P600,000 for the net assets of
Seiko Company in a tansaction properly accounted for as acquisition. On this
date, the assets and liabilities of Seiko Companywere as follow:
Cash
Merchandise inventory
Plant assets (net)
Liabilities
60,000
180,000
360,000
135,000
Furthermore, it was determined that the merchandise inventory of Seiko

Companyhad a fair market value ofP t42,500 and the plant assets of P420,000.
What should be the amount recorded as goodwill by Rolex Company as a
result of the business combination?
o-
b.
P 37,500
c
d
P112,500
P112,00A
lts
B u s i nes $ C.titn b inati o ns
14-15: MM Company issued its cornmon stock{orthe nt assets of PP,Cornpany in a

business combination teated as aacquisition. MM's common stock isiuea was
worth P1,000,000. At thedate of combination, MM's net assets had a book
value ofP I .2 million and a fair value ofP I .6 million; PP's net assets had a book
value of F650,000 and a fair value of P800,000. Immediately fotlowing the
combinatioq thene't asse$iofthe combingl companyshould have bear reported
atwhatamount?
o.
b.
c.
P3,000,000
P2,200,000
P2,000,004
P1,850,00a
14-16: The net assets of BB Company have a book value of P300,000 and iteir
market value ofP420,000. Among the undervalued assets are the plant and
equipment which have a book vah6 ofP200,000 and a fair value of P225,000.
AA Company issues stock with a parvalue of P250,000 and a market value of
P600,000 for the net assets of BB Company. Shortly after the stock issue BB
merges withAA Cornpany. At what amount should BB's plant and equipment
be recordpd onAACompany's books
0.
b.
l-.
d
t4-17t
P250,000
P200,000
P225,000
P300,000
Presented below is a condensed balance sheet for the Tiger Company as
Decembei3l,20l3:
Book
Current assets
Plant assets
Value
Market Value
P200,000
P225,000
300,000'
Total
Liabilities
Capital stock,parPl0
P625,000
P150,000
50,000
Additional paid-in capital
100,000
Retained earnings
200,00CI
Total
400,000
34pfl9
Pl25,000
of
*,ISr"
Chapter
*.#Hit4fitffi
l4
gnlanrmry l,20l3,Acquisition,Inc. issues 10,000 shares ofits P 10 parvalue

wi& a ml,arket vafue of P50 per share for the net assets ofTiger Company.
1.s@ck
rd&at is the fotal socl<holdeis' equiy ofAcquisition, Inc. after the acquisition?
a.
P850,000
b.
c.
Pi50,000
d.
P450,000
P500,000
14-18: Using the data in Q 14* I 7, the gcquisition should be recorded by Acquisition
Inc.with the following en!ry assuming stock issuance costs amounting to
P405,000 was
&
incurrd:
Qurreat qssels
Plant
ossets
200,000
300,000
Liibilities
150,000
Capital stock
Additional paid-in copital
100,000
Retained earnings
200,000
Carrent assets
Plant ossets
Goodwill
Stock issyance costs
50,400
200,000
300,000
150,000
5,004
Liabilities
Ctpital stock
15A,oo0
Cash
405,000
100,000
Current assets
2.25,000
Plant assets
Goodwill
400,000
l2 5,000
Capital stock
Additional pgid-in capital
Retained carnings
100,00a
Cuneatasric,s
Plant
150,0a0
Liabitiiies
ass*
.Soctirsacrcc cofi
Liabilitics
Cqitol fioc*
Cesh
50,0a0
240,000
225,000
100,000
5,000
125,000
100,00a
405,000
,I
.Busriress Co inb i nal
14-19: The
1t7
io n s
Conp.anywilfiSsug
lhares ofP l0 par value con'rmon stock forall the
NN
company. vV conrpany,s common ,to.t t,ur-u
jrtne
current *urrylvalup of p40 per shart. The NN'co'm'punyt itui"n
Financial Position pdior to the aiquisition is shown below.
"nioi
assets and tiabitities
M{Company
.
itatement of Financial Position
January I,20t3
Assels
Current assets
Property, plant and
cquipment (net)
Liabil ities and Eqaitlt
320,000
880,000
Liabilities
Equity:
Conrmon stock. P4 par
Additional paid-in
capital
Retained eamjngs
Total
Assets
Pr
,200.000
Total Liabilitics und Equity
400.000
P 80,000
320.000
.100.000
800.000
P
I.200.o00
The fairmarketvalue ofthe curentassets is p400,000 while that ofthc propcrty,

plant and equipment is P I ,600,000. All the liabilitiei are correctly statcd
Company issued suffrcient shares of stock so that thc fair nrarket valuc of thc
stock issued is equal the fair market value NN company's net asscts.
vv
To have an income from acquisition of p I 00,000 the number of shares to be

issued by W Company should be:
a.
b.
c.
d.
37,500
37,000
42,500
42,0A0
14-20: Using the data in Q l4- 19, to have a goodwill of p200,000, the number of
shares to be issued
L 40,000
b.' 44,500
c.. 36,000
d. 45,000
byW
Company is:
II8
Alwpter 14
14-21:, Condensed Starcment of Financial Position for Pablo and Siso Corporatrons at
Dece,lnber 3 l,2}lz,ar as follows (in thousands):
Pablo
P130
7a
40
Total assets
:P700
P500
P50
500
50
100
P700
P60
Curent liabilities
Capital stock, Pl0 par
Retained earnings
Total eguities
i
go
200
140
100
P500
u*"t
value
i:
P60
Current assets
Noncurrent assets
ofPi0
per sharc for the assets and liabilities of Siso Corporation. Siso is
dissolved. TLe book values reflect fair values, except a nonculrent asset of
Pablo, which have a fair value of P400,000, and the current assets of Siso,
which have a net realizable value of P 100,000.
i
I
,ubro*^*Pilo*,"**ot.*n*tT
r.
Costs of registering and issuing securities issued

Other acquisition costs of combination
II
n'
F15,000
25,000
l.
t
I
I
Contract for contingent consideration to be paid to Siso, P75,000. This is

determined on the date of acquisition.
t
t
I
I
t
i
I
I
I
What is thetotal assetof Pablo Corporation afteracquisition?

ob.
c.
P1,410,040
P1,265,000
P1,395,000
P1,385,000
14-22: Using the data in 14.21, what is the total stockholders' equity of Pablo
Corporation after acquisition?
& P1,210,000
b. P1,2501000
C.
PU50,000
d"
P1,2E5,000
119
Items 11-23 to 14-25 are based on thefollowing data:

Statement of financial position refld;ting *i6r* *.ourting procedures, as well
as fairvalues that are to be used as baiis of the combinatlon
p.rp*.a oo
"rc
September 1,2013 as follows:
Assets
Capital stock, ali Pl0 par

Retained earnings (deficit)
Total equities
e 9grypqY
A Company
B Company
Bs250pgg
P6199!00
P3,950,000
1,700,000
P2,650,000
1200,000
C Company
P00,gq
P530,000
275,000
140,000
500,000
(400,000)
P5,250,000
2,450,000
(1s,ooo)
.P900,000
P6,800,000
shares have a market valu eof P}2per share. Market values is not
available forshares
ofB Companyand
Company.
p1 lgptem-b-er
I , 20 I 3 A Company acquires all of the assets and assumes ihe

liabilities of B Companyand CCompanyby issuing 200,000 shares ofiG siock
-of
to B cornpany and 29,000 shares
iis Stoct tdc companv. A comoanv
pays.Pl.0,000 forregistering and issuing securities anO 1TZO,OOO for ottrei
acqui si ticn Costs of comb inati-on.
14*232 what is_the goodwill to be recorded byACompany on September
a.
b.
c.
d.
P518,000
P250,0AG
P268,00A
P500,000
l,zol3?
14-24: What is the total assets of A Company after cornbination?

b.
P13,438,000
P12,920,000
c.
P12,80,A00
d.
P13,249,000
il"
14'25: What
is the total stocichoiders'equity in the combined statement of financial

position aftcr combination on Septerirb er l,ZAl3?
s. P6;A8,000
b. P7,149,000
c. P6,728,0A0
d" P|,3ilq,fi0a
120
Chapter
l4
l4-25ii Pearl Company is acquiring the nt assets of Sam Company for an agreedupon price of P900,000 on Julj I , 20 1 3. The value was tentatively assigned as
follows:
'Current
assets
Land
Equipment -year life)
Building (20-year life)
Current liabilities
(5
Goodwill
P100,000
50,000
200,000
500,000
(150,000)
200,000
Values were zubject to change during the measurement period. Depreciation is

taken to the nearest month. The measurement period expired on July 1 ,2014,
at which time the fair values ofthe equipment and building as of the acquisition
date were revised to P 1 80,000 and P550,000, respectively.
I
How much total depreciation expense would be recorded for 20 14.
o. P63,500
P65,:000
b. 'P61,500
c.
d" P65,500
-
2.
Howmuchgoodwill''ispresentedinflre20l4statementoffinancialposition?
a.
b.
c.
d
P230,000
P170,000
P180,000
P200,000
14-27: On August I ,2012, the Gerry Company acquired the net assets of the Rodil
Company for a price ofP32M. At the acquisition date the carrying value of
Rodil's net asset was P20M. Atthe acquisition date a provisional fair,value of
the net assets was P24M. fui additional valuation received on June 30, 20 1 3
incrcased the provisional value to 27M and onAugust 3 l, 20 13 this fair value
was finalizeditZAl\d.
What amormt of shuld Gerryeomparlypresant lhe gpodwill in ie statement
fuancial position at December 3 l, 201 3?
&.
PSIII
P0M
a${._
of
Business Combinatiotrs
l2t
Big Corpgration purchases the net assets of the Small Corporation

for p500,000 cash.
Prior to the combination, Small Corporation has the follo;ing
Statement ofFinancial
Position.
Small Corporation
Statement of Financial position
January 1,2013
Assets
Lia
receivable
Propefi plant, and

equipment
Total Assets
il i t ies antl Eq
ui
ty
Current
Stockholdcrs' equity:
.stock,
Conrmon
Accounts
Inventories
liabilities
Current asscts:
Pt2b,000
100,000
P220,000
PlO
par
Retained
p50.000
p200,000
eamirrgs 250.000
450,000
280,000
Total Liabilities and
l!99,099
Equiti
P500,000
Fair.rnarketvalue agreewithbookvalues exceptto,rinventories andproperty,

plant ano
equipment, which have fair market values of p 140,000 and p300,0ooi".pJ.[*ivr"
consummate the transaction Big incurs p5,000 acquisition-related
costs.
Required:
'
2'
i
Record the acquisition on the Big Corporation's books. Provide

support for your
entyas needed.
|ecord the
sale on the books of Small Corporatron and the subsequent

total
liquidation of the corporation.
122
Chapter 14
DOG Cornpany acquiled the net assets ot CAT Corporation on January 3, 201 3, for
P565,000 cash In ad<titiorL P5,000 ofprofessional fees were incurredin consummating
tbe con6ination" At the tim-e of-acquisition CAf Corporation reported the following
book value and curre,nt market data:
Book l/alue
Fair
Yalue
Total Assets
135p,000
P700,000
Accounts Payable
Cash and Receivables
[nventory
Buildings and Equipment (net)
50,000
100,000
200,000
Patent
Common Stock
Additional Paid-in Capital
Retained Earnings
Total Liabilities and Equities
30,000
'
50,000
150,000
300,000
200,000
30,000
100,000
80,000
140,000
P350,000
Required: Give the joumal enty or entries recorded by DOG Cornpany to record the
acquisition of the net assets of CAI Corporation
On January 1, 2013, Tagalog Corporation issued 5,000 shares of its P10 par value
common stock to acquire the assets and liabilities ofVisaya Corporation. Tagalog
Corporation shares were selling at P90 on that date. Carrying value and fbir value data
forVsala Corporation at the time of acquisition were as follows:
Inventory
Fair
50,000
I20,000
Value
50,000
200,000
300,000
Buildings and Equipment

Less: Accumulatcd Depreciation
(150,000)
Total
P420.000
Prs0,000
A.ssets
Accounts Payable
eommoh Stock iP20 par value)
Retained Earnings
ri
Carrying value
Total Liabilitirs and Equities
400,000
50,000
200,000
t70,000
50,000
Business Combinationi
t23
Problem I 4-3, Continued
Thgalog Corporationpaid P25,000 for SEC registration and issuance ofits new shars
and paid professional fees of P I 5,000.
Required: Record the jodrnal entnes for the acquisition in the books of Tagalog
Corporation.
On January l,20l3,Pal Products Corporation issues 12,000 shares of its PlO par
value stock to acquire the net assets ofTan Company. Underlying book value and iirir
value information for the statement of financial position items ofTan Company at ttre
time ofacquisitionare as follows:
Book
'
Value
Fair
Value'
Cash
P60,000
Accounts Receivable
Inventory (lifo, basis)
I00,000
60,000
Land
50;000
400,000
150,000)
350;000
ts29,00q
P695,000

Less: Accumulated Depreciation
Total Assets
Ascounts Payable
Bonds Payable
Common Stock (P5 par value)
Retained Earnings
60,000
100,ooo
il5,000
70,000
10,000
200,ry
10,000
1t0,000
150,000
70,000
90,000
P520,009
Tan shares were sellingatPl8 and Pal Products sharcswere selling atP5Qjr,rstbefor
the merger announcement. Additional cash payments made by Fd Corlhtion in
completin g the acquisition were:
Broker's fee paid to firm rhat located Tair
Audit fee for.stock.issued by Pal produbts
Cost of SEC rqgistration ofPal products Bhaies
P10,000
I2,000
6,000
Required: Prepare all.joumal entries to be rccordd os pat produc-tsr'Bods,
t24:
Lhapler
l4
P,apaGorporationandMamaCompanyhaveannouncedtermsofanexchangeageement
uqderwhic\Papawillissue 8,000 shares ofits P10 parvalue comrnon stock to acquire
all the adsets ofMama Company. Papa shares currently are trading at p50, and Mama
P5 par value shares are trading at P l8 each. Book value and fair value statement of
financial position data on January l, 20l3,are as follows:
Papa Corporation
Book
Land
Buildings and Equipment (net)
Total
Assets
Yqlue Fair Value
Mama Company
Book
Value Fair Value
P1s0.000
P150,000
P 40,000
100,000
300,000
170,000
400,000
50,000
160,000
P550,000
P720,000
P250,000
Common Stock
Additional Paid-in Capitat
Retained Earnings
P200,000
330,000
P100,000
10,q00
140,000
Total Equities
P550,000
P250,000
20,m0
,10,000
85,000
230,000
P355,000
Requiredi
.Whatwillbetheamountrcportedimmediatelyfollowingthebusinesscombinationfor
each ofthe following items in the companls combined Statement of Financial Position.
1.
2.
3.
4.
5.
6.
7.
CommonStock
'
CashandReceivables
Iard
BuildinpandEqurpment(n*)
Gmdwill
AdditionalPaid-incapital
RetainedEamings
B u si.n
ess Contbin
a t i o tt
t 25
i1
tl:
The following Statemenf of Financial Position r.vere prcpartd for Rcd unri Blu"^
Corpprations on Jatiuary l, 20l3,just before theyentered into a busiru-issconrbinatiop:
Rcd, Corporatiou
ltems
Book
Lwentory
l4tluc
300,000
400,000
tiog{oot
Total Assets
P1,100.000
.:
Accounts Payablc
Bonds Payablc
Common Stock:
Pl0 par value
P5 par valuc
Retained Earnings
Total Liabiliries and Equitics
l\iluc l:airlrtlrt,
I' 50.000
l, -i0.000
Fair value Boak
900,000
Lcss: Accumulatccl Dcpreciation
lJIttL'Coryrot'dtion
'
300,000
600.000
870"000
{
PtJ70,qo0
l0i).00{)
145.0(x)
100.(x)0
r50,01x))
-2s0lu)
P100.000
I'54-s.0U)
::::t::,=
100,000
400,0q0
100,000
440,000
4q,(X)0
(r0,0U0 '
l,
4Q.000
t{-5.(x)0
30o,oq0
t00.00()
rt00,0@
20.000',
.400,000
80.0(x)
};8900
'
I'300.{xx)
Required:
AsSune that Red acquires the net assets of glue by issuing 15,000 sharcs olsrock.
Prepare a Staternent of Financial Position for the conibined company irnmctliatcly aftcr
the acquisition if the market price of Red shares is (l ) P40and (2) P20 ar rhc rinrc rhc
acquisition occurs.
126
Chapter 14
Coke Company and Pepsi Company agreed to a combination on January I , 2013. On

the date gfthe combination, the companies report the following data:
Coke Company
Book
Pepsi Company
Yalue Fair Value

90,000
90,000
Yalue Fair lhlue
Book
Inventory
100,000
150,000
20,000
30,000
Land
100,000
140,000
10,000
Plant and Equipment

Less :
Accumulated Depreciation
400,000
( 150,000)
300,000
200,000
80,000)
20,000
42,000
15,000
Ji
II
lf
I
12i0"000
11
-tt
Total Assets
Current Liabilities
I:fllOO
P680,000
P180,000
:=
P2y,qm.
80,000
200,000
20,000
240,000
Capitd Stock
Additional Paid in Capital

Retained Earnings
P540,000
80,000
20,000
20,000
5,000
20,000
135,000
1180{A
Coke has 10,000 shares of its P20 par value shares outstanding on January t,2013
and Pepsi has 4,000 shares ofP5 par value stock outstanding. The market values ofthe
shares are P300 and P50, respectively.
Required:
Coke rcsues 700 shares ofstockin exchange forallthenetassets ofPepsi. Frepare
a
StateinentofFinancialPosition forthe combined entityimmediatelyfollowing
theacquisition.
b.
Prepare the stockholders'equity section ofthe combined company. Assuming

coke acquires allthe netassets ofPepsi byissuingthe followingshares and stock
issuance costs ofP350,000 was incuired:
(1)
(2)
(3)
1,100 sharesofcommon
1,800 sbares ofcommon
1,000 shares ofcommon
127
Business Combinat:ions
On July 1,2012 Dollar Transport acquired all of the assets and liabilities of the Avis
Companybyissdlng25,000 common shares. Atthedate ofacquisition, Dollar stock

was selling forPg6pershare; thenetbookvalueoftheAvis Companyonthatdatewas
P2,200,000. All the excess of the purchase price overAvis Company net book value
was attributable to goodwill. The following annual results of operations were reported
by Dollar and Avis prior to the combination and by the combined company subsequent
tothecombination:
2012
2011
2013
Revenue:
Dollar
Avis
P1,400,000
350,000
P2,000,000
P2,100,000
500,000
100,000
620,000
700,000
Net Income:
Dollar
Avis.
These results of operations reflect thd amounts actually reported for each year; the
amounts reported for periods subsequent to the combination are based on the
combination's having been treated as a purchase.

The revenues and income for both companies have been earned evenly throughout
individual years. For the first half of l!}lz,Dollar eamed net income of P255,000 on
revenue of P800,000 Avis earned P55,000 on revenue of P200,000. There pere no
intercompany kansactions between the two companies at any time. Dollar had 100,000
shares of common stock outstanding prior to the combination.
Required:
Present the amounts that rvould appear for 20 I | ,20l2,and 20 13 in Dollar Transport's
comparative statement of comprehensive income prepared at the end of its fiscal year
on Decenrber 3 1, 20 i 3, for (1) revenues, (2) net inconte, and (3) earnings per share:
.:,
Cltapter
l4
.i
ktc., entered into a busineis combination agrement with Honey

ShBmicql Corporation (HCC)" Under the tenns of the agreeirent, Peter trndustries
Iseued f80,000 shares of its Pl par common stock in exchange for all the assets and
tiiibilities ofHCC. The Peterlndustries shares then were distribited tc the shareholders
ofHCC, and HCC was liquidated.
PertEi Industries,
Irnmediately pnor to the combination, HCC's statemeru ot financiei position appeared

as follows, with fair values also indicated:
Book
Yalues
Assets:
Casr.
Accounts Receivable
Less: Allowance for Bad Debts
Inventory
P
(
Liabilities:
Debentures layable
Eess: Discount,on Debentures
55,000
130,000
100,000
63,000
2^425,M0
2,500,000
500,000
14'oS
P 3,027,300
&Ir,500
t37,,2W
500,000
100,000
1,000,000
1,597300
Stockholders' Equity:
600,000
500,0CI0
Retiiement of Preferrd,stook
Rctiired:Erraings
Loss: 'Ireasury Stock (1,500 shares)
Total"tiabilitics rnd Equity
ZZ000
i
I
137,200
520,000
i{
95,000
950,000
40,000)
CoomooStock(P5 par)
AdUitiond Paid-In Capital
&omComraonStock
Additional Paid-In.Capital &om
l?_5,000
95,900
Total Liabilities
395,0C10
125,000
Current Payables
Mortgages Payable
Equipment Trust Notes
391,000
150,000
iil4,000)
Patents
Special Licenses
Total Assets
28,000
251,500
6,500)
Land
'
259,000
Long-Term Investments
Rolling Stock
Plant and Equipment
29,000
Fair
Values
220,100
12,000)..
u,0r?,3w
P1J02200
8rr.siae.r.s Cotn bi fia tions
t 29
Problem I 4-9, Continued
hnnrediately prior to the cornbination Peter Industries common stock was selling for
P 1'l pershare. Peter Industries incurredprofessional fees of PI35,000 in uo*!ir!tfr.
business cambination and P42,000 of stock issue costs.
Required:
a-
b.
Prepare all joumal entries that Peterlndustries shoutd have entercd on its books
to record the acquisition.
Present all jotmal enbies that should lrave been entered on the books of HCC to
record the cornbination and the distribution of the stock received.
O-n
langarY l, 201 3 Subic Company issued shares of its P5 par value stock to acquire
all the shares of Ciark inc. Company, which was liquidated immediately thereafter. The
Statement ofFinancial Position for Subic Company and Statement ofFinanciai position
for the combined company under the purohasl mlthod are presented below:
SubicCompany
Cash
CombinedCompany
P 70,@0
Aicounts Receivable
Inventory
180,000
100,@
220,W0
Land
100,000

400,000
100,000
130,000
150,000)
175,000
.
550,000
150,000)
Goodwill
55,000
Total Assets
P650,000
Pr,130.000
Accounts Payable
P 40,000
Bonds Payable
C::mrnon Stock
Additional,Paid-In Capital
RetainedEamings
100,000
200,000
60,000
250,000
P650,000
60,000
160,000
240,000
42A,NA
250,000
P1,130,000
13',A
Chapter
l4
Prohlem I 4- I (t, Continued
Required:
ShortlyapertheaboveinformationwascompildafiredestoyedSreaccountingrecords.
Youhavebeenemployedto determinetheanswers to anumberofquestions raisedby
the owners bf the newly combined company.
a.
b.
c.
d.
Whatwas thevalue oftheshares issuedbySubic Companyto acquireClarlq hc.
Companf
Whatwasthe fairvaiue ofthenetassetsheldbyClarklnc. immediatelybeforethe
combination?
HowmanysharesolSubicCompanywereissuedincompletingthecombination?
What was the markef price per share of Subic Company stock at the date of
combination?
&rMay6,2013,
Papa Corporation acquiredall ofSon Cornpanls assets andliabilities
by issuing its P5 par common stock Son's P I 0 par value comfilon shares had
price of P55 each at the time of conabination.
market
Required:
Using the partial Statement ofFinancial Fosition for Papa Corporation and Son Company
prior to the business combination and immediately following the combination presented
on the next page, answer the following questions:
a.
b.
c.
d.
e.
L
tr
What was the book value ofSon's inventory at the date ofcombination?
Whatwasthe fairvaiue oftotal assets reported bySon atthe date ofcombination?
Whatwas the marketvalue of Son's bonds at the date ofcombination?
How many shares of connrnon stock did Papa issue in completing the acquisition
ofSon?
Whatwas the market price per share of Papa's stock at the date of combination?
What amcunt of goodwill will be reported following the business combination?
What amount of retainet! earnings did Son report immediately before the
conrbination?
tr
What aqnount of retained earnings wiil be reported following the business

cornbination?
I3t
Problem l4-l 1, Coitinued
Totalsfor
Papa Corporation
'Book Yalue
Cash
P50,000
Equipment (net)
assets
Accounts payable
Bonds payable
Bondpremium
Common stock
APIC
Retained earnings
Total equities'
Yalue
P 20,000
Fair
l/alute
100,000
350,000
2
1rt0 000
30,000
40,000
8620,o,ry
1125,000
P?
P 30,000
Goodwill
Total
Book
20,000
55,000
110,000
.?
Accounts receivabie
Inventory
,Sor Company
70,000
300,000
l29,OOO
10,000
120,000
P620;000
55,000
P 70,000
145,000
210,000
570,000
?
Pl,o77,qq0
30,000
100,ooo
Combiaed
sopoo
-
55,000
,1
P325,000
100,000
400,000
5,000
190,000
262,000
?
DO
L:
P1,077,000
In addition to the requirements on page t 30, assume that priorto the time the business
combination was completed, Papa paid professional fees of P8,500 and P6,300 for
itock registation and transfer fees in connection with the combination:
I.
2.
3
Give thejournal anhy or entries recorded by Papa for these costs.

Taking these additional costs.into consideration, what amount ofgoodwill will be
reported by the combined entity following the brsiness oombinatiori?
Taking these additional costs into consideratioh, what amouirt of additional pai,&
in capital will the combined entity report following the business combination?
E*iE Csmpany acquired the net assets of Honey Cornpany
frffib#
following enu'y to record the acquisition:
Cwtent
20a,0ac
30a,aa0
t 0*,aa{}
60a,a0a
200,aaa
assets
'&qulptrtent
I,add
t&uilding
Goodwill
Liabilities
t 60,040
2A0,040
I,A4A,00A
Cqmmon stock, P! par

,$.dditional paid in capital
Reqwr*d: Prepare the required entry on January

rrdependent contiiryency agree*rents:
1
I.
,1
3.
or: January I , 201 1 , and
, 20 i 3,
for each of the follcwing
An additional eash payrxents woutrd be rnade on January l , 20 i 3, equal to twice

the arnount by which avffrage earnings of the Honey Con:pany exceed P 5 0,000
pcr year, prior tc January l, 2013. Net income was P100,000 in 20tl and
p120.0S ig20t2.Assr.rmettratthe liabilitiesrecordedonJanuary 1,2011, include
aa estklated cr:ntingent liabiliry recorded at an estimated amount of P80,000.
Added shler,esn*euldbe issued on January L,2Al3, equal in value to twice the
amo-ant bywhieh averago arurual eamings ofthe Honey Company exceed P50,000
per yeer, prior to Januaqy 1, 2013. Net inconne was P100,000 in 2011 and
P1?0,m0 in 2Str2. Th*marketprice oflthe shares on Jantlary tr,2013, was P10.
g-ddedstlares wouldbe issued on Jani:.ary 1,2013, to compensatefor anyfall in
the value of Gene comrnon stock below P I 2 per share. The settlernent wouid be
to c.ure the deficiencyby issuing adcied shares-based ori their fai-r value on January
1, 20 i 3. The market prie e of the shares on January I , 20 I 3, was P8.
Snsiaes.s
e* m h inat
i on
t33
Papa Corporation is contemplating the atquisition i)f tlre ner assets of Baby Company
on December 3 I " 201 l. It is considering making an offer, which would inilude o .u.i,
payout of P400,00-0 along with grving t 5,000 shares of its P4 par value comnron stock
that is currentlyseliing forP40 pershare. Papa aisc agrees that it willpay an additional
P100,000 on January I ,2}l4,ifthe average net nreome of Baby's businesi unit exceeds
P 160,000 for 20 I 2 anii 20 13. The likelihood of reaclring that target is estimated to be
75?o. The Statetnent of Financial Position of Babi, Company aiong with estimatcd fair
viiues trfthe net assets to be acquired is as follows.

BabyCompany
Statemrnt of Financial Position
December3I,20t3
Book Vtlue
Current assets
Non-current
Total
assets
assets
Current liabilities
Non-current liabilities
2?4,0c0
P2s6.000
560.000
_rt%p00
I'el!!O0
P162,000
464.000
626,N0
P162.000
_44qq00
_60191!
100.000
40S,,Jiii.)
Retained earnings
158,ry
Total equity
668.000
Total liabilities and equity
Value
ri,020.090
lOtal llablhtles
Common stock
Foii
P1,294,000
Required:
l.
2.
Prepare thc entryon the books of Papa Corporation to record the acquisition
of
BabyCompany.
Assurne the net income ofBabyCompany is P240,000 tor 2{i14. As a result, thc
likelihood ofpaying the contingent cpnsideration is believcd to be 90%. What, if
any, adjusting entry is required as of becernber 3l ,2014?
134
Chapter ! 4
Ace co-Elpanyacquired the net assls cf Hcart cornpany on January

1,2013,
5
rv'.
} -v ir' for
P5O0,dO0 cash. Tlie tair v*lue ofAceos net aseets *";E40'0,6{r.
---'
Required:
I.
2.
I/hatamoy,t*l'g<:or;"ariil
Compa.r3{
r.'as;ee*rded byAcecnmpanywhen itacqr_rired Heafi

'i
usingtheingcm:atiry *?:cv+ ffis-eniirtl:* foll*wiilgindependentquestiors;

On Decemrer 3 I . ;r,r j 4, ihcre w+r* i,,ci,;af,or,s
,i#* nuuu
been impeirai:Al"f or rit5..-$e
irai ue of,Ace
1a;:ryurg
including goodu,ili, u,as F5il0,+0u and itre recoverable amounicr*r*
;;
P520,000. x g+:eiwi[ impaired? If so, what adiustonent i, n".aJi- -"- ion December 3 i, z*r6,thcre +er* ir:dications thatgo;Jwili;-;* *igr,,
have been impaire,i. At ti'rat time, ttracar$ng vut
excludinggocdrvill- was p340,CSS" ffre i"coreiUf. i*ouni
estimated to be F4cc. 000. Is geoei,r,ril I i mpaired? If so,
"frn-
a.
ilil;;;;irj
;"*p*y;;il;,;".,
*i
b.
needed?
Jore**'-;;;#;.
*ii*;
dt;dj -;;;;;
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,S"r* :. $:
l;li S CRC-ACE
eftc#
tr009
The Professional CPA Review School
IFRS 3: BUSIHESS COMBINATIONS
A Blsiness-eomhlna$m is simply "a transaction or other event in which an

acquirer obtains conirot of one or more businesses". lontrol of an entity is where
one pdfi-1or'a*ffibbr of parties) has the power over another to.vgovern.its
"'" financial and operating policies so as to obtain the benefits from its activitE
In a straightforward business combination one entity will acquire another, resulting
in a parelr!-su$9gry Lqlatgl:I'8..
t* -' "---'-i
ifns S ishould be applied to all business combinations, except in the following
'ciiiu-mttances:
where two or more"quite separate businesses are brought together to

operate as one
entity in the form of a-jrin[ venturg
ultimately controlled by the same party) are reorganized as part of a

business combination. A typical o<ample is where subsidiaries within a
group are moved around the group so that theif immediate parent entity
' c
,
and
where an asset or a group of assets have been acquired and they do not
constitute a business. In such circumstances; the accuirer should recognize
statements.
Identifying a business combination

An entity shoulo urr"ir-*rrJ;r;;-il;rti.ular transaction is a business combination
by applying the definition of a business combination, i.e. has the entity gained
A business is defined as being 'an integrated set of adivities and assets that rs
capable of being atnducted and managea for the purpose of proviCing a return in
the form of diviCends, lower asb or other economic benefrts dkectly to investors or
other owners, membets or prtbipants'.
business combination may be struCured in a number of different ways, and
therefore the facts of each transaction should be assessed carefully. IFRS 3 provides
a list of examples of business combinations, including:
one or more businesses become subsidiaries of an acquirer;
one entity transfers its net asset to another entity;
r
.
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,*.;TI
\F'i ij
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.
r
CRC.ACE
all entities that are
The Professional CPA Review5-ckrol -
pafi to the business combination
transfer their net
assets to a newlY formed entitY; or
a group of former owners of one of the combining entities obtains control

the combined entitY.
of
Acquisition method of accounting

/ll business combinations should be accounted for by the q-cqg!St!!9$-lI9j!,-o"*
whereby:
I,
I
I
{'ae.Agirqi;
with the other'
-one party to the transactisn is identified as ttre
being the
iqcqgiree. It is assumed that it will always be possible to identify an acquirer;
the acquisition date is determined;
the' identifiable assets acquired, the liabilities assumed and the non-
controlling
(minority) interest are recognized and measured; and
ihe resuliing goodwill or gain from a bargain purghase is recognized and
measured.
,;fhe application'of the acquisition metlpdioes not result in changes. to the

recognition :or measurement of thq'a_cquire/s-rown assets and liabilities, because
1'-i raentifying the Acguirer
'-j';il;'il;i';Ep';; ilplilil
the acquisition method

identify the acquirer. The acquirer is
over the other PartY.
to a
business combination is to
A combining entity is assumed to have control of another when;

The parent owns Jnore than half the voting power of an entity
The parent also" has .control, even if it owns less than half
*
+
of the voting
rights, if it has Power:
over more than hatf of the voting rights by viftue of an agreement with
r
,
r
.
policies of the entity under a

statute or an agreement
to appoint or remove the majority of the board of directors; or
to cast the majority of votes at meetings of the board directors
to govern the financial and eperating
i:c '{
"f$h
'W
IFRS 3 sets out
CRC-ACE
a number of indicators that may help with the identification of the
acquirer. These are:
.
.
.
the combining entity whose owners as a group receive the largest

proportion of the voting rights in the combined entity is likely to be the
acquirer;
where there is a large minority interest in the combided entity and no other
owner has a significant voting interest, the holder of the large minority
interest is likely to be the acquirer;
where one of the enUties has the ability to select the management team, or
the majority sf the members of the governing body, of the combined entity,
that party is likely to be the acquirer; or
where a premium has been paid over the fair value of one or more of the
combining entitler.grlor to the combination, the ?qqUtrer is likely to & the gntiff tha-[lp?!19 thg Prepigln
/,
i; -Determining the Acquisition Date
'7it iri-n"-iiqri.*t responsibility to identiff the.qcqur5jlrqq datr. The acquisition
date
i;?Afrn&-as wins tha affimWhizti tfre aiqiter iotaiis aittrot o{ the qqutlg-I
---. 1---i.l
The ac{uisition date is normally the date on which the acquirer legblly transfers the
onsideration for the business. However, it is possible for control-to pass to the
acquirer before or after this date.Ilhere several dates are key to the business
ombination, it is the date on which control passes that determines the date on
which the acquisition otrurs.
,jtonsideration Transferred in a Business Combination
The mnsideration tlansfered in a. business combination is tlie total of the fair

values at the acquisition date of the consideration given by the acquirer.
The consideration transfe
,
.
. r
da *uytake a nu*U",
of forms, such as:
cash or other assets given up;
liabilities assumed, such as taking on the liability for a bank loan of the
acquiree. But {qty1g-loqseE gl.gther*sngQ expected to be incurred in the
future do notform part'of the consideration; or
the issue'of equity instruments:,:r:h as ordinary shares.
Fair value is the amount which an entity will pay for, say, an asset when
exchanged between unrelated and willing pafties (i.e. not in a forced sale).
it
is
to achieve the business combination should;nog'

r'qny cggls_ jJrg.yIed by lhe Scqulrsr
instead such expenses, for example bffi
form partof tne consideration'tirlnsfegJ;
profit or loss in !h:. period in whiCh
and professi"nuf i""i, should Ue ,eiogttized in
is that where costs
they are incurred. Ihe exception to lhis g"neral requirement
should instead be
costs
such
.r. have ueen incurrfi,.iL issuing debr sr-is"uity,
and IAS
Presentation
*$Fi recoqnized ir i.;tfr;r." *iitlini i; Flra;;irt'.instruments:
ri
39 FinanciatinstrfmenB: Recognrtion and measurement'
(,t'
u"
-rhis usually r6ults in these msts beins gggEgjgn-Ile-g?:ryl3g.?Ln'99llldUrc
e!lYJil'flli9:
consideration payable'
considurution transferred should include any contingent
acquirer if specified
e.g. additional iash or equity sharei to be transferred by the
the transfer of additional
future events or conditions are met. A.b*ron example is
if agreed profit targets are met by the acquiree i{r the.post-acquisition
/he
consideration
value at the
period. Contindit considera-tion should ,be measured at its fair
a liabitity or as equlty
acquisition oiil.a-i"irdir"a uv the acquirer as either
should only include the
according to its nature. 1tt" .onsideration transferred
exchanged in the business
consideration transfeireA by the acquirer for the business
relationship between
a'trading
already
is
cornbination. Wf1"iu, for example, ihere
to this existing
paid.in
relation
is
that
the acquirer and acquiree, any consideration
part of the
forrn
not
should
contract,
supply
trading rerationinin'io1.
"*u*ple.a
snou6 be made of any such amounts paid'
businu* .o*ninutiln. O6.fotuie
$business combination achieved in stages

in stages,
such as where a 30o/o

A business combination may be achieved
purchases another
subsequently
interest in an'aciuireu *u, held and the acquirer
whole of the
H;-;q;ity intlluirto gain control' In these.circ.umstances;&e
acquisition
the
at
value
fair
its
at
consideration transferred ihoulO still be measured
should be
acquiree
the
in
date, so the previously recognized equity . interest
should 'be
gain
loss
or
remeasured to- riir. ,uru. ut itrat Oate''afiy resulting
where a
required
are
recognized Oiiertiy in profit or loss. Specific disclosures
equity
busiiess combination has been achieved iri stages'
Subsequent accounting for contingent consideration

to the amount recognized at the acquisition
The treitment of Subseqient changes
-depends
on the reas,on for the change' If the
date for contingent consiUeration
.nirg. *G iro, ,aaiirc,rrf information aboutrconditions at the acquisition date
and it arises within the measurement period (i.e. within 12 months of the acquisition
date - see below), the change should be related back to the acquisition date, with a
possible effect on the goodwill acquired. If the change results from events'after the
acquisition date, such as when it becomes clear that the acquiree has met an
earnings target and additional consideration is to be transferred, then:
.
-
.
:
,
where the contingent consideration is classified as equity, this amount

should not be remeasured and instead the final settlement of the
consideration should be recognized ds part of equity;
where the contingent consideration is classified as a liability and is
recognized as a financial instrument in accordance with IAS 39, it should be
measured at fair value with any gain or loss being recognized in profit or
loss or in other comprehensive inmme in arcordance withlAS 39; or.
where thb contingent consideration is ctassified as a liability but is not within
the scope of IAS 39, it should be accounted for in accordance with IAS 37
Provisions, contingent tiabitittEs and contingent assets or another more
appropriate standard
Recognition and Measurement of the Identifiable Net Assets Acquired

3 requires the acquirer to recognize at the acquisition date the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree. [IFRS 3.10] The definition of an identifiable asset is the same as that used
in IAS 38 Intangibte asseb, i.e. that the asset is either separable (it could be sold or
otherwise disposed of by the owner) or arises from contractual or legal rights (even
IFRS
though those rights are not separable).
Classifying and measuring the identifiable net assets acquired

The ideritifiable net assets acquired in a business combination should be classified or
designated according to their nature at the date oi acquisition, to ensure that other
international standards can be applied subsequent to the acquisition. Two
exceptions to this basic principle exist in relation to lease contracts, classified as
operating or finance in accordance with IAS 17 Leases, and an insurance contract
classified in accordance with IFRS 4 Insurane contncts. For these two exceptions,
it is the date of the incepUon of the contract (which wilt be prior to the acquisition
date) that is used for classification purposes.
The acquirer shall, at the acquisition date, measure the acquiree's identifiable assets
and liabilities at their fair value. in addition to the identifiable net assets acquired,
the acquirer should recognize any non-@ntrolling interest in the acquiree at either
fair value or at the noncontrolling interest's proportionate share of the acquiree,s

identifiable net dssets. This choice is available separately for each acquisition,
A number of exceptions to the recognition and/or measurement criteria in IFRS 3
apply in relation to:
contingent liabilities - these should be recognized if there is a present

a result of a past event and the amount can be measured
reliably in accordance with IAS 37.f6r a contingent tiability to be recognized
as part of a business combination, it is not a requirement for an outflow of
resources (i.e, cash or other assets) required to settle the obligation to be
obligation as
probable;
' income taxes
any deferred tax asset or liability arising from the
recognition of the identifiable net assets should be recognized in accordance

with IAS tZ Income taxes, notat fair value;
employee benefrts
any asset or liability related to the acquiree's
ernployee benefit arrangements should be recognized in accordance with
IAS 19 Employee benefiB, not at fair value;
indemnifrcation assets where the seller in a business combination
agrees to indemniff the acquirer for the uncertain outcome of an bvent or
item, the indemnification asset should be recognized at the same time as,
the recognition of the indemnified item. This will usually be measured at fair
value at the acquisition date;
reacquired rAhB - an example of a reacquired right is where an acquirer
had previously given the acquiree the right to use the acquirer's irade
a result of the business combination the acquirer reacquires this
right that it had previously given up. The reacquired right shoutd be
recognized at the date of acquisition on the basis of the remaining
contractual term of the related contract, even if the normal fair value rule
would require the likelihood of the rights being renewed for another term to
name. As
be considered;
share-basei payment awards- where the acquirer has replaced sharebased payment awards in the acquiree with those in the acqi.rirer, these
should be measured in accordance with IFRS 2 share.-based payment, not
at fair value; and
asrets held for sale - where the acquired entity holds a non-current
asset or disposal group, that is classified as held for.sale at the acquisition
date in accordance with IFRS s Non-current assets heid for site and
-,,l,Tqa
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'%**tr
CRC-ACE
The professro:ral CpA Review School
discontinud oprations, the acquirer should measure it at fair value less

costs to sell at the date of acquisition, not at fair value.
Application of the acquisition method may result in new assets and liabilities being
identified and recognized that did not prevlously form part of the acquiree,s net
assets, for example brands, licences and trademarks.
Initial
recog
nition a nd subsequent adjustrnents
Every effoft should be made by an Acquirer to complete its assessment of the

identifiable assets and liabilities acquired by the end of the reporting period in which
the combination takes place. However, it is sornetirnes not practicable for the
assessment to be finalized in this time scale, especially when the valuatbn of noncunent assets including intangibles is required, or the transaction occurred near the
end of the acquirer's reporting period. In such circumstances, the acquirer is
required to make a provisional assessment at the end of the first repofting period.
These provisional values should subsequently be finalized within the meaiurement
period and adjustments should be made directly to the identifiable net assets and
the consideration transfered (and hence to goodwill - see below) accordingly.
The measurement period ends as soon as the aquirer obtains enough information
to finalize the ppyisional amounts, but in any orent does not exceed one year from
the date of acquisition. [IFRS 3.a5]
Adjustments that arise after the end of the measurement period should be
recognized as revisions of estimates in accordance with IAS 8 Accounting potici*;
chang* in accounting estimates and errorc and therefore recognized in profit or
loss in the cunent and future periods, Where an enor is identified, retrospective
treatment is required in accordance with IAS
The adjustment of provisional
figures should reflect new information about facts and circumstances thalexisted at
the acquisition date. This also extends to the recognition of new assets or liabilities
if this new inforrnation would have led tc their recognition, had it been known at the
acquisition date.
Subsequent measurement
The assets and liabiliUes identified and recognized, along with any equity instrument
issued as a result of a business combinaUon, should be measured in accordance
with the relevant standard following the recrynition of the business combination.
However, IFRS 3 provides specific guidance in the area of;
+d"iss$^
dFr,\
Wd
'
CRC-ACE .
reacquired rights
intanginte assei,
.-
;i
period;
it
The Professional CPA Review- School
where a reacquired right is recognized as an

should be amortized over its remaining contractual
tiabiliti* reognized at the'aquisfition date -
until the
of the
higher
the
measured'at
liability-is settled or cancelbJ it shoutd'be
the
and
IAS
37..
with
amornt that would be recognized in accordance
if
amortization,
any
amourit initially recognized a{the acquisition ddte:'bss
this is appropriate, in accordance with IAS 18 Revenue,
;, 3[ the end of each" reporting' period a1
, indemniftcatioi asseF
indemnification a5set.recognized as part of a business comlinatio.n shguld
be measured on the sarne basis as that applied on the acquisition date. This
measurement is subject tro any contractual limitations on the amount; and
'
atrtingent considention- as set out abdve. '
contingent
raac.
Goodwitl and Gains on Bargain Purchases
rto
gain
to 'the future emnomic benefits
Co"O*ilit iiline irount paid
"..E
not spmifically ldentified and separately
anticipated to be generated from the assets
recognized.
Recognition and measurement of goodwill

IFRS 5 requires goodwill resulting from a business combination to be recognir$..ut
an asset of the acouiring entity. .dcrdtwill is meastired as the excess of the
consideration transfeired plus the amount of any non-coniiolling interest in the
acquiree over the identifrable assets and liabilities recognized. If the business
combinatiOn has been achieved in stages, as discussed above, then the
consideration will also include the fair value of the acquirert pieviously held equity
interests in the acquiree at the acquisition date.
Aftei initial remgnition, goodwill should not be systematically amortized by charges
to profit or losl on a ltraight-line or other basis. It should be carried in the
staiement of financial positio-n at cost less accumulated impairment losses (where
the recoverable amount of the goodwill falls below its current carrying amount).
Goodwill should be tested for impairment at least on an annual basis in accordance
with the requirements of IAS 36 Impairment af asse9. Although recognized as an
asset, goodwill should not be revalued, and therefore it wiil either be carried in the
statemEnt of financial position at the an*ount recognized on initial recognition or it
will be reduced as impairmeht losses are recognized.
to Provisionat values
A justments
-noted
previousln adjustments to
provisional values during the measurement

period should be related back to the acquisition date. There can be a compensating
increase/decrease in goodwill or the gain on the bargain purchase.
As
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f
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'l
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c;
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BUSIN ESS COM BINATION
}4ERG ER1
f.'1r
COilSOLIDATION & ACQUXSIrxON
PROBLEMS
1. on January 2, 2010 P corporation ii;sues its own p x0 par common stock forGil
lh!-oylslTding stock of S Corporation, and S is dissn'rred. In addition; p
paf
P.30,000 for other costs of

P!. rto:k on :January z, zot} is pr3g"+er
:-f-T_,1Tf:!1.:.?f
share. Relevant
balance sheet information for p and s corporation onJilinrEry r,
2010 just before the business combination, is as follovvs:
SGorp.
,. P 120,000 P 10,000
Sorp
P Cofp,
- : Bookvalues Bookvaluei: Fair.ualues
Inventoris '
'
Other current asseb
Land
Plant and equipment-net
LiabiliUes
gy
Capital stock
80;000,
650,00[
Pro!ffiWr
P 200,000
P 10 par 500,000
Additional paid-in capital 200;000

Retalned
earninss
A:
E#ffit
Pt 10,000
401000
30,000
90,000 :
50,000
100,000
",2pq,!qq
*P35a,0_0q
'P
50,000
100,000
100,000
'100,000
20,000
-iaoooa;
P550,000
"
Lp so,qoo I
*'ri-,r.t,r
.
50,000 -"t -i-*. -.

J59,ru* | ,i
=
Sso"ooo-:
,'
,'
Assume that P issues 251000 shar"es.of its stocK fqr all of s,s
'+
oubtanding
*i*W ssq;,a.e i-,
lrL,rrrjournal
1) Prepare
entries to record the business ombijration of p and
i'
2) Prepare a balance sheet for p corporation immediately after the
shares.
-**
S.
B: , Assume that
'P issues
, -.outstandingshares,
1) Prepare journal
2)
of its doct ror. all of s's

*=-=*-*t'g;6 ..p,nx;fi
15r.000 shares
.'1.7,1;:igi;,*,.*
entries to record the business comuinatLn of p and
S.
Prepare the balance sheet

business combinatidn.
for e cnrp. immediately after the
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The professional CpA Review School
EffeCtive December 31, 2011, Warly Corpqration proposes to acquire, in a onefor-one exchange of common stocX, 'atl)the assets and. liabilities of Sally
Corporation unO irfy.Corporation, after Vni.f, the latter two corporations will
distribute the Warly stock to their shareholders in complete liquidation and

dissolution. Warly proposes to increase its outstanding stock for purposes of
these acquisitions. Balance sheeB of each of the corporations immediately prior
to merger on December 31; 2011,rare given here. The qssets are deerned to be
' t!!'4
{.ftf,
worth their bookvalues: Ac,;
Current assets ,,:"
Fixed assets (net)
:.
Total
Current liabilities
Long-term debt
Common stock (PtO par)
Retained earnings
rotal
UUarlY SallY -
ErlY
P 500,000 P 25,000
' 4.000'000 200,000
P 2,000,000
10,000;000'
EL2n00-000 P4,5!0-000 P225*400

P 1,000,000 P 300,000 P 20,000
'
3,000,000 1,000,000 105,gqq

3,000,000 1,000,000 50,000
5,000,000 2.200.000 50,0q0
Pl2,ry+ry P4^500S00 Pees-00!
Other data relative to acquisittbn
300,000 100;000
outstanding
Pzt0
P40
Fair market value per share
Number shares of WartY stock to be
100,000
exchanged for SallY assets
Shares
Number of shares of Warly stock to be

exchanEed for ErlY assets
s;000
5,q99
P30
.*'?
The fair market value of the common shares of Warly refleqts the impact of the
increased number of shares to be issued
How much/aodwill will be recognized as a result of the business
combination?
How much is theJotal assdts of Warly after the business combination?
2)
much is thSJpfal equity of W5r1V after the business combination?
How
3)
1)
id&\
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3.
CRC-aCf n.
prof.ssional CpA Review School
Barker Corporation has been looking to expand its operations and has decided
to acquire the assets of Verk Company and Kent Company and Vert Company
and Kent Company WI!_!g it:sgl/ed. Barker will issue j10,000 shares of its p10
par common stock to. acquire the net assets of verk'company and will issue
-10,000 shares to acqriire the net assets of Kent Company. Verk and Kent had
the following balance sheets as of December 31, 2009:
Assets
receivable
Acmunts
Verk
P200,000
Kent
*5eB0O' Srei::
--
B0,OO0
50;069-".
**:,F-
equipment -5g$,S00rist*:- 00fB8r* i.{r":d.r*

depreciation *('tr5+,00q --ft[lo,]B0(l}
Total assets
Pg50+0oq 1 8305,000
Liabilities and Equity
Current liabilities
P160,000 P 55,00b
'
-Bonds payable
*8e,000*ee ro0p00{}.cK
Building and
Accumulated
Stockholders'equity:
.1
Common stock (P10 par)

Retained earnings
Total liabilities and equrty
30o,oo0
*agq.@
100,000
1s0.000
E850000
Pl05-000
The following fair values are agreed upon
Assets
Inventory
ry the two finns:
Bonds payable
_-Verk
P?00,000""
s0;000 -300,000 r
450,000 "
Lind
Euildings and equipment
P100,00tr
.95,000'/
80,000,400,000
Barker's stock is'currently trading at-PJfury19hare, Barker will incur the
costs
Direct acquisition
Indirect acquisition
costs
Verk
ta
tr.+
i "
P 13,000
7,40O
Kent
P
6,000
Barke/s stockholders'equity is as follows:

p 1,200,000
Common stoc( P10
Paid-in capital in excess of
800,000
par
par
Retained earnings
11,000
750,000
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Determine the following:
1)
2)
3)
4)
4.
The cost of acquisition

The goodwill/gain arising from business combination
The increase in assets of Barker resutting from business combination
The total stockholders equity of Barker after business qombination
on 1 July 2011 The Magla company acquired 100% of The Naturat company
for.a consideration transferred of PHp160 million. At the acquisition date the
carrying amount of Natural's net assets waS FHP100 million. At the acquisition
date a provisional fair value of PHP120 million was attributed to the net assets.
An additional valuation received on 31 M.ay'2012 increased this provisional fair
value to.PHP135 million and on 30.,'uly 2012 this fair value was finalised at
1)
2)
What amount should Magna present for goodwill in its statement of

financial position at 31 DecerLbe!:. Zl!2'according to IFRS3 Business
combinationi?
Journal entries to record the business.combination and the necessary
adius!rygnts?
5. ABC acquires,.-Lq0_% of YYZ Co" December 31, 2009 when the fair values of
assets and liabilities of xYZ are pM and p2M respectively. ABC issues 50,000 of
its P100 par unissued shares with fair values of P120_per share. In addition, the
cornbining firms agreed on the following.
II.
III.
ABc will pay an additional plM in cash if the combined income of

ABC and X\.2 in 2010 exceeds p5M.
ABc guarantees the fair value of its shares by committing to pay the
peso decline in the value within one year.
,
't\
L)
2)
The cost of business combination and goodwill on December 31, 2009?

what is the entry nbeded, if the net fncome of the combined corpuni.t
for 2010 is P7M and the fair value of the shares of ABC at the.end of 2010
is P140 per share?
t2
6.
ABC acquires t00o/o of X\.Z co. December 31, 2009 when the fair values of
assets and liabilities of XYZ are p8.5M and p2M respectively. ABC issues s0,oo0
of its P100 par unissued shares with fair vatuls
rir;r. rn addition,
the combining firms agreed on the following.
;ipiri #;
I.
il.
ABC will pay an additional p1M in cash if the combined income of ABC
and XYZ in 2010 exceeds p5M.
ABC guarantees the fair value of its shares by committing to pay the
peso decline in the value within one year.
Information as at date of acquisition indicates that it is probable that combined

income wilt'be over 5 million and it can be measured reliably and as such the
contingent consideration is valued at p 900,000 on acquisition date.
1).
2)
The cost of business combination and goodwill on December 31, 2009?

what is the entry
if the net income of the combined companies
for 2010 is P7M and the fair vatue of the shares of ABC at the end oi zoto
is P 110 per
i
T"d{,
share?
7.
R corporation purchased 30olo interest in H corporation for p 90,000 on

January 1, 2009 when 'H had ordinary shares oi p z+0,a00 and retained
earnings of P 40,00o, Any difference betwen the cost of investment and book
value acquired is dueto undervalued equipment with remaining useful life of 3
years' For the years 2009 to 2011 H corporation reported the following:
Income
30,000
50,000
10,000
Net
2009
2010
2011
Dividend Declared
20,000
40,000
40,000
R corporation purchased additional 40o/o of H corporation on January l, zoLz

for P 140,000. Assuming that the 30yo inveshnent acquired in 2009 is now with
a fair value of P 90,000 (representing 3oo/o of net assets fuir vatue on that date
- difference attributable to land.)
Required:
1) Journal entries to record the above transactions.
3) The resulting goodwill/gain from acquisition.

4) The minority interest on January L iAtZ.
t3
ABC acquired 750,000 of
the 1 million equity shares of LMN at a price of pHp5

each at the time when the total fair vaiue of LMN's assets less liabilities was
PHP4 million. ABC estimated that the price paid included a premium of pHpO.50
per share in order to gain control over LMN.
Determine the value of Non-Controlling
Interest.
.
P company acquired Q0- percent of the .outstanding common stock of s

company on January 2, 2409, by issuing F,000 of its shires to the stockholders
of s company. In connection with this-combination, the following costs were
incurred:
. , r , :.
- for preacquisition audit
Accountanfs feq
Legal fee for contract of business combination
ana accounting fees for SEC registration
leOal
,1
Findersft:.
p30,000
60;000
BO,00O
100,000
Printing cost of stock certificates issued to S Company
Trial balances of the companies on that date, together with other pertinent
information, are:
Book Value
Cash
P
receivable
Inventory
Land
Accounts
,CI0,000
S Company
Book yalue Fair value
200,000
150,000
50,000
Equipment (net of accumulated

depreciation)
P 100,000
P100,000
150,000
100,000
110,000 135,000
150,000
90,000
300,000 220,000 200,000

Long-term investments
100,090 125.000 130,000
Totals
Pt,442,oao PTqSqOO
p 175,000 p 115,000 p 115,000
Accounts payable
Patents
242,000
par)
Company
Ordinary Shares - S Company (p10

Premium on Ordinary Shares - p Company 200,000
Retained earnings - P
667,000
Retainedearnings-SCompany _
100,000
-5g0,00!
nf,++Z,OOO ----F7G,OOO
Totals
14
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CRC-ACE
The common stock of P Cnmpany trades regularly on a stock exchange, and the
stock traded at P.!0p. f,e1 sfraie at the time of the acquisition.
Required:
1.
Assume that minority interest is measured as the percentage of the fair

value of S Company's
identifiable net assets :
Prepare the entry on the books of P Company to record the business
combination.
a.
b.
P;;prr; itre consotidated balance sheet of P Company and its B0o/o

subsidiary S Company on acquisition date. (optional requirement:
eliminating entrieg)
2.
Assume
that that minority interest is measured on
market based,
PBS per share.
assuming that S Company's ordinary shares are selling at

Prepare the entry on the books of P Company to record the business
combination
a.
b.
of P Company and its B0o/o

subsidiary S Company on acquisition date' (optional requirement:
Prepare the consolidated balance sheet
eliminating entries)
l5
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_ a,
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CRC-ACE
The Professional CpA Review School
MULTIPLE CHOICE
Should the following costs be included in the consideration transferred in a
business combination, according to [FRS3 Business combinationi?
(1) Costs of maintaining an acquisitions department..
(2) Fees paid to accountants to effect the combination.
1.
Zr
c.
No
Yes
No
Yes
Yes
d.
2.
hst (2)
Cost (1)
No
No
Yes
Are the following statements about an acquisition true or false, according to

IFRS3
Busness combinationi?
should recognise the acquiree's contingent liabilities if
certain conditions arb met.
(2) The acquirer should recognise the acquiree's contingent assets if
certain conditions are met.
Sbtement
Stutement (2)
(1) The acquirer
-d
b.
c.
d.
False
False
True
True
(1)
False
True
False
True
The excess of the consideration transferred plus the amount of any noncontrolling interest in the acquiree over the identifiable assets and liabilities
recognized is _.
-a;{
b)
4.
goodwill
minority interest
c.
d.
Gain from acquisition
cost of acquisition
In a business combination, an acquirer's interest in the fair vdlue of the net

assets acquired exceeds the co'nsideration transferred in the combination.
Under IFRS3
the acquirer should (setect one answer)
recognise the excess immediitely in profit or loss
recqnise the excess immediately in other comprehensive income
reassess the recognition and measurement of the net assets acquired
Eusiness
"N.
b.
c.
and the
consideration transferred,
immediately in profit or loss
then recognise any
excess
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d.
5.
the recognition and measurement of the net asse$ acquired

and the consideration transferred, then reqognise any excess
immediatety in other comprehensive income
reassess
A parent entity is acquirinQ almajority holding in an entity whose shares are

dealt in on a recognised market. Under IFRS3 Business combinations, which
TWO of the following measurement bases may be used in measuring the noncontrolling interest at the acquisition date?
a, The nominal value of the shares in the acquiree notacquired
b. The fair value of the shares in the acquiree not acquired
"e:: The non-controlling interest in the acquiree's assets and liabilities at
d.
book value
The non-controlling interest in the acquiree's assets and liabilities at fair

,l
On 1 OctobEr 2009 BDO Company acquired 100o/o of PCI Cpmpany when the
fair value of PCI's net assets raas P115 million and their carrying amount was
piZO-mitfion. The cbnsideration transferred mmprised P200 million in cash
transferred at the aquisition date, plus another P60 million in cash to be
transferredill months after the acquisition date if a specified profit target was
met by PCI. At the acquisition date there was only a low probability of the
profit target'being met, so the fair value of the additional consideration
iianility was PtO million. In the event the profit target was met and the P60
million cash was transfered. What amount should Tingling pre5ent fior
goodwill in iE statement of mnsolidated financial position at 31 December
2010, according to IFRS3 Business combinations?
d. P 144 million
a. P94 million b. P B0 million c. P 84 million
7.
100% of the equity share capital of Richway Company was acquired by Sunlife
Company on 30 lune 2009. Sunlife issued 500,000 new P1 ordinary shares
wnich nad a f;air value of PB each at the acquisition date. In addition the
acquisition resulted in Sunlife incurring fees'payable to.external adviseis of

P2d0,000 and share issue costs of PIB0r000. In accordance with IFRS3
Business combinations, goodwill at the acquisition date is measured by
subtracting the identifiable assets acquired and the liabilities assumed from
p 4.18 million
P 4.38 million
P 4.za million
a. p4.00 i.,iltion
c.
b.
17
d.
8.
interest in EASTWISI' Company for P1,960,000

when the fair value of EASTWEST's identifiablei assets and liabilities was
p700,000 and elected to measure the non-controlling interest at its share of the
identifiable net assets. Annual impairment reviews of goodwill have not resulted
in any impairment losses being recognised.
AIG Company acquired a
70o/o
enSfWeSfs current statemint oi financial position shows share capital of

of
P100,000, a revaluation reserve of P300,000 and retained earnings
P1,400,000.
Under IFRS3 Business rcmbinations, what figure in respect of goodwill should

now be carried in AIG',s consolidated statement of financial position?
9.
a.
b.
c.
P L,47O,A00
d.
700,000
160,000
P 1,260,000
Mango Inc. acquired on January 1, 2009 all the issued and outstanding common
day, the
snarEs of Celini Inc. for P310,b00 and Celine Inc' is dissolved' On this
Inc.
show:
assets and liabilities of Celine
P 30,000
Cash
90,000
160,000
Plant and equiPment
50,000
Goodwill
60,000)
Liabilities
. (
per appraisal, plant and equipment and merchandise inyentlrY were valued at
P190,bb0 and'pZS,OOS, respectively. What is the amount of goodwill resulting
from this transaction?
a. P125,000 b.
P40,000
c.
d.
P75,000
P90,000
10. P Corporation used debentures with a par value of P610,000 to acquire 100
percent of the net assets of s company on January L, 2009 and s _company
is dissolved. On that date, the fair value of the bonds issued by P Corp. was
P564,000, and.the following balance sheet data were reported by S co.:
Balance Sheet Item

Inventory
.
Historical
cost
Fair value
P 55,000
105,000
60,000
400,000
Land
Plant and EquiPment

18
50,000
200,000
100,000
300,000
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(
Less: Accumulated Depreclation

Goodwill
150,000)
10.000
P4g0-0q0
Totalassets
Accounts Payable
Common Stock
Retained Earnings
50,000
50,000
100,000
60,000
270.000
L480JO0
P Corporation incurred an out of pocket expenses of P20,000. How much

goodwill is to be recognized on the book of P as a result of the business
combination?
'
a. P0
11.
b.'P10,000 c.
P20,000
d,
P30,000
Patrick Company acquired the assets (except for cash) and assumed the
liabilities of Steve Company on January Z, 2OO9 and Steve Company is
dissolved. As compensation, Patrick Company gave 24,000 shares of its
common stock, 12,000 shares of its 8% preierred stoclq and cash of P240,000
to the stockholders of Steve Company. On the date of acquisition, Patrick
Company had the following characteristics:
Common , par value P5; fair value, P20 Preferred, par value P100; fair value, P 100
Immediately prior to acquisition, Steve Company's balance sheet was as follows:
Cash
132,000 Curent liabilities
P 228,000
Amounts receivable
Bonds payable
400,000
(net of P4,000 allowance) 170,000 Common stock'P5 par value 600,000
Inventory - UFO
200,000 Additional paid-in capital 380,000
384,000 Retained earnings
310,000
Land
,l0o/o
cost
!
PLgtS-000
EL9LS-0oO
An appraisal of Steve Company showed that the fair values of its assets and
liabilities were equal to their book values except for the following, which had fair
values as indicated:
Accounts receivable
land
P540,000
Inventory
Bonds payable 448,000
How much must be the goodwill recognized as a result of this business
combination?
a. P322,0AA
b. P454,000
c.
d. P0
P158,000
4L2,000
P94,000
l9
Lz.
The Grand Company will. issue share at P10 par value iommon stock for all
the net assets irr tne Nuts company. Grand's .or*on r'm .rri"ni *urrJ
value of P40 per share. Nuts balance iheet accounts are shown below.
Current assets:
Propefi and eouipment
Liabilities
Common stoc( P4 par
Retained
P320,000
880,000
400,000
80,000
320,000
earnings
400,000
The fair value of current assets is p400,000 whire that of property and
equipment is P1,600,000. All the liabilities ur. .orr*atv ututuo. Grand issued
s!fficient shares so that the fair market value of the stock equals the fair market
value of Nuts net assets plus goodwill of p200,000. How much must be the cost
of investment if goodwill of P200,000 must be recognized?
2,200,000
b. 1,800,000
45,000
d. 55,000
a.
c.
Questions 13 and 14 are based on the fottowing:

puryhased the net assets of Hanes company on January
lrorCano !o*pu!I
Currerf assets
Equipment
1,
100,000
Land
Buildings
"100,000
Goodwill'
Liabilities
par
Common stock, pl
paid-in capitil in excess of
BO,O0O
par
100;000
520;000
A contingent consideration agreement was made on Jan. 1, 2009, wherein an

additional cash payment would be made on Jan. L, zrLl, equal to twice the
amount by which average annual earnings of the Hanes'oivision
P2I,9qq qlyeal, prior to January t, ZOLL. Net income was p50,000 in
"*."uJ
2009
and P60,000 in 2010. How much goodwill will still be r.ecorded on the books
a.
P50,000
b.
c.
P120,000
20
P85,000
d.
none
14. A coltingent
consideratign'agreement was made on January 1, zo0g, wherein

additional shares would be issued on January 1, 2011, to compensate for anv
fatt in the value of Giordano conmon stock below
pi"i"r'].,'.;'
;i.,:
il;';;
;-l;.;;
settlement would be to cure the deficiency by issuinn."oo"u ;h;*;

their fair valueon January 1, 2011. The mirklt priceti tr,"'in.*,
!,^?l:x, was P4. How many shares will Giordano still issue on January 1,
zOLL?
a.
b.
50,000
100,000
c.
'20;000' d. iL,OO7
Questions 15 through 18 are based on the fofiowing:

on January L,2009, Joshua conrpany-acquired all the net assets of Froilan
company:in exchange for 9,000 newly issued common shares of Joshua with a
paq value of P100 and-a market value of p250, Immediatef prior
to the
purchase combination, on January L, zaog, the book values and fair values
of
,,Book
valUe,
value
p 100,000 p 100,000
Cash.
Inventory
300,000 SOO,OOO
Plant and eguipment {net) f ,.S5O,OOO', ,', 2.000.000
Totalassets P2050400 P210CI0q0
p 200,000 C 200p00
Notes payabte
par
earnings
Excess over
Retained
2S0,OO0
_ 69A,0ID
Fair
Pa050i00
As part of the combination plan, Joshu-lgnffi-to give additional consideration

to Froilan if certain future events_or transactions
ociur.
.:
: '
"
15. Assume that Joshua agreed to issue 1,000 additional shares of common stock
to the former stockholders of Froihn if Joshua,s totat net in.or".ror. th;-;;;
Po
Veap exceeds a specified amount. Assudre the contingenry is met and that
the market price of Joshua's corrmon shares at the end of the contintency
period i1 P300 per shar:e. what entry is to be recorded by Joshua amp.r-nv
i6
record the contingency met?
a..Goodwill
Capialstock
b.
'
c. Goodwill
100,000 Cash
300,000
Addrtionalpaid-incapital 200,000
Additionalpaid.in capital300,000
Cash
300,000
2t
'
d.
300,000
300,000
Adciitional paid-in capital 100,000

Capitalstock
100,000
16. Assume that Joshua agreed to pay p25Q000 cash to the former stockholders
of
Froilan.if Joshua's total net income for the next three years exceeds a specified
books of Joshua Company?
Goodwill
2501000
a.
.
b.
c. Goodwill ,.
100,000
Additional paid-in capital 150,000

A{ditional'paid-in capital 250,000
Cash
d.
250,000
Cash
250/000
plLSummary
250,000
17. Assums that Joshua agreed to
250,000'
250,000
Capital stock
pay. cash,fo the former stockholders of Froilan

for any difference net*Een ir,e pxb lirignud- ir,"
date and the market price of the securitiJs at the ena orone
G;;. ih;1r;ril
price of Joshua's stoik at the end of the conungency p";il';;; prod;il;i
:-- ' ---1 .''"-'
entry is'to be recorded on the books- of Joshua coilpanvi" ,
Capitalstock
b.
l".rrit,:;;;il;;o;##;
80,000
Cash
+SO,OOO
Additional pqiid-inicpital 270,000

Additional paid-in capitat 450,000 d. Additional paid-in capital 50,000
Cash
,,
,, ,.
45QP00
Capitalstock
'
'
450,000
18. As-sume that Joshua agreed to issue'additional sharm of comm:m stock

for any
difference between the P250 assigned the securiUes at the combination
ift"
y"*.T#;r# il;;
;Gi;itl;
a. Goodwill
450,000 c. Goodwill:
450,000
Capitalsrock
180,000
Cash
ei0poO
.
Addifional paid-in capital ,; 2/0;000 .
.. .:, ,
b' 'n{fltlopaf paid-in capital .,,js0,OQp d;. Addtionat pald.in capirat z2s,aaa
Cash ,
;450,000_ ,, Capftalstoek , i., ,, . 2j1i,AAO
and the marketprice of rhe secupiiles qt iii"
oi.n;
"naperiod wis
of Joshua's stock at the end of the contingency
-- - -- p200,
be
recorded
on
the
bobks
ofJoshua
co,ipanyi
!o
,, ;
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1'
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TNG
THUESh*S CFA
RETiCIE
$&Od
_:
aj-:
Main: 3F C. Vittaroman Btdg. 873 P. Campa St. cor Espana, Sampatoc, Manita
Branch: Rudet Btdg. v, Lower Mabini cor Diego Sitang, Baguio city
emaiI add: [email protected]
r
r
(032) 735 8901 I 735 gO31

(074) 304 zo15
.:.S9-llinll9,q9.ul'tJl!?r1ro-.-.,.-!rrrrrrrrrrrrrtrrrrrrrrr*rrrr.,.[1I5[119:!]lt{B,I.c.fflu.9!*t!?.
SoLUTION to Booklet 3
BUSINESS
COMBINATION MERcER/CONSOuIOatiOtl-a ACOutjrlrorrr, rwESn rENT
tN
ASSOCIATES/CONSOLIDATED FINANCIAL STATEMENTS, CONSOLIDATED FiS INTERCOMPANY TRANSACTIONS MULTIPLE CHOICE

BUSINESS COMBINATION MERGER/CONSOLIDATION & ACQUISIT]ON
1.A
All acquisition-related costs should be recognised as expenses in the periods in which they are incurred. See
IFRS 3 para 53.
2.
c
IFRS3 para 23 states that the acquirer shall recognise contingent liabilities if certain conditions are met. There
is no mentlon of contingent assets ln IFRS3, so they should not be recognised.
3.
4.
GOODWILL
c
This situation concerns a bargain purchase (negative goodwill), The correct answer is to reassess the
recognition and measurement of the net assets acquired and the consideration transferred, then recognise
any
excess as a gain immediately in profit or loss. see IFRS3 paras 34 and 36.
5.
Answer-B&D
The non-controlling interest shall be measured either at fair value or at its
proportionate share of the acquiree's identifiable net assets, which are
measured at fair value.
SeefFRS3 para 19.
5.
A
shoutd be compgred with the fair value of the net assets acquired, per IFRS3
1-t-*tt*ration..ignsfened
para 32.,Jhe conliLt--i'$ent conSiderptiqn should be measured at its fair value
at the acquisition date; any
subsequent c!:ange in thia coslr liabiiilT cornes uncier LrrS3 9 Fiitarrcial instruments:
recognition and
measuremenf and should be recognized in profit or !oss, even if it arises within
the measurement period.
See
IFRS3 pams 39, zl0 and 58. Goodwill is the P210 mitlion (P200 million + P10
million acquisition date fair value
of contingent consideraUon) hss P116 million f;air vatue oi net assets p94 million.
=
7.
B.
A
The ans'wer is P4.00 million. Goodwill is calculated by reference to the consideration
transferred plus
noncontrotling interest (nil in this case) plus the fair valle of any shares
in Richway
(ni[ in this case). Professional fees should be recognized in profit
"rr"uav-n"iJ'o!-sullire
or loss and the issue
costs deducted from
the fair value of the shares issued, The considerition transferrecl is p4
million (500,000 x pB). see IFRS3
paras 37 and 53.
A
P1,470,000 is the correct answer. Goodwill is calculated as the P1.96
million consideration transferred plus the
P210,000 (30olo x P700,000) non-controlling interest less the P700,000
fair value at the acquisition date of the
assets and liabilities acquired. See IFRS3 para 32.
9.
Cost of investment (100%)

Fair value of identifiable net assets
Cash
P310,000
p 30,000
inventory
75,000
equipment 190,000
Liabilities
( 60,000)
23s.000
Goodwill from business combination
LZA000
c
Note: Only identifiable assets are acquired, thefefore goodwill
recorded by Mango Inc. is not incruded
Merchandise
Plant and
the acquisition.
10.
Cost of investment
Fair value of identifiable net assets
Cash
Inventory
Land
Plant and equipment
_ Accounts payable
Excess of fair value over cost
of
P 564,000
50,000
200,000
100,000
300,000
( 50.000)
600,000
investrnent p 3G-00O
in
Ansvrrer: No goodwill recognized, the e:<ess is treated under the
orrentlFRS as gain from business
combination. A
11.
Cost of investment:
Common shares (24,000 x 20)

Preferred shares (12,000 x
100)
Cash
480,000
1,200,000
240,000
P1,920,000
Fair value of identifiable net assets acquired:
P 158,000
receivable
412,000
Inventory
Land
540,000
1,032,000
Buildings and equipment
( 228,000)
Current liabilities
( 448.000) 1.466,000
payable
Bonds
Goodwill from business combination
P-*154.400 B
Accounts
L2.
Fair value of identifiable net assets acquired:

Current assets
Property and equipment

Liabilities
Add: Goodwill from business combination
Cost of investment
13.
400,000
1,6oo,oo0
( 400.000)
P55,000
25,000
P30,000
xZ
P60-000
stillto be recognized
L4. . Minimum market value
of shares issued (100,000 x 6)

Market value of shares, January 1, 2011 (100,000 x 4)
Decline the market value of shares issued
Market value per share January 1, 2011
P600,000
400.000
P200,000
+4
--50,0!0 shares A
Total shares to be issued
***
P1,600,000
200,000
ru,800*000
Average earnings (50,000 + 60,000/2)

Normal earnings
Excess earnings
Goodwill
For items 15 and 16
The contingent consideration based upon future condition such as meeting certain level of income should
be measured at fair value on acquisition date. If such is not determinable disclosure shall be made and be
taken up only when condition is met. Such will be taken as an adjustment to the securities issued. (ApIC) or
be taken as expense chargeable to P & L unless it can be proven to be an error existing at acquisition date.
15.
16.
L7.
Additional paid-in capital (1,000 x 100)

Capital stock (1,000 x 100)
100,000
P/L Summary
250,000
Cash
250,000
Additional payment due to a decline in the market value of shares issued in acquiring
charged to additional paid-in capital. (250 - 200) x 9,000 shares = 450,000.
Capital Stock
18.
100,000
business must be
450,000
450,000
Additional payment due to a decline the in the market price of the stocks issued must be charged to additional
paid-in capital.
Capital stock (450,000/200 x
100)
4SO,00O
225,000
225,000
OR
Capital stock
225,000
225,000
HAr.{n.A
PRACTIGAL ACCOUNTING PROB!.EMS
6,lenneRo/&RMAN/ft
II
JEsu$fiM
ACQUISITION OF NET AS$ETS

Prli': #
On September 18, 2010, OL Co. acquired all rhe TM !nc.'s P2,000,000 identifiable assets
and P500,000 liabilities. Book values of the TM's-assets and liabilities equal to their fair
values except for the overvalued plant & equiprnent. As a consideration, OL issued its own
shares of stock with a market value of F1,600,000. The merger resulted into P200,000
goodwill. Assuming oL had P5,000,000 total assets prior the dmbination,
How much is the combined total
A. p6,400,000
assets? ,sil + r.rllp t
B. p6,600,000
.r_cj)
yao {
p7,100,000
D. p7,000,000
il
A condensed balance sheet at July 1, 2010 and the related.cunent fair value data for
DEF Company ere presented below:
Carrying
value
Fair Value
P 184,000 P 202,250 "

296,250 345,000
29.250 24,000
Current assets
Property and equipment
Patent
Totalassets
:P
Current liabilities
Non-cunent liabilities
Capital stock, P20 par value
Retained eamings
Fotal liabilities and stockholders' equity
P 53,750 P .{53,750'r
14o,0oo (148,750
:''
509.500
l
105,000
210.750
e_@Js
On August 1,2O1O, LMN Corporation issued 4,450 shares of its P29 par value comrnon
stock (fair value, P45 per share) and F125,500 cash for the net assets of DEF
Company. Of the P116,250 acquisition related costs paid by LMN Corporation on
August 1, 2010. P20,000 were stock issuance cost.
A
B.
12500
P (12,500)
-1e]-
i].
P143.000)
P 4s,ooo
What is the net increase in the stockholders' equity in the books of LMN Corporation as
a result of the business combination?
A. P 139,500
P127,000 4 t'-{ja rlil(. r ?9 : i|Q,Ctr!a-\
B. P 3't9,500
P200,250 rir! *f Ap!( -- rlr{gt, { !t, . 1t,?cu _J.:g : 5 [ ,r,rr
r:r! S tali .: ri3! -1(1.:;i',
fft
The following statement of financial positi*n were prepared for HlJt Corp. and NOP Co.
on Jaquary 1, 2010, just before they entered into a business combirlation.
H{J Corp.
Nop co.
Cash
P210.CI00
P 5,000
-'i.l a'i-' "
Accounis receivable
75,000
4 a
lzo,ooo
..
.
,
200,0CI0
.,
iSqooo
Buitding and equipment
",
400,000
lrA .
+so,oo&*
Accumulated depreciation
(100,000)
(25,000)
Goodwill
,50.00CI
TotalAssets
P785,000
P200,000
,l
Accounts payable
Bonds payable
Common stock
P30 par value
P20 par value
Retained eamings
Totat Liabilities & Stockholders' equlty
P 125,000
200,000
P 70,000 - -'-- - i
8,CI0g't q'),o$a ) -:'!
":'t^
210,000
50,000
_200,000
P785,000
50,000
10,000
40,000
:'=11331
PA - 6qCIE
"i -
6.-,-:!g4::]:!,%--
On that date, the fair market value of NOP's inventories and building and equipment
were p78,000 and P'124,000 respectively, while bonds payable has a fair value of
p42,000. The fair market values of all other, as$et$ and liabilitie$ of NOP {except for
goodwill) were equal to their book vatues. HIJ Corp..acqgiled t!-re- ngl-Atfels of NOP
p36
Lo. Uy iisuing 2,5b0 shares of its P30 par value sommCIn stock (current fair value
per share) and purchase price in cash arn$unting ts P12,0$0. Coniingent consideration
ifrat ls deierminable (probable and reasanebly estir"nated) amCIunt to P2,000. Additional
cash payments made by HIJ Corp. in_cqmpleting the acquisition were: Legal_fees fqr
contract- of business combination, lF"-8,O0(t,,, Accounting and legal fees for SEC
registration, P:!1,Qp-0 ; Printing costs oistock certificates, f$,000-; FindeCs fee,ff,0Q0-';i
ti
lndirect cos1yP5,000i
.*u, =l 1.I :r;;:.***-:--:----_.t'"" ----._
A-s a resutt of the bulsiness cornLrination, the amo*nt of total assets and tstal tiabilities,
iv 't'Ltt :: : tlt
$ompany
surviving 9ory8any
books of the $
in the bookq
respectively,
{y, m
q'Clrooa,ooo;P.{3g,ooo
P1,016,000 ; P437"00O
'U.J Pgtj3,UuU ; l-4sv,uuu
ii:ir:. '
P1ffi
ffi
-. t.
D. P1,016,00;P439,000
P 963,000;P437,000
i,,
)
F:rl.r")
{"*''
As a res,rlt ot ilre nus.ines"q, qp .ffih-p'Sctively,
tar,, th- -ffi-ttt1f1'*
in thq!99!1of tr,q!!,rlyqg rgrrlggly--]
in capitaland retairiiff?,,Airiifi'g"i,
P285,000 ; F50,000, P189,000
A. P285,000; P48,000; P195,000
P260,000, PS0,000 ; P240,000
.F,<tirtr+ cr:rJ d.r,,",id
i;nt "':i'rl:' i' '':'::l
On January 2, 2010, the FB Company o,ll*n**uo the net a$sets of CP ComPanY bY

issuing shares of stocks at P'1,500,CI00 fair nnarket value' Book value and fair value
balances sheet data on January 1, 2010, are as follows:
FE.Comnanv
Book Value Fair Value
P2,300,000 P2,300,000
Cash
500,CI0s
Accounts receivable
s50..o00
750,000
:r, V{ raVU
l,lnventory
730,000
900,000
Building & Equipment,
Gcodwill
TOTAL
P4AAASSA E41sEgPg
net
500,000
-
ASSETS
P500,000 P500,000
Liabitities
800,000
Capital stock
Additionalpaid in capital 450,000
2,29q888
Retained earnings
rorAL LIAB & SHE giJSgSg
CP Cowan:t
Baok Value Fair Value
P 150,000 P 150,000490,0CI0 490,000
355,000
532,000760,000
45,0Q0
_ 40.000
L@
PJSt?pQg
P 285,000
P285,000
300,000
490,000
735,0q9
:EtEggsgg
FB incuned arrd paid legal and brokerage fees of F45,000 for business cornbination; and
P15,000 indirect acquisition costs. Gqr*lpgexcy-fee of"P2OSgO for additional legal services
would be paid within the year. lmmediattblyf,fuf *h: bi:l1t.e.q|,,T*:I,$,.?:1.,,,
lr
,l
A.
P4,750,000
B.
----.iq. P6,300,000
. P.6,195,000
P6,24CI,000
V
BGP, $RL and KCJ agreed to a husiness combinatir:n. Their
before combination show:
SRL
BGP
Eook l/*Iue Fair Value
ASSETS
l-iabilities
''r
!e':
'
P-8;Egg
4,987,500 307,S0CI
BJ-oqeL0oa
;Capitat str:ck, P100 par 2,625,000. 437,5CI0

218,000
i ,Additional paid in capitai
(612,
50CI)- (87,$0())
i Retained earnings{deficit)
LIABILITIES &
SHE
PJ-OOqOM*.:SZ5,OCIO
gw&s
-J
balance sheets
KCJ
Value
Fafr Value
P9 000.000
1,750,00fi
loo,ooo
4,950,000
P_s,L25-000
It was agreed that BGP will be the continuing entitv and shall issue 4,180 shares to SRL
and 60,800 shares to KCJ. lVlarket value of BGF's share on ttie date of business
combinatio",":,]u,lrnmed.ratel,*:'thebusinesscCIrnbination:
"1
- tr prr
ll
The stockholders'equity of BGP increased by:
A.
P6,237,920
B. P9,030,500
fi}
nz,ote,ooo
D. P6,627,960
VI
AB lnc., CD lnc. and EF lnc. are to combine. Tha stockholders' equity on their respective
balance sheets immediately prior to cornbination show:
EF Inc.
CD lnc.
AB lnc.
P
400,000
P
200,000
P
300,000
Common stock
70,000 100,000
Additional paid in caPital
60,000 90,000
(40,000)
Retained earnings
As per appraisal, book values of CD's assets and tiabilities approximate their fair values
except fii tne Land and Non-cr.rnent liabilities, which is undervatued by P50,000 and
p1g,bOO, respectively. EF's Equipment and Long-term debt is overvalued by P80,000 and
p13b,00b, respectiv6ly. Alt other EF's assets and liabilities equal to their fair_values. lt
was agreed that RA iftatt issue its own shares of stocks to CD and EF. Twenty five
p"r.*ni of the total stocks issued shall be received by CD and the remaining, will be
giu"n to EF. AB paid ry?_qqo0 and fgg0gp indirect costs with CD's and EF's business;
iespectively. lmmediatety after the-ffibination, AB has Cornmon stock balance of
pt,too,ooo. AB p100 par common stock has a market value of P"150.
How much retained
A. P50,000
s is to be reported
B. P60,000
ir"r
Vlf
I
I
I
I
L
tI
the connbined balalq93!99t[

D" P(60,000)
P(50,000)
(&rr;rsi.* r vJ
On August 1, 2009 the MNO Company acquired 'l00Yo of the NOP Company for a
consideration transfened of P82M. At the acquisition Oelg.,.lh".grurying amount of NOP's
net asset was P20M. AT ifie-aiquisition date a pro$t$iohil'Tdir value of P24M was
attrlbuted to the net assets. An additiona[ valuation received on June 30, 2010 increased
-'-fiiif-pf6,fisional fair value of PffMand on Augrust 31, 2010 this fair value was finatized at
P28M.
ls q,lirr ,l L1r
t1 [.1op/ !rt
What amount should MNQ present for goodwill in its staternent of financlal position at
December 31, 2010?
PsM
B.
P8M
D"
C. P4M
Vlll
({t:rrl',r.;1r't" il.;'t,dqqr,hdr
P12M
On October 1, 2009 the TUV Company acquired 100olo of GHI Company when the fair
value of G's net assets was EegM and their carrying amount was P30M. The
consideration transfened comprisdC of p50M in cash transferred at the acquisition date,
plus another P15M in cash A_pg"tran$feirecl 'tr1 nnonths afier the acquisition date if a
specified profit target was rnet by Gl-ll. At the acquisition date there was only a low
probability of the profit target being rnet, so the fair value of the additional consideration
liability was P2.5M. ln the event, the profit.tarq*1ly3l ntt and the P_15M _ctsn y3-:
(
rrciri i ";
tiaLiii
transferred.
.i.;q
r?.
L ssg
r:
I-,r"1':
What amount should TUV present for goodwill in its statement of qonsolidated financial
posjli.on at December 31, 2A1O?
D. P36M
C. P21M
B. P2oM
6) P23.5M
END
P* - 6409,

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A business eantbination is the term applied to external exparzsion inwhich separate

Howeven business cantbinations involve certain linritations and risks;. Corporate

assets are acquired directly from the

lnanacquisition af assets,atr ol$r9.-c9fPany's

Business combinations maybe a9lrieyed

the sole surviving legal entity' The

(typically,'more than 50%) of another

METI{ODS OF BUSINESS CGMBIN ATIONS

ofinterests methodwas allowed. Thepooling_of interest

IFRS 3 elindnatec! the pooling of interest rnethod'

ACQUISITION METHOD OF ACCOUNTING ,FOR BUS/NESS

(3i Determine the consideration given (price paid) bythe-agQuirer ,

n[n-contolling interest (formerly called rninority

Identify theAcquirer.In an asset acquisition, the companytransfening cashor other

gaven (price paid)

astt es,rirr oftlre acquisition-date fairvalues

Ccntingent-consideration is an agreement to issue addlfional consloerauon

additional information about facts

ofmahtaining an intemal acquisition deparfrnent

priee-of the cornpany acqgiied and are expensed

YALUATTON OF IDENTIFIABLE ASSETS AND LIABILITtrES

with Uncertain Cash Florvs lvaluation aliowances)

a separate valuatian allowance as of the

An acquirer is n*t permitted to recagnize

Unrgcognized Assets and Liabilities

aPPLYING THE ACQUISITION METHOD

Fair values for all accounts have bben measured

of June 3o,z0l3 as follows:

Fair value ofnct idcntifiable asscts

Acc*unting Procedures in Reqording the Acquisitions

All accounts identified

lair valuc. '1'his is alr,vays tlrr.

reduction from the value assigned to additional paid in capital account.

Before recordingthe acquisition,.the acquircr slrould calculatc thc tlillercncc bctwccrr

Case 1: Price paid e-uceeds the

value of net, identifiahle assets acquirccl.

Price paid (considerdtion given), 80,000 shares x P40 market

Profess ional fees (expense)

Stock issue costs (reduction from additional paid-in capital)

Entrigs recordedbytheAcquirer, Inc. are as follows:

To record the net assets acquiredincluding the new goodwill:

Additional paid in capital (P30 x 800,000

Case 2: Price paid is /ess

value of net identifiabteassers acquired:

Professional fees (expense)

To record the acquisition

C,ammon stock QA,A00 shares x plIS par)

Additiorul poitl in capital

be aotod frorn the errtries of the acquirer'

The.stock issuance costs exceed'the additional paid in capital recorded at

the staternent of financial position.

Recording Contingent Consideration

Contingent consideration payable

Additional poid in iapital

To record acquisition+elated cosfs:

Additional paid in capital

Recording Changes in Contingent Consideration

Contingent consideration payable

fftheegiryteisagainrevisedafterthemeasurementperiod, the adjustment is included

shares receivbd to its shr'elilders and