BUSINESS COMBINATION is a transaction

or event in which an acquirer obtains

control of one or more business (IFRS 3)

Business combinations may be

➢Acquisition of Net Assets

Merger (A + B = A or B)
Consolidation (A + B = C)

➢Acquisition of Stocks (A + B = A and B)

The following are the types of problems to be
encountered in the actual CPA examination:

➢Determining the consideration given by the

acquirer

➢Computations of Goodwill and or Gain on

Acquisition to be recorded by the
acquirer on the date of acquisition

➢Preparation of the statement of financial

position after acquisition.
DETERMINING THE CONSIDERATION GIVEN

Generally, the consideration given (price

paid) by the acquirer is assumed to be the
fair value of the ACQUIREE as an entity.

Usual forms of consideration include cash,

other assets, equity instruments and
contingent consideration.
ACQUISITION RELATED COSTS-

the costs acquirer incurs to effect a

business combination, such as
broker’s fee, legal, accounting,
valuation and other professional an
internal acquisition department, are
not included in the consideration
given to the acquired company and
ARE EXPENSE.
Where the consideration given is the
equity instruments of the acquirer, the
cost of registering and issuing such
securities should be deducted from the
value assigned to additional paid in
capital from previous issuance.

Any excess of the stock issuance costs

over the additional paid in capital
should be deducted from retained
earnings as a contra account.
COMPUTATION OF GOODWILL AND OR
GAIN ON ACQUISITION TO BE
RECORDED BY THE ACQUIRER ON
THE DATE OF ACQUISITION

Consideration Given xx
+NCI ( 0 under merger, consolidation and
100% stock acquisition) xx
Total xx
-Fair Value of Net Identifiable
Assets Acquired xx

Goodwill (Gain on Acquisition) xx

The acquirer records all identifiable
assets and liabilities acquired from the
acquiree at fair values.

The identifiable assets should not

include goodwill that exists on the
acquirer’s books.

The only goodwill recorded is the “new”

goodwill based on the price paid by the
acquirer.
 PREPARATION OF THE STATEMENT OF
FINANCIAL POSITION AFTER ACQUISITION
(Merger and Consolidation)
 Acquirer's Acquiree's BS
Book Value + Fair value = after
Assets (including "new"
goodwill) x x x
Liabilities x x x
Equity:
Capital stock (including
new issuance) x x
APIC (net of stock issue
costs) x x
Retained earnings (after
gain on acquisition
and expenses) x x
Net Share issuance
costs (if any) x (x)
 ILLUSTRATIVE PROBLEM
(Merger and Consolidation)
Presented below are statements of financial position of P Company
and S Company on January 2, 2021:
P COMPANY S COMPANY
STATEMENT OF FINANCIAL BOOK BOOK
POSITION VALUE FAIR VALUE VALUE FAIR VALUE
Cash 200 200
Accounts receivable 150 200 150 175
Inventories 100 150 50 125
Land 300 500 150 300
Building 400 350 200 300
Equipment 300 200 250 200

Total 1,450 1,000

Accounts payable 200 175 100 50

Notes Payable 100 125 100 150
Share Capital
P Company (P50 par) 250
S Company (P10 par) 300
Share Premium
P Company 400
S Company 100
Retained earnings
P Company 500
S Company 400

Total 1,450 1,000

 Case 1

P Company borrowed P2,000 from PNB and

purchased S Company for P1,500.

Cash 2,000
Bank Loan Payable 2,000
 P COMPANY S COMPANY
STATEMENT OF FINANCIAL BOOK BOOK
POSITION VALUE FAIR VALUE VALUE FAIR VALUE
Cash 2,200 200
Accounts receivable 150 200 150 175
Inventories 100 150 50 125
Land 300 500 150 300
Building 400 350 200 300
Equipment 300 200 250 200

Total 2,450 1,000

Accounts payable 200 175 100 50

Notes Payable 100 125 100 150
Bank Loan Payable 2,000
Share Capital
P Company (P50 par) 250
S Company (P10 par) 300
Share Premium
P Company 400
S Company 100
Retained earnings
P Company 500
S Company 400

Total 2,450 1,000

Computation of Goodwill and or Gain on
Acquisition to be recorded by the acquirer on
the date of acquisition

Consideration Given 1,500

NCI ( 0 under merger and consolidation) 0
Total 1,500
Fair Value of Net Identifiable
Assets Acquired 1,100
Goodwill (Gain on Acquisition) 400
ACQUIRER’S Journal Entry
Cash 200
Accounts receivable 175
Inventories 125
Land 300
Building 300
Equipment 200
Goodwill 400

Accounts payable 50
Notes Payable 150
Cash 1,500
 CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
Cash 900
Accounts receivable 325
Inventories 225
Land 600
Building 700
Equipment 500
Goodwill 400
Total 3,650

Accounts payable 250

Notes Payable 250
Bank Loan Payable 2,000
Share Capital
P Company (P50 par) 250
S Company (P10 par)
Share Premium
P Company 400
S Company
Retained earnings
P Company 500
S Company
Total 3,650
ACQUIREE’S Journal Entry
Accounts payable 100
Notes Payable 100
Cash 1,500

Cash 200
Accounts receivable 150
Inventories 50
Land 150
Building 200
Equipment 250
Retained Earnings 700

S Company-Share Cspital 300

S Company -Share
Premiums 100
S Company - Retained
earnings 1,100
Cash 1,500
 Case 2

PS Company is organized to take over the

net assets of P Company and S Company.

PS Company issued 140 shares to P

Company and 80 shares to S Company of its
P10 par value share. PS Company’s share
has fair value of P12.
Computation of Goodwill and or Gain on
Acquisition to be recorded by the acquirer on
the date of acquisition

Consideration Given 1,680 960

NCI 0 0
Total 1,680 960
Fair Value of Net Identifiable
Assets Acquired 1,300 1,100
Goodwill (Gain on Acquisition) 380 ( 140)
 P Co S Co CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
Cash 200 200 400
Accounts receivable 200 175 375
Inventories 150 125 275
Land 500 300 800
Building 350 300 650
Equipment 200 200 400
Goodwill 380

Total 3,280

Accounts payable 175 50 225

Notes Payable 125 150 275
Share Capital 2,200
PS Company (P10 par)

Share Premium
PS Company 440

Retained earnings
PS Company 140

Total 3,280
 CONSOLIDATION
OF FINANCIAL
STATEMENTS – DATE
OF ACQUISITION
ACQUIRER’S (Parent’s) Journal Entry

Investment in S Co. xx
Cash xx

EFFECTS: Increase in one asset, decrease in

another asset

Acquisition Cost: Out right expense, whether

direct or indirect

Expense (Retained Earnings) xx

Cash xx
ACQUIRER’S (Parent’s) Journal Entry
Investment in S Co. xx
Common Stock xx
APIC xx

EFFECTS: Increase in an asset, increase in

SHE

Acquisition Cost: Out right expense, whether

direct or indirect, EXCEPT cost of issuing
equity instruments which shall be charged
against APIC arising from the business
combination
ACQUIRER’S (Parent’s) Journal Entry

Acquisition cost other than cost of issuing

equity instruments

Expense (Retained Earnings) xx

Cash xx

Cost of issuing equity instruments

APIC xx
Cash xx
CONSOLIDATION PROCEDURE

1. Prepare Table 1 or Schedule 1

Table 1: Goodwill or Gain Determination

Consideration Given xx
+NCI ( 0 under merger, consolidation and
100% stock acquisition) xx
Total xx
-Fair Value of Net Identifiable
Assets Acquired xx
Goodwill (Gain on Acquisition) xx
NCI (GIVEN or COMPUTED) shall not be less
the product of FV of Net Identifiable Assets
acquired multiplied by NCI %age)

Therefore: NCI = NCI (given or computed) or

Minimum NCI, whichever is HIGHER.

Consideration Given xx
Divide: CI %age xx
FV of S Co xx
Multiply: NCI %age xx
NCI (computed) xx
CONSOLIDATION PROCEDURE

2. Prepare Table 2 or Schedule 2 (Goodwill or

Gain Determination and Allocation of Excess)
FV CI (%) NCI (%)
Fair Vale xx xx xx
BV of S Co
CS xx
APIC xx
RE xx xx xx xx
Excess xx xx xx
Allocation of Excess
FV BV DIFF
Asset (FV>BV) xx xx xx
Asset (FV<BV) xx xx (xx)
Liabilities (FV>BV) (xx) (xx) (xx)
Liabilities (FV<BV) (xx) (xx) xx xx
Goodwill (Gain) xx
CONSOLIDATION PROCEDURE

3. Prepare Elimination Entries

To eliminate SHE
Common Stock xx
APIC xx
RE xx
Investment in S Co xx
NCI xx
CONSOLIDATION PROCEDURE
3. Prepare Elimination Entries
To adjust Assets, Liabilities & NCI and
GW/Gain recognition

Assets (FV>BV) xx
Liabilities (FV<BV) xx
Goodwill xx
NCI xx
Assets (FV<BV) xx
Liabilities (FV>BV) xx
Investment in S Co xx
4. Prepare Working Paper
HEADING
P S ELIM ENTRIES CONSOLIDATED
BALANCE SHEET Company Company DEBIT CREDIT BALANCES
Cash 100 150 250
Accounts Receivable 150 50 50 250
Inventories 300 250 50 500
Investment in S Co 500 500
Goodwill 300 300
TOTAL 1,050 450 1,300
Accounts Payable 50 50 25 125
Notes Payable 150 100 25 225
Common Stock –P Co 400 400
Common Stock – S Co 100 100
APIC – P Co 100 100
APIC – S Co 50 50
RE – P Co 350 350
RE – S Co 150 150
NCI 100
TOTAL 1,050 450 1,300
4. Prepare Consolidated BS
HEADING
ASSETS
Cash 250
Accounts Receivable 250
Inventories 500
Goodwill 300
TOTAL ASSETS 1,300

LIABILITIES
Accounts Payable 125
Notes Payable 225

SHAREHOLDERS’ EQUITY
Common Stock –P Co 400
APIC – P Co 100
RE – P Co 350
NCI 100
TOTAL 1,300
TO SUM UP

GW or Gain in the CBS – Table 1

GW to be included in the EE – Table 2
Elimination Entries – Table 2
NCI – Table 1 or 2 (Given or computed)
In the CBS
Assets & Liabilities - P Co (@BV) + S Co (@FV)
Investment in S Co. – Eliminated
SHE of S Co – Eliminated
SHE of P Co - shown
Goodwill arising from Bus Com (Table 1) - shown
NCI (Table 1 or 2) - shown
 ILLUSTRATIVE PROBLEM

Presented in the next slide are statements of

financial position of P Company and S
Company on January 2, 2021:
 P COMPANY S COMPANY
STATEMENT OF FINANCIAL
POSITION BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
Cash 200 200
Accounts receivable 150 200 150 175
Inventories 100 150 50 125
Land 300 500 150 300
Building 400 350 200 300
Equipment 300 200 250 200
Total 1,450 1,000

Accounts payable 200 175 100 50

Notes Payable 100 125 100 150
Share Capital
P Company (P50 par) 250
S Company (P10 par) 300
Share Premium
P Company 400
S Company 100
Retained earnings
P Company 500
S Company 400
Total 1,450 1,000

P Company issued 20 shares for 80% interest of S Company.

The fair value of P Company’s share is P55. Broker’s fee
amounted to P50,000 while cost of issuing the 20 shares
amounted to P50,000 also.
:
ACQUIRER’S (P Co) Journal Entry

Investment in S Co. (20 X 55) 1,100

Common Stock 1,000
APIC 100

Expenses (Retained Earnings) 50

Cash 50

APIC 50
Cash 50
 P COMPANY S COMPANY
STATEMENT OF FINANCIAL
POSITION BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
Cash 100 200
Accounts receivable 150 200 150 175
Inventories 100 150 50 125
Land 300 500 150 300
Building 400 350 200 300
Equipment 300 200 250 200
Investment in S Co 1,100
Total 2,450 1,000

Accounts payable 200 175 100 50

Notes Payable 100 125 100 150
Common Stock
P Company (P50 par) 1,250
S Company (P10 par) 300
APIC
P Company 450
S Company 100
Retained earnings
P Company 450
S Company 400
Total 2,450 1,000
 Table 1: Goodwill or Gain Determination

Consideration Given 1,100

+NCI (1,100/80%)x20% 275
Total 1,375
-Fair Value of Net Identifiable
Assets Acquired 1,100
Goodwill (Gain on Acquisition) 275

Computed above 275

VS
FV OF NIA x NCI %age (1,100 x 20%) 220
Whichever is HIGHER
2. Prepare Table 2 or Schedule 2 (Goodwill or
Gain Determination and Allocation of Excess)
FV CI (%) NCI (%)
Fair Vale 1,375 1,100 275
BV of S Co
CS 300
APIC 100
RE 400 800 640 160
Excess 575 460 115
Allocation of Excess
FV BV DIFF
AR 175 150 25
Inventories 125 50 75
Land 300 150 150
Building 300 200 100
Equipment 200 250 (50)
Accounts Payable (50) (100) 50
Notes Payable (150) (100) (50) 300
Goodwill 275
3. Prepare Elimination Entries

To eliminate SHE

Common Stock 300

APIC 100
RE 400
Investment in S Co 640
NCI 160
3. Prepare Elimination Entries
To adjust Assets, Liabilities, NCI & GW/Gain
recognition

Accounts receivable 25
Inventories 75
Land 150
Building 100
Accounts Payable 50
Goodwill 275
NCI 115
Equipment 50
Note Payable 50
Investment in S Co 460
 HEADING
STATEMENT OF FINANCIAL EE
POSITION P Co S Co DR CR CONSOL BS
Cash 100 200 300
Accounts receivable 150 150 25 325
Inventories 100 50 75 225
Land 300 150 150 600
Building 400 200 100 700
Equipment 300 250 50 500
Investment in S Co 1,100 640
460
Goodwill 275 275
Total 2,450 1000 2,925

Accounts payable 200 100 50 250

Notes Payable 100 100 50 250
Common Stock
P Company (P50 par) 1,250 1.250
S Company (P10 par) 300 300
APIC
P Company 450 450
S Company 100 100
Retained earnings
P Company 450 450
S Company 400 400
NCI 160
115 275
Total 2,450 1,000 2,925
 HEADING
STATEMENT OF FINANCIAL
POSITION
ASSETS
Cash 300
Accounts receivable 325
Inventories 225
Land 600
Building 700
Equipment 500
Goodwill 275
Total 2,925

LIABILITIES
Accounts payable 250
Notes Payable 250
SHAREHOLERS’ EQUITY
Common Stock 1,250
APIC 450
Retained earnings 450
NCI 275
Total 2,925