Asst. Prof. Jennifer M.

Perez
1st Semester 2020-2021
ACCT 513: Accounting for Specialized Industries
This course deals with specialized accounting problems likely to be encountered by
accountants related to consolidation and mergers, parent-subsidiary relationships, and
consolidated statements, including foreign subsidiaries. This also covers accounting for
government and not-for-profit organizations and specialized industries.

Credit: 3 units

Prerequisite: ACCT 411

Topic Outline:

1. Business Combination

2. Separate Financial Statements

3. Consolidated Financial Statements

4. Foreign Currency Transactions

5. Translation of Foreign Currency Financial Statements

6. Non-profit Organizations

7. Government Accounting

8. Other Special Topics

a. Accounting for Insurance Contracts

b. Accounting for Build-to-Operate (BOT)

PAGE 1
Module 1: Business Combination
Learning Objectives

At the end of this module, students should be able to:

1. Define business combination.

2. Account for business combinations.
3. Compute for goodwill or gain from acquisition.

Reasons for Business Combinations

Cost advantage

Lower risk

Fewer operating delays

Avoidance of takeovers

Acquisition of intangible assets

Other reasons

Advantages of Business Combination

 Companies may be able to expand operations even in the midst of recession,

inflation, and continued uncertainty over the ability of the government to control
economic ills.

 Both companies will utilize common facilities and share fixed costs

 Business combination may also be undertaken for the possible tax advantages
available to one or more parties to the combination.

Limitations/Disadvantages of Business Combination

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  Corporate objectives must be taken into consideration. Only those companies
which have the same or compatible sets of objectives should combine.

 Successful firms are usually not willing to combine.

 The acquiring enterprise may also inherit the acquired firm’s inefficiencies and
problems together with its inadequate resources.

Definition of Business Combination

A business combination occurs when a corporation and one or more other business
are brought together as a single entity to carry on the activities of the previously separated
enterprises.

It is the result of acquiring control of one or more enterprise by another enterprise or

the union of ownership interests of two or more entities.

‘A transaction or other event in which an acquirer

obtains control of one or more businesses.
Transactions sometimes referred to as ‘true
mergers’ or ‘mergers of equals’ are also business
combinations as that term is used in this IFRS.’ [IFRS
3(2008)]

A business is defined as an integrated set of activities and assets that is capable of

being conducted and managed for the purpose of providing a return directly to investors
or other owners, members or participants.

Transactions outside the scope of IFRS 3(2008)

 the formation of a joint venture;

 the acquisition of an asset or a group of assets that does not constitute a business a
combination between entities or businesses under common control (see section
4.2.2).

PAGE 3
 Business combinations involving mutual entities
are within the scope of IFRS 3(2008), but were not
in the scope of IFRS 3(2004). Similarly,
combinations achieved by contract alone rather
than through an exchange transaction are within
the scope of IFRS 3(2008) but were excluded from
IFRS 3(2004)

Types of Business Combination

 Legal Point of View

1. Acquisition of Assets - Acquiring the assets of the target company and in most
cases existing liabilities of the acquired company are also assumed. (Statutory
merger or statutory consolidation) Acquired company ceases to exist.

a. Statutory merger - Occurs when one corporation takes over all the
operations of another business entity and that other entity is dissolve (A + B
= A or B)
Examples:
- Company A purchases the assets of Company B for cash, other assets,
or Company A debt/equity securities. Company B is dissolved; Company
A survives with Company B’s assets and liabilities.

- Company A purchases Company B stock from its shareholders for cash,

other assets, or Company A debt/equity securities. Company B is
dissolved. Company A survives with Company B’s assets and liabilities.

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 b. Statutory consolidation - Occurs when a new corporation is formed to take
over the assets and operations of two or more separate business entities
and dissolves the previously separate entities. (A + B = C)
Examples:
- Company D is formed and acquires the assets of Companies E and F
by issuing Company D stock. Companies E and F are dissolved.
Company D survives, with the assets and liabilities of both dissolved
firms.
- Company D is formed acquires Company E and F stock from their
respective shareholders by issuing Company D stock. Companies E and
F are dissolved. Company D survives with the assets and liabilities of
both firms.

2. Stock Acquisition - Acquiring a controlling interest (50% or more) in the target

company’s voting shares. Acquired company continues to exist – becomes a
subsidiary partially or wholly owned.
FS of Parent + FS of Subsidiary = Consolidated FS of Parent and Subsidiary

 Methods for Accounting Business Combination

Prior to IFRS 3, there are two methods used to account for business combinations.

1. Purchase method – all assets and liabilities of the acquired company are
usually recorded at fair value.

2. Pooling of interests method – the assets and liabilities of the acquired

company are recorded at their book values.(IFRS 3 eliminated the pooling of
interest method.)

Effective July 1, 2009: Business Combinations and Consolidations on PFRS No. 3 and PAS
No. 27

The following are some of the principal changes of PFRS No. 3

1. Scope

2. Definition

3. Terminology

4. Goodwill and Non-controlling interest (NCI)

5. Step acquisitions

6. Acquisition-related costs/Transaction costs

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 7. Contingent liabilities of the acquiree

Method of accounting for business combinations

Acquisition method

The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is
used for all business combinations. [IFRS 3.4]

Steps in applying the acquisition method are: [IFRS 3.5]

1. Identification of the 'acquirer'

2. Determination of the 'acquisition date'

3. Recognition and measurement of the identifiable assets acquired, the liabilities

assumed and any non-controlling interest (NCI, formerly called minority interest)
in the acquiree

4. Recognition and measurement of goodwill or a gain from a bargain purchase

Identifying an acquirer

The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer

in a business combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]

If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an
acquirer, IFRS 3 provides additional guidance which is then considered:

 The acquirer is usually the entity that transfers cash or other assets where the
business combination is effected in this manner [IFRS 3.B14

 The acquirer is usually, but not always, the entity issuing equity interests where
the transaction is effected in this manner, however the entity also considers other
pertinent facts and circumstances including: [IFRS 3.B15]

o relative voting rights in the combined entity after the business

combination

o the existence of any large minority interest if no other owner or group of

owners has a significant voting interest

o the composition of the governing body and senior management of the

combined entity

o the terms on which equity interests are exchanged

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  The acquirer is usually the entity with the largest relative size (assets, revenues or
profit) [IFRS 3.B16]

 For business combinations involving multiple entities, consideration is given to

the entity initiating the combination, and the relative sizes of the combining
entities. [IFRS 3.B17]

Acquisition date

An acquirer considers all pertinent facts and circumstances when determining the
acquisition date, i.e. the date on which it obtains control of the acquiree. The acquisition
date may be a date that is earlier or later than the closing date. [IFRS 3.8-9]

IFRS 3 does not provide detailed guidance on the determination of the acquisition
date and the date identified should reflect all relevant facts and circumstances.
Considerations might include, among others, the date a public offer becomes
unconditional (with a controlling interest acquired), when the acquirer can effect
change in the board of directors of the acquiree, the date of acceptance of an
unconditional offer, when the acquirer starts directing the acquiree's operating and
financing policies, or the date competition or other authorities provide necessarily
clearances.

Acquired assets and liabilities

IFRS 3 establishes the following principles in relation to the recognition and measurement
of items arising in a business combination:

 Recognition principle. Identifiable assets acquired, liabilities assumed, and non-

controlling interests in the acquiree, are recognised separately from goodwill [IFRS
3.10]

 Measurement principle. All assets acquired and liabilities assumed in a business

combination are measured at acquisition-date fair value. [IFRS 3.18]

Exceptions to the recognition and measurement principles

The following exceptions to the above principles apply:

 Contingent liabilities – the requirements of IAS 37 Provisions, Contingent

Liabilities and Contingent Assets do not apply to the recognition of

PAGE 7
 contingent liabilities arising in a business combination [IFRS 3.22-23]

 Income taxes – the recognition and measurement of income taxes is in

accordance with IAS 12 Income Taxes [IFRS 3.24-25]

 Employee benefits – assets and liabilities arising from an acquiree's employee

benefits arrangements are recognised and measured in accordance with IAS
19 Employee Benefits (2011) [IFRS 2.26]

 Indemnification assets - an acquirer recognises indemnification assets at the

same time and on the same basis as the indemnified item [IFRS 3.27-28]

 Reacquired rights – the measurement of reacquired rights is by reference to

the remaining contractual term without renewals [IFRS 3.29]

 Share-based payment transactions - these are measured by reference to the

method in IFRS 2 Share-based Payment

 Assets held for sale – IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations is applied in measuring acquired non-current assets
and disposal groups classified as held for sale at the acquisition date.

In applying the principles, an acquirer classifies and designates assets acquired and
liabilities assumed on the basis of the contractual terms, economic conditions, operating
and accounting policies and other pertinent conditions existing at the acquisition date.
For example, this might include the identification of derivative financial instruments as
hedging instruments, or the separation of embedded derivatives from host contracts.[IFRS
3.15] However, exceptions are made for lease classification (between operating and finance
leases) and the classification of contracts as insurance contracts, which are classified on
the basis of conditions in place at the inception of the contract. [IFRS 3.17]

Acquired intangible assets must be recognised and measured at fair value in accordance
with the principles if it is separable or arises from other contractual rights, irrespective of
whether the acquiree had recognised the asset prior to the business combination
occurring. This is because there is always sufficient information to reliably measure the
fair value of these assets. [IAS 38.33-37] There is no 'reliable measurement' exception for
such assets, as was present under IFRS 3 (2004).

Goodwill

Goodwill is measured as the difference between:

 the aggregate of (i) the value of the consideration transferred (generally at fair
value), (ii) the amount of any non-controlling interest (NCI, see below), and (iii) in
a business combination achieved in stages (see below), the acquisition-date fair
value of the acquirer's previously-held equity interest in the acquiree, and

PAGE 8
  the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed (measured in accordance with IFRS 3). [IFRS 3.32]

This can be written in simplified equation form as follows:

Goodwil = Consideration + Amount of + Fair value of - Net assets

l transferred non- previous recognised
controlling equity
interests interests

If the difference above is negative, the resulting gain is a bargain purchase in profit or loss,
which may arise in circumstances such as a forced seller acting under compulsion. [IFRS
3.34-35] However, before any bargain purchase gain is recognised in profit or loss, the
acquirer is required to undertake a review to ensure the identification of assets and
liabilities is complete, and that measurements appropriately reflect consideration of all
available information. [IFRS 3.36]

Choice in the measurement of non-controlling interests (NCI)

IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis,

to measure non-controlling interests (NCI) either at: [IFRS 3.19]

 fair value (sometimes called the full goodwill method), or

 the NCI's proportionate share of net assets of the acquiree.

The choice in accounting policy applies only to present ownership interests in the
acquiree that entitle holders to a proportionate share of the entity's net assets in
the event of a liquidation (e.g. outside holdings of an acquiree's ordinary shares).
Other components of non-controlling interests at must be measured at acquisition
date fair values or in accordance with other applicable IFRSs (e.g. share-based
payment transactions accounted for under IFRS 2 Share-based Payment). [IFRS
3.19]

Business combination achieved in stages (step acquisitions)

Prior to control being obtained, an acquirer accounts for its investment in the equity
interests of an acquiree in accordance with the nature of the investment by applying the
relevant standard, e.g. IAS 28 Investments in Associates and Joint
Ventures (2011), IFRS 11 Joint Arrangements, IAS 39 Financial Instruments: Recognition and
Measurement or IFRS 9 Financial Instruments. As part of accounting for the business
combination, the acquirer remeasures any previously held interest at fair value and takes
this amount into account in the determination of goodwill as noted above [IFRS 3.32] Any

PAGE 9
resultant gain or loss is recognised in profit or loss or other comprehensive income as
appropriate. [IFRS 3.42]

The accounting treatment of an entity's pre-combination interest in an acquiree is

consistent with the view that the obtaining of control is a significant economic event that
triggers a remeasurement. Consistent with this view, all of the assets and liabilities of the
acquiree are fully remeasured in accordance with the requirements of IFRS 3 (generally at
fair value). Accordingly, the determination of goodwill occurs only at the acquisition date.
This is different to the accounting for step acquisitions under IFRS 3(2004).

Measurement period

If the initial accounting for a business combination can be determined only provisionally
by the end of the first reporting period, the business combination is accounted for using
provisional amounts. Adjustments to provisional amounts, and the recognition of newly
identified asset and liabilities, must be made within the 'measurement period' where they
reflect new information obtained about facts and circumstances that were in existence at
the acquisition date. [IFRS 3.45] The measurement period cannot exceed one year from
the acquisition date and no adjustments are permitted after one year except to correct an
error in accordance with IAS 8. [IFRS 3.50]

Related transactions and subsequent accounting

General principles

In general:

 transactions that are not part of what the acquirer and acquiree (or its former
owners) exchanged in the business combination are identified and accounted for
separately from business combination

 the recognition and measurement of assets and liabilities arising in a business

combination after the initial accounting for the business combination is dealt with
under other relevant standards, e.g. acquired inventory is subsequently accounted
under IAS 2 Inventories. [IFRS 3.54]

When determining whether a particular item is part of the exchange for the
acquiree or whether it is separate from the business combination, an acquirer
considers the reason for the transaction, who initiated the transaction and the
timing of the transaction. [IFRS 3.B50]

PAGE 10
Contingent consideration

Contingent consideration must be measured at fair value at the time of the

business combination and is taken into account in the determination of goodwill.
If the amount of contingent consideration changes as a result of a post-acquisition
event (such as meeting an earnings target), accounting for the change in
consideration depends on whether the additional consideration is classified as an
equity instrument or an asset or liability: [IFRS 3.58]

 If the contingent consideration is classified as an equity instrument, the original

amount is not remeasured

 If the additional consideration is classified as an asset or liability that is a financial

instrument, the contingent consideration is measured at fair value and gains and
losses are recognised in either profit or loss or other comprehensive income in
accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments:
Recognition and

Measurement

 If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is
accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets or other IFRSs as appropriate.

Acquisition costs

Costs of issuing debt or equity instruments are accounted for under IAS 32 Financial
Instruments: Presentation and IAS 39 Financial Instruments: Recognition and
Measurement/IFRS 9 Financial Instruments. All other costs associated with an acquisition
must be expensed, including reimbursements to the acquiree for bearing some of the
acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal,
accounting, valuation and other professional or consulting fees; and general
administrative costs, including the costs of maintaining an internal acquisitions
department. [IFRS 3.53]

Pre-existing relationships and reacquired rights

If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the
acquirer had granted the acquiree a right to use its intellectual property), this must must

PAGE 11
be accounted for separately from the business combination. In most cases, this will lead to
the recognition of a gain or loss for the amount of the consideration transferred to the
vendor which effectively represents a 'settlement' of the pre-existing relationship. The
amount of the gain or loss is measured as follows:

 for pre-existing non-contractual relationships (for example, a lawsuit): by

reference to fair value

 for pre-existing contractual relationships: at the lesser of (a) the

favourable/unfavourable contract position and (b) any stated settlement
provisions in the contract available to the counterparty to whom the contract is
unfavourable. [IFRS 3.B51-53]

However, where the transaction effectively represents a reacquired right, an intangible

asset is recognised and measured on the basis of the remaining contractual term of the
related contract excluding any renewals. The asset is then subsequently amortised over
the remaining contractual term, again excluding any renewals. [IFRS 3.55]

Contingent liabilities

Until a contingent liability is settled, cancelled or expired, a contingent liability that was
recognised in the initial accounting for a business combination is measured at the higher
of the amount the liability would be recognised under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, and the amount less accumulated amortisation
under IAS 18 Revenue. [IFRS 3.56]

Contingent payments to employees and shareholders

As part of a business combination, an acquirer may enter into arrangements with selling
shareholders or employees. In determining whether such arrangements are part of the
business combination or accounted for separately, the acquirer considers a number of
factors, including whether the arrangement requires continuing employment (and if so, its
term), the level or remuneration compared to other employees, whether payments to
shareholder employees are incremental to non-employee shareholders, the relative
number of shares owns, linkages to valuation of the acquiree, how the consideration is
calculated, and other agreements and issues. [IFRS 3.B55]

Where share-based payment arrangements of the acquiree exist and are replaced, the
value of such awards must be apportioned between pre-combination and post-
combination service and accounted for accordingly. [IFRS 3.B56-B62B]

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Indemnification assets

Indemnification assets recognised at the acquisition date (under the exceptions to the
general recognition and measurement principles noted above) are subsequently measured
on the same basis of the indemnified liability or asset, subject to contractual impacts and
collectibility. Indemnification assets are only derecognised when collected, sold or when
rights to it are lost. [IFRS 3.57]

Other issues

In addition, IFRS 3 provides guidance on some specific aspects of business combinations

including:

 business combinations achieved without the transfer of consideration, e.g. 'dual

listed' and 'stapled' arrangements [IFRS 3.43-44]

 reverse acquisitions [IFRS 3.B19]

 identifying intangible assets acquired [IFRS 3.B31-34]

Disclosure

Disclosure of information about current business combinations

An acquirer is required to disclose information that enables users of its financial

statements to evaluate the nature and financial effect of a business combination that
occurs either during the current reporting period or after the end of the period but before
the financial statements are authorised for issue. [IFRS 3.59]

Among the disclosures required to meet the foregoing objective are the following: [IFRS
3.B64-B66]

 name and a description of the acquiree

 acquisition date

 percentage of voting equity interests acquired

 primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree

 description of the factors that make up the goodwill recognised

PAGE 13
  qualitative description of the factors that make up the goodwill recognised, such as
expected synergies from combining operations, intangible assets that do not
qualify for separate recognition

 acquisition-date fair value of the total consideration transferred and the

acquisition-date fair value of each major class of consideration

 details of contingent consideration arrangements and indemnification assets

 details of acquired receivables

 the amounts recognised as of the acquisition date for each major class of assets
acquired and liabilities assumed

 details of contingent liabilities recognised

 total amount of goodwill that is expected to be deductible for tax purposes

 details about any transactions that are recognised separately from the acquisition
of assets and assumption of liabilities in the business combination

 information about a bargain purchase

 information about the measurement of non-controlling interests

 details about a business combination achieved in stages

 information about the acquiree's revenue and profit or loss

 information about a business combination whose acquisition date is after the end
of the reporting period but before the financial statements are authorised for issue

Disclosure of information about adjustments of past business combinations

An acquirer is required to disclose information that enables users of its financial

statements to evaluate the financial effects of adjustments recognised in the current
reporting period that relate to business combinations that occurred in the period or
previous reporting periods. [IFRS 3.61]

Among the disclosures required to meet the foregoing objective are the following: [IFRS
3.B67]

 details when the initial accounting for a business combination is incomplete for
particular assets, liabilities, non-controlling interests or items of consideration
(and the amounts recognised in the financial statements for the business
combination thus have been determined only provisionally)

 follow-up information on contingent consideration

PAGE 14
  follow-up information about contingent liabilities recognised in a business
combination

 a reconciliation of the carrying amount of goodwill at the beginning and end of the
reporting period, with various details shown separately

 the amount and an explanation of any gain or loss recognised in the current
reporting period that both:

o relates to the identifiable assets acquired or liabilities assumed in a business

combination that was effected in the current or previous reporting period, and

o is of such a size, nature or incidence that disclosure is relevant to

understanding the combined entity's financial statements.

Summary of Changes in IFRS 3 (2008)

Acquisition costs

All acquisition-related costs (e.g. finder’s fees, advisory, legal, accounting, valuation
and other professional or consulting fees) are to be recognised as period expenses and
generally written-off rather than added to goodwill (as previously). Costs incurred to issue
debt or equity securities will continue to be recognised in accordance with the Standards
on financial instruments.

Contingent Consideration

Consideration for an acquisition, including any contingent consideration

arrangements, is recognised and measured at fair value at the acquisition date Subsequent
changes in those fair values can only affect the measurement of goodwill where they occur
during the ‘measurement period’ and are as a result of additional information becoming
available about facts and circumstances that existed at the acquisition date. All other

PAGE 15
changes (e.g. due to the acquiree meeting an earnings target, reaching a specific share
price, or meeting a milestone on a research and development project) are dealt with in
accordance with relevant IFRSs. This will usually mean that changes in the fair value of
consideration are recognised in profit or loss (e.g. where the contingent consideration is
classified as debt under IAS 32 Financial Instruments: Presentation).

Partial Acquisition

A partial acquisition refers to the acquisition of a controlling interest, but with a

proportion of acquiree equity interests held by other investors referred to as
‘noncontrolling interests’ (formerly ‘minority interests’). A choice is available, on an
acquisition-byacquisition basis, to measure such non-controlling interests either at their
proportionate interest in the net identifiable assets of the acquiree (which is the previous
IFRS 3 requirement) or at fair value (which is a new option and is mandatory under US
GAAP). The choice of method has a consequential effect on the balancing amount
recognised as goodwill.

Step Acquisitions

A step acquisition refers to obtaining a controlling interest through two or more

separate transactions. Accordingly, changes to IFRS 3 and IAS 27 work together with the
effect that a business combination occurs, and acquisition accounting is applied, only at
the date that control is achieved. Consequently, goodwill is identified and net assets
remeasured to fair value only in respect of the transaction that achieved control, and not
in respect of any earlier or subsequent acquisitions of equity interests. In measuring
goodwill, any previously held interests in the acquiree are first remeasured to fair value,
with any gain recognised in profit or loss (including the reclassification to profit or loss of
any gains previously recognised in other comprehensive income if this would be required
on disposal). Similarly, on disposal of a controlling interest, any residual interest is
remeasured to fair value and reflected in any profitor loss on disposal.

Transactions with non-controlling interests

Once control has been achieved and acquisition accounting applied, any subsequent
transactions in subsidiary equity interests between the parent and non-controlling
interests (both acquisitions and disposals that do not result in a loss of control) are
accounted for as equity transactions. Consequently, additional goodwill does not arise on
any increase in parent interest, there is no remeasurement of net assets to fair value, and
no gain or loss is recognised on any decrease in parent interest.

Principles behind the revised standards – Entity Concept

PAGE 16
In respect of classification, the Standards have changed from the position where non-
controlling interests were recognised separately from both shareholders’ equity and
liabilities in a consolidated statement of financial position, and as a deduction in arriving
at the ‘bottom line’ of a statement of comprehensive income, (which is usually described
as a ‘parent concept’ or ‘proprietary concept’) to a position where non-controlling interests
are part of equity (which is a feature of the ‘entity concept’).

Key definitions

[IFRS 3, Appendix A]

Business Combination . A transaction or other event in which an acquirer obtains

control of one or more businesses. Transactions sometimes referred to as 'true
mergers' or 'mergers of equals' are also business combinations as that term is used
in [IFRS 3]

Business. An integrated set of activities and assets that is capable of being

conducted and managed for the purpose of providing a return in the form of
dividends, lower costs or other economic benefits directly to investors or other
owners, members or participants

Acquisition date. The date on which the acquirer obtains control of the acquiree

Acquirer. The entity that obtains control of the acquiree

Acquiree. The business or businesses that the acquirer obtains control of in a

business combination

Assessment

Exercise

A. On December 31, 2013, AR Corporation purchased the net assets of AE Corporation

which has the following balance sheet prior to the business combination.

PAGE 17
 AE Corporation

Balance Sheet

December 31, 2013

Accounts receivable (net) 20,000 Current liabilities 20,000

Notes receivable (net) 130,000 Long-term liabilities 85,000

Inventory 100,000

Buildings (net) 250,000

Equipment (net) 300,000 Common stock, P30 600,000

Land 150,000 APIC 200,000

Goodwill 50,000 Retained earnings 95,000

1,000,000 1,000,000

The current fair values of its non-cash assets and liabilities on December 31, 2013 were
as follows:

Inventory P120,000

Buildings 400,000

Equipment 200,000

Land 200,000

Current liabilities 15,000

Long-term liabilities 85,000

The following out-of-pocket costs were incurred:

PAGE 18
 Accounting fee for investigation on AE Corp. as

prospective acquired company P 5,000

Legal fees to arrange the business combination 7,000

Finder’s fee and brokerage fee 8,000

Indirect cost of combining, including allocated

overhead and executive salaries 6,000

Required: Prepare the journal entries on AR Corporation’s books. Entries should be

written on the space provided.

1. By paying cash (Assume the following purchase prices):

a. P 950,000

PAGE 19
 b. P1,000,000

c. 860,000

2. Assume that AR Corporation issued 100,000 shares of its P10 par common stock
with a fair value of P12 per share for the net assets of AE Corporation. The acquirer
incurred the following additional out-of-pocket costs:

Accounting fees for SEC registration statement

PAGE 20
 of AR Corp.’s common stock P 6,000

Legal fees for SEC registration statement for

AR Corp.’s common stock 4,000

Printer’s charges for printing securities and

SEC registration statement 5,000

SEC registration statement fee 5,000

Total P20,000

3. Prepare the journal entries on AR Corporation’s books to account for the purchase
of 100% interests of AE Corporation for the following purchase prices:

a. P 950,000

PAGE 21
 b. 860,000

4. On January 1, 2013, the Sara Company entered into a transaction for acquisition of
assets and liabilities of Ana Company. Sara issued P400 in long-term liabilities and 40
shares of common stock having a par value of P1 per share but a fair value of P10 per
share. Sara paid P20 to lawyers, accountants and brokers for assistance in bringing
about this purchase. Another P15 was paid in connection with stock issuance costs.
Prior to these transactions, the balance sheets for the two companies were as follows:

PAGE 22
 Sara Ana
Cash P180 P 40
Accounts receivable 810 180
Inventory 1,080 280
Land 600 360
Buildings (net) 1,260 440
Equipment (net) 480 100
Accounts Payable ( 450) ( 80)
Long-term liabilities (1,290) (400)
Common stock, P1 par (330)
Common stock, P20 par (240)
Additional paid-in capital (1,080) (340)
Retained earnings (1,260) (340)

In Sara’s appraisal of Ana, three assets were deemed to be undervalued in the books of
Ana: Inventory by P10, Land by P40 and Buildings by P60.

1. If the transaction is accounted for as an acquisition, what is the amount of

consideration transferred?

2. Compute the amount of additional paid in capital after the combination.

5. North Company issued 24,000 shares of its P20 par value common stock for the net
assets of Prairie Company in business combination under which Prairie Company will
be merged into North Company. On the date of the combination, North Company
common stock had a fair value of P30 per share. Balance sheets for North Company
and Prairie Company immediately prior to the combination were as follows:

North Prairie
Current assets P1,314,000 P192,000
Plant and equipment (net) 1,725,000 408,000
Total P3,039,000 P600,000

Liabilities P900,000 P150,000

Common stock, P20 par value 1,650,000 240,000
Other Contributed Capital 218,000 60,000
Retained earnings 271,000 150,000
Total P3,039,000 P600,000

If the business combination is treated as an acquisition and Prairie Company’s net assets
have a fair value of P686,400. North Company’s balance sheet immediately after the
combination will include goodwill of

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