Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao

Accounting Review IV – Practical Accounting II (ACCTG100D) P2-08

BUSINESS COMBINATIONS

Problem I
The following summarized balance sheets were prepared for Red Company and White Corporation on December 31, 2016
Red White
Assets
Current assets P350,000 P185,000
Land 80,000 25,000
Buildings, net 325,000 250,000
Goodwill 120,000 100,000
TOTAL P875,000 P560,000

Liabilities and Equity

Accounts payable P115,000 P85,000
Bonds payable 170,000 150,000
Common stock, P10 par 150,000 75,000
Paid-in capital in excess of par 200,000 40,000
Retained earnings 240,000 210,000
TOTAL P875,000 P560,000

The appraised values of the White Corporation land and buildings are P50,000 and P350,000 respectively. Red will issue
15,250 shares of its P10 par value common stock with a market value of P20 each for the net assets of White Corporation.
Red will also pay P3,000 in cash for indirect expenses and P2,000 for stock issuance costs.

REQUIRED: Entries in the books of Red Corporation and prepare balance sheet of Red Corporation immediately after the
combination.

Problem II

On January 1, 2016, Blue Corporation paid P1,000,000 and also issued 18,000 shares of P50 par ordinary share with a market
value of P1,650,000 for all the net assets of Berry Corporation. In addition, Blue paid P15,000 for registering and issuing the
18,000 shares: P15,000 for direct acquisition costs; and P10,000 for indirect costs of the business combination. Summary
balance sheet information for the companies immediately before the merger is as follows:
Blue Berry Corporation
Book Value Book Value Fair value
Cash P1,750,000 P200,000 P200,000
Inventories 600,000 400,000 500,000
Other current assets 150,000 100,000 100,000
Plant assets, net 1,300,000 900,000 1,400,000
Current liabilities 800,000 150,000 150,000
Other liabilities 400,000 250,000 200,000
Ordinary shares, P50 par 2,100,000 1,000,000
Retained earnings 500,000 200,000

REQUIRED:
1. Prepare journal entries in the books of Blue Corporation to record the acquisition of Berry Corporation.
2. Prepare a balance sheet for the merged entity as of the date of acquisition.

MULTIPLE CHOICE PROBLEMS

1. One Company issued 120,000 shares of its P25 par common stock for the net assets of Two Corporation in a business
combination completed on March 1, 2016. Two Corporation’s net assets are worth P3,800,000 at FMV. Out of pocket
costs of the combinations were as follows:

Legal fees 26,000

Contingent consideration (highly probable
& measurable) 18,000
Printing costs of stock certificates 8,500
Finder’s fees 27,000
Professional fees paid to a CPA 21,000
Fees paid to company lawyers 23,450
Fees paid to company accountants 38,900
 The goodwill from business combination is P418,000. How much is the FMV per share of One Company at March 1,
2016?
A. P25 C. P30
B. P40 D. P35

2. Red Corporation issued 100,000 shares of P20 par common stock for all the outstanding stock of Blue Company in a
business combination consummated on August 1, 2016. Red Corporation’s common stock was selling at P30 per share
at the time the business combination was consummated. Out-of-pocket costs of the business combination were as follows:

Finder’s fee 50,000

Accountant’s fee (advisory) 10,000
Legal fees (advisory) 20,000
Printing costs of stock certificates 5,000
SEC registration costs and fees 12,000
Total 97,000

The acquisition cost of the combination will be

A. 3,097,000 C. 3,017,000
B. 3,080,000 D. 3,000,000

3. James Corporation issues 500,000 shares of its own par common stock for the net assets of Kobe Company in a merger
consummated on July 1, 2016. On this date, James stock is quoted at P10 per share. Balance sheet data for the two entity
at July 1, 2016, just before combination, are as follows:

James Kobe
Current assets 18,000,000 1,500,000
Plant assets 22,000,000 6,500,000
Total assets 40,000,000 8,000,000

Liabilities 12,000,000 2,000,000

Common stock (P10 par) 20,000,000 3,000,000
APIC 3,000,000 1,000,000
Retained Earnings 5,000,000 2,000,000
Total equities 40,000,000 8,000,000

James also paid finder’s fees of P50,000 and legal fees of P10,000, as well as indirect expenses of P40,000. The retained
earnings after the business combination will be
A. 4,960,000 C. 4,900,000
B. 5,900,000 D. 7,000,000
4. Prince Corporation is to acquire Cedie Co. by absorbing all the assets and assuming all the liabilities of the latter company,
in exchange for shares of stocks of the former. Below are the balance sheets of the two companies with corresponding
appraised value increment for Cedie. Parties agree to use the appraised values against which the fair market value of the
shares will be matched.
Prince Cedie
Assets per books 4,000,000 2,500,000
Assets increase per appraisal 300,000
Liabilities 1,500,000 800,000
Capital stock (no par) (P100 par)
2,000,000 1,000,000
APIC 700,000 300,000
Retained earnings (deficit) (200,000) 400,000
Total equities 4,000,000 2,500,000

The stock of Prince Corporation is currently selling at P100 per share. The number of shares to be issued to Cedie by
Prince is
A. 20,000 C. 13,000
B. 17,000 D. 10,000

5. The following balance sheets were prepared for Miami Company and Heat Company on January 1, 2015, just before they
entered into a business combination.

Miami Company Heat Company

BV FV BV FV
Cash 150,000 150,000 10,000 10,000
Accounts receivable 150,000 150,000 40,000 40,000
Inventory 400,000 600,000 100,000 245,000
Building & Equipment
800,000 870,000 200,000 250,000
Accum. Depn. (200,000) (50,000)
Goodwill 100,000
Total assets 1,300,000 1,770,000 400,000 545,000
 Accounts payable 100,000 100,000 140,000 140,000
Bonds payable 400,000 440,000 60,000 85,000
CS – P10 par/P5par 300,000 100,000
Additional paid in Cap.
100,000 20,000
Retained earnings 400,000 80,000
Total Liab. & SE 1,300,000 400,000

Miami Company acquired the net assets of Heat Company by issuing 10,000 shares of stocks.

Additional payments made by Miami Company in completing the acquisition were:

Broker’s fee paid to firm that located Heat Company 10,000

Cost to register and issue stocks 40,000
Professional fees paid to accountants 20,000
Professional fees paid to lawyers 20,000
Professional fees paid to official valuers 20,000
Indirect acquisition cost 15,000

Assuming the stocks issued by Miami Company has a market price of P40, how much is the total assets after the business
combination?
A. 1,720,000 C. 1,870,000
B. 1,800,000 D. 1,145,000

6. Queen Corporation issued 120,000 shares of 25 par ordinary shares for all the outstanding stock of King Company in a
business combination consummated on July 1, 2015. Queen’s ordinary shares were selling at P40 per share at the time
of consummation of the combination. In addition, cash payment of P200,000 was made and a deferred cash payment of
P1,500,000 payable on July 1, 2016. Market rate of interest is 12%. King’s net assets are P3.8 million at book value. Out
of pocket costs of the combination were as follows: Legal and accounting fees related with the issuance of shares, P12,000
and printing cost of stock certificates, P9,400. A contingent consideration which is probable and can be reasonably
estimated amounted to P50,200. What is the total cost of the investment?
A. 6,389,486 C. 6,983,684
B. 8,983,864 D. 8,389,648

7. E, F, G, and H are companies to be combined. Just prior to combination, their individual shareholder’s equity consists of
the following balances (in thousands):

E F G H
Ordinary shares 600 120 450 150
Share premium 150 60 45
Retained earnings 180 90 270 45

Company E is the surviving entity with a stated capital of P1,800,000 and share premium of P800,000 after the business
combination. How much goodwill is to be recognized assuming the net assets are fairly valued?
A. 845,000 C. 485,000
B. 548,000 D. 440,000

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wep/ACCTG100D/businesscombinations