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Bucom 2

Pham Company acquired the assets and liabilities of Senn Company for $720,000 cash plus contingent consideration of $135,000 if certain earnings targets were met. The fair value of Senn's net assets was $801,000, resulting in $54,000 of goodwill. If the earnings target was met, Pham would pay $135,000 cash on January 2, 2026 to settle the contingency. If the target was not met, Pham would recognize a $135,000 gain by reversing the contingent liability. Zintel Corporation issued shares to acquire Smith Corporation and Platz Corporation. Zintel issued 144,000 shares valued at $2,160,000 to acquire assets of $362

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322 views3 pages

Bucom 2

Pham Company acquired the assets and liabilities of Senn Company for $720,000 cash plus contingent consideration of $135,000 if certain earnings targets were met. The fair value of Senn's net assets was $801,000, resulting in $54,000 of goodwill. If the earnings target was met, Pham would pay $135,000 cash on January 2, 2026 to settle the contingency. If the target was not met, Pham would recognize a $135,000 gain by reversing the contingent liability. Zintel Corporation issued shares to acquire Smith Corporation and Platz Corporation. Zintel issued 144,000 shares valued at $2,160,000 to acquire assets of $362

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I – Consideration Transferred: Cash plus Contingent Consideration

Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn
Company on January 1, 20x4, paying P 720,000 cash. Senn Company’s December 31,20x3,
balance sheet, reflecting both book values and fair values, showed:
Book Value Fair Value
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . P 72,000 P 65,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000 99,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 162,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369,000 450,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,000 288,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 874,000 P1,064,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 83,000 P 83,000
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 180,000
Common stock, P2 par value . . . . . . . . . . . . . . . . . . 153,000
Other contributed capital . . . . . . . . . . . . . . . . . . . . . . 229,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 874,000
As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn
Company P 135,000 cash if the post combination earnings of the combined company (Pham)
reached certain levels during 20x4 and 20x5.
Required:
1. Determine the amount of goodwill/gain on acquisition on January 1, 20x4 if it is expected
that the earnings target is likely to be met.
2. Assuming the earnings contingent is met, prepare the journal entry on Pham Company’s
books to settle the contingency on January 2, 20x6.
3. Assuming the earnings contingency is not met, prepare the necessary journal entry on
Pham Company’s books on January 2, 20x6.

Answer:
1. January 1, 20x4
Accounts Receivable (net) 65,000
Inventory 99,000
Land 162,000
Buildings 450,000
Equipment 288,000
Goodwill 54,000
Accounts Payable 83,000
Note Payable 180,000
Cash 720,000
Estimated Liability for Contingent Consideration 135,000
Consideration transferred (P720,000 + P135,000) P855,000
Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000
Goodwill P 54,000
2. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Cash 135,000

3. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Gain on Contingent Consideration 135,000

II – Acquiree: Two Corporations


Effective December 31,20x4, Zintel Corporation proposes to issue additional shares of its
common stock in exchange for all the assets and liabilities of Smith Corporation and Platz
Corporation, after which Smith and Platz will distribute the Zintel stock to their stockholders in
complete liquidation and dissolution. Balance sheets of each of the corporations immediately
prior to merger on December 31, 20x4, follow. The common stock exchange ratio was negotiated
to be 1:1 for both Smith and Platz.
Zintel Smith Platz
Current assets . . . . . . . . . . . . . . . . P 1,600,000 P 350,000 P 12,000
Long Term assets (net) . . . . . . . . 5,700,000 1,890,000 98,000
Total . . . . . . . . . . . . . . . . . . . . . . P 7,300,000 P 2,240,000 P 110,000

Current liabilities . . . . . . . . . . . . . . P 700,000 P 110,000 P 9,000


Long-term debt . . . . . . . . . . . . . . 1,100,000 430,000 61,000
Common stock, P5 par value . . . . 2,500,000 700,000 20,000
Retained earnings . . . . . . . . . . . . 3,000,000 1,000,000 20,000
Total . . . . . . . . . . . . . . . . . . . . . . P 7,300,000 P 2,240,000 P 110,000
Required: Prepare journal entries on Zintel’s book to record the combination. Assume the
following:
1. The identifiable assets and liabilities of Smith and Platz are all reflected in the balance
sheets [above], and their recorded amounts are equal to their current fair values except for
long-term assets.
2. The fair value of Smith’s long-term assets exceed their book value by P20,000, and the fair
value of Platz’s long-term assets exceed their book values by P5,000. Zintel’s common
stock is traded actively and has a current market price of P15 per share.
Answer:
Current Assets 362,000
Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000
Goodwill * 395,000
Liabilities 119,000
Long-term Debt 491,000
Common Stock (144,000 P5) 720,000
PIC - par (144,000 x P15 - P5)) 1,440,000
* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000
Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000
Fair value of stock issued (144,000P15) = P2,160,000

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