UNIVERSITY OF THE EAST – Caloocan

College of Business Administration

Department of Accountancy, Business Law and Taxation
Accounting for Business Combinations (BSA 3203)
Module 2 – Problem Exercises 3

Name: _________________________________________________Yr. and Section: ____________________

Instructions: In the following questions, provide the best answer that corresponds to the question.
Provide solutions in good form.

Part I – Problems

Problem 1
Big Corporation acquires the net assets of the Small Corporation for P500,000 cash. Prior to the
combination, Small Corporation has the following Statements of Financial Position.

Small Corporation
Statement of Financial Position
January 1, 2021

Assets
Accounts Receivable P 120,000
Inventories 100,000 P 220,000
Property, Plant and Equipment 280,000
Total Assets P 500,000
Liabilities and Equity
Current Liabilities P 50,000
Shareholders’ Equity
Ordinary Share Capital, P10 par P 200,000
Retained Earnings 250,000 450,000
Total Liabilities and Equity P 500,000

Fair market value agrees with book values except for inventories and property, plant and equipment,
which have fair market values of P140,000 and P300,000, respectively. To consummate the
transaction, Big Corporation incurs P5,000 acquisition – related costs.

Required:
1. Record the acquisition on the Big Corporation’s books. Provide support for your entry as
needed.
2. Record the sale on the books of Small Corporation and the subsequent total liquidation of the
corporation.

Problem 2
Dog Corporation acquired the net assets of Cat Corporation on January 3, 2013, for P565,000 cash. In
addition, P5,000 of professional fees were incurred in consummating the combination. At the time of
acquisition, Cat Corporation reported the following book value and the current market data:

Carrying Value Fair Value

Cash and Receivables 50,000 50,000
Inventory 100,000 150,000
Buildings and Equipment (net) 200,000 300,000
Patent - 200,000
Total Assets 350,000 700,000
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 Carrying Value Fair Value
Accounts Payable 30,000 30,000
Ordinary Share Capital 100,000
Share Premium 80,000
Retained Earnings 140,000
Total Liabilities and Equities 350,000

Requirement:
1. Give the journal entry or entries recorded by Dog Company to record the acquisition of the net
assets of Cat Corporation.

Problem 3
On January 1, 2021, Tagalog Corporation issued 6,000 shares of its P10 par value ordinary shares to
acquire the assets and liabilities of Visayas Corporation. Tagalog Corporation shares were selling at
P90 on that date. Carrying value and fair value data for Visayas Corporation at the time of
acquisition were as follows:

Carrying Value Fair Value

Cash and Receivables 50,000 50,000
Inventory 120,000 200,000
Buildings and Equipment 400,000 300,000
Less: Accumulated Depreciation (150,000)
Total Assets 420,000 550,000

Accounts Payable 50,000 50,000

Ordinary Shares (P20 par value) 200,000
Retained Earnings 170,000
Total Liabilities and Equities 420,000

Tagalog Corporation paid P25,000 for SEC registration and issuance of its new shares and paid
professional fees of P15,000.

Requirement:
1. Record the journal entries for the acquisition in the books of Tagalog Corporation.

Problem 4
On January 1, 2021, PAL Products issues 12,000 shares of its P10 par value share to acquire the net
assets of Tan Company. Underlying book value and fair value information for the statement of
financial position items of Tan Company at the time of acquisition are as follows:

Carrying Value Fair Value

Cash 60,000 60,000
Accounts Receivable 100,000 100,000
Inventory 60,000 115,000
Land 50,000 70,000
Buildings and Equipment 400,000 350,000
Less: Accumulated Depreciation (150,000)
Total Assets 520,000 695,000

Accounts Payable 10,000 10,000

Bonds Payable 200,000 180,000
Ordinary Share Capital (P5 par value) 150,000
Share Premium 70,000
Retained Earnings 90,000
Total Liabilities and Equities 520,000
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Tan shares were selling at P18 and PAL Products shares were selling at P50 just before the merger
announcement. Additional cash payments made by PAL Products Corporation in completing the
acquisition were:

Broker’s fee paid to firm that located Tan P 10,000

Audit fee for share issued by PAL Products 12,000
Cost of SEC registration of PAL Products shares 6,000

Requirement:
1. Prepare all journal entries to be recorded on PAL Products books.

Problem 5
Papa Corporation and Mama Company have announced terms of an exchange agreement under which
Papa will issue 8,000 shares of its P10 par value ordinary share to acquire all the assets of Mama
Company. Papa shares currently are trading at P50, and Mama P5 par value shares at trading at P18
each. Book value and fair value statement of financial position data on January 1, 2021, are as
follows:
Papa Corporation Mama Company
Items
Book Value Fair Value Book Value Fair Value
Cash and Receivables 150,000 150,000 40,000 40,000
Land 100,000 170,000 50,000 85,000
Buildings and Equipment (net) 300,000 400,000 160,000 230,000
Total Assets 550,000 720,000 250,000 355,000

Ordinary Shares 200,000 100,000

Share Premium 20,000 10,000
Retained Earnings 330,000 140,000
Total Equities 550,000 250,000

Requirements:
What will be the amount reported immediately following the business combination for each of the
following items in the company’s combined Statement of Financial Position?
a. Ordinary Shares
b. Cash and Receivables
c. Land
d. Buildings and Equipment (net)
e. Goodwill
f. Share Premium
g. Retained Earnings

Problem 6
On January 1, 2021, Subic Company issued shares of its P5 par value share to acquire all the shares
of Clark, Inc. which was liquidated immediately thereafter. The Statement of Financial Position for
Subic Company and the Statement of Financial Position of the combined company under the
acquisition method are presented below:

Subic Company Combined Company

Cash 70,000 100,000
Accounts Receivable 130,000 180,000
Inventory 100,000 220,000
Land 100,000 175,000
Buildings and Equipment 400,000 550,000
Less: Accumulated Depreciation (150,000) (150,000)
Goodwill 55,000
Total Assets 650,000 1,130,000

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 Subic Company Combined Company
Accounts Payable 40,000 60,000
Bonds Payable 100,000 160,000
Ordinary Shares 200,000 240,000
Share Premium 60,000 420,000
Retained Earnings 250,000 250,000
Total Liabilities and Equities 650,000 1,130,000

Shortly after the above information was compiled, a fire destroyed the accounting records. You have
been employed to determine the answers to a number of questions raised by the owners of the newly
combined company.

a. What was the value of the shares issued by Subic Company to acquire Clark, Inc.?
b. What was the fair value of the net assets held by Clark Inc. immediately before the
combination?
c. How many shares of Subic Company were issued in completing the combination?
d. What was the market price per share of Subic Company shares at the date of combination?

“That in all things, GOD maybe glorified”

“Hear; for I will speak of excellent things; and the opening of my lips shall be right things” Proverbs 8:16

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