Business Combination

Practice Set

1. Rivendell paid finder’s fee of 40,000, accountant’s fee of of 10,000, legal fees of 15,000, salaries of employees
assigned to the implementation of merger of 16,000, cost of closing duplicate facilities of 12,000, cost of shareholder’s
meeting to vote of 14,000, cost of printing stock certificates of 7,000, audit and accountant’s fee related to the stock
issuance of 3,000, SEC registration fee of 5,000 and stock listing application fee of 4,000.
a. What amount should be expensed outright?
b. What amount should be added to the share premium?
c. What amount should be added as Bond Issue Cost?
2. BSAc3 is acquiring USL . USL has the following intangible assets:
- Patent on a product that is deemed to have no useful life 10,000
- Customer List with a fair value of 50,000
- A 5 year operating lease with favourable terms with PV of 8,000
- Identifiable R&D of 100,000
a. BSAc3 will record how much for acquired Intangible Assets from the purchase of USL Inc?
3. Tree Corporation is a company involved in manufacturing cars. On January 1, 2019, the board of directors of the said
company has decided to acquire the net assets of Knee Corporation and Dudd Corporation, suppliers of materials they
use in production. The merger is expected to result in producing higher quality cars with lower total cost. The following
information was gathered from the books of the entities on January 1, 2019:
Tree Knee Dudd
Current Assets P 1,375,000 P 390,000 P 260,000
Noncurrent Assets 3,125,000 2,550,000 1,700,000
Liabilities 325,000 210,000 140,000
Ordinary Share 2,748,500 1,780,200 1,186,800
Capital, P100 par
Share Premium – 176,500 169,800 113,200
Ordinary Share
Accumulated Profits 1,250,000 780,000 520,000
(Losses)
Tree will issue 22,500 of its ordinary shares in exchange for the net assets of Knee and 11,200 of its ordinary shares in
exchange for the net assets of Dudd. The fair value of Tree’s shares is P150. In addition, the following fair values were
available:

Knee Dudd
Current Assets P 450,000 P 230,000
Noncurrent Assets 2,150,000 1,975,000

The following out of pocket costs of the combination were as follows:

Legal fees for the contract of business combination P 8,000

Audit fee for SEC registration of share issue 9,000
Printing costs of share certificates 5,000
Broker’s fee 4,000
Accountant’s fee for pre-acquisition audit 10,000
Other direct cost of acquisition 7,000
Internal secretarial, general and allocated expenses 9,000
Documentary stamp tax on the new shares 2,000

Required:

1. Record the acquisition of the net assets of Knee and Dudd and related transactions on the books of Tree.
2. Determine the following amounts that will appear in the balance sheet of Tree on January 1, 2019:
a. Goodwill arising from acquisition of Knee
b. Gain on acquisition of Dudd (to be added to accumulated P&L)
c. Current assets
d. Noncurrent assets
e. Total assets
f. Total liabilities
g. Ordinary share capital
h. Share premium
i. Accumulated profits (losses)/retained earnings
j. Shareholders’equity

3. Determine the amount of goodwill arising from business combination of assuming that Tree agreed to pay an additional
P500,000 on January 1, 2021 to Knee Company, if the average income of Knee Company during the 2-year period of 2019 -
2020 exceeds P5,000,000 per year. The expected value is P200,000 calculated based on the 40% probability of achieving the
target average income. The amount of goodwill arising from acquisition amounted to:
4. Assuming the same facts as in (3) above. Before the contingency period is over, the probability present value of the earnings
contingency declines to P180,000, determine the amount of goodwill if the changes in:
a. the value is within the measurement period (due to facts and circumstances existing as of the date of acquisition).
b. the value is due to events occurring subsequent to acquisition .

5. In addition to the stock issue, Tree Company also agreed to issue additional shares of common stock to the former
stockholders of Knee Company if the average post-combination earnings over the next two years equaled or exceeded
P5,000,000 per year. The additional 2,000 shares expected to be issued are valued at P320,000.
On January 1, 2021, the earnings for 2019 and 2020 amounted to P5,000,000 and P5,350,000, respectively.
Required:
a. Determine the amount of goodwill on January 1, 2019
b. The entry on January 1, 2021.

6. In addition to the stock issue, Tree Company also agreed to issue additional 2,000 shares of common stock to the former
stockholders of Knee Company two years later if the fair value of acquirer (Tree’s common stock) fell below P150 per share.
On January 1, 2021, the contingent event happens and the common stock of Tree had a fair value below P150.
Required:
a. Determine the amount of goodwill on January 1, 2019
b. The entry on January 1, 2021.
c. The entry on January 1, 2021, if the fair value of stock increase to P155:

7. In addition to the stock issue, Tree Company also agreed to issue additional shares of common stock to the former
stockholders of Knee Company on January 1, 2021, to compensate for any fall in the market value of Tree common stock below
P150 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1,
2021.
On January 1, 2021, the contingent event happens and the stock had a fair value of P135.
Required:
a. Determine the amount of goodwill on January 1, 2019
b. The entry on January 1, 2021.