BUSINESS COMBINATION

Problem No. 1
On December 31, 2021, Kang Corporation acquired all the assets and assumed all the liabilities of Ravona
Company by paying P400,000, issuing bonds with face amount of P300,000 at 125, and issuing 20,000 of its
own shares with a fair value of P57.50 per share. Because of the very high profitability of Ravona, Kang further
agreed to pay additional P200,000 on December 31, 2022, if the merged corporation’s earnings exceed the 2022
forecast by 30%. As of acquisition date, it is estimated that there is a 60% chance that the condition will be met.
In addition, the Kang paid the following acquisition related costs:
Finder’s fee 50,000
Legal, accounting, and other consulting fees 50,000
SEC Registration of the business combination 15,000
General and administrative cost 35,000
Cost of printing stock certificates 10,000
Accountant’s fee related to the stock issuance 20,000
SEC Registration of new shares issued 40,000
Bond Issue Cost 10,000

The Statement of Financial Position as of December 31, 2021 of Kang and Ravona, together with the fair market
value of the assets and liabilities are presented below:
Kang Ravona
Book Value Fair Value Book Value Fair Value
Cash P640,000 P640,000 P45,000 P45,000
Accounts receivable 360,000 335,000 70,000 54,000
Inventories 475,000 390,000 87,000 78,000
Prepaid expenses 25,000 - 13,500 5,000
Land 2,000,000 2,900,000 900,000 1,550,000
Building 800,000 900,000 723,000 768,000
Equipment 700,000 585,000 361,500
Goodwill - - 300,000 -
Total assets P5,000,000 P5,750,000 P2,500,000 P2,500,000
Accounts payable 312,500 312,500 200,000 200,000
Notes payable 937,500 980,000 700,000 765,000
Share capital (P50 par) 2,000,000 850,000 -
Share premium 1,000,000 400,000
Retained earnings 750,000 350,000
Total Equities P5,000,000 P2,500,000

Due to the specialized nature of the equipment owed by Ravona, it has no available fair value as of December
31, 2021. In order to push through with the merger, it was provisionally valued at 360,000. It has remaining useful
life is 5 years from the date of the merger.
Compute for the following balances on acquisition date:

1. Goodwill (Gain) arising from acquisition

a. 510,000 c. 30,000
b. 150,000 d. 90,000
2. Total assets of the merged corporation
a. 7,020,000 c. 7,740,000
b. 7,610,000 d. 7,380,000

3. Total liabilities of the merged corporation

a. 2,580,000 c. 2,700,000
b. 2,710,000 d. 2,610,000

4. Share premium of the merged corporation

a. 1,150,000 c. 1,000,000
b. 1,080,000 d. 1,480,000

5. Retained earnings balance of the merged corporation

a. 600,000 c. 520,000
b. 950,000 d. 870,000

6. On July 1, 2022, it was determined that the probability that the condition attached to the additional cash
consideration is 75% as of acquisition date. On December 31, 2022, it was shown that the condition has been
complied with. The journal entry to record the adjustment and the payment of additional cash of P200,000 to
Ravona on December 31, 2022 will include:
a. Debit to loss of 80,000
b. Debit to loss of 50,000
c. Credit to liability of 30,000
d. Memorandum entry only

7. On December 31, 2022, the value of the equipment was finally fixed at P400,000. Depreciation is recorded
at year-end, and the depreciation of the equipment based on the provisional value has already been
recorded. Journal entries to record the adjustment/s, if any, will include:
a. Debit to goodwill of 40,000
b. Debit to accumulated depreciation of 40,000
c. Debit to depreciation of 8,000
d. Credit to gain of 40,000

Problem No. 2

On January 1, 2021, Taskmaster Co. acquired all of the assets and assumed all of the liabilities of Natasha, Inc.
by paying P5,000,000 cash. Natasha’s net asset at book value is P5,600,000 as of January 1, 2021.

The assets and liabilities of Natasha are fairly valued, except for its building which is overvalued by 450,000, and
its inventory which, based on negotiation, should be increased by 150,000. The parties also agreed that Natasha
should record additional accounts payable of 200,000 which was unrecorded prior to the negotiation.

In addition, Taskmaster agrees to issue 1,000 P10-par shares to the former owners of Natasha, if the market
price of Taskmaster’s shares increases to P120 per share by December 31, 2021. The fair value of the contingent
consideration as of January 1, 2021, was fixed at P90,000, based on consideration of the vesting conditions.
The additional shares, if any, are to be issued on January 15, 2022.

On the negotiation for the business combination, Taskmaster Co. incurred transaction costs amounting to
₱400,000 for legal, accounting, and consultancy fees.
1. How much is the goodwill (gain) arising from the acquisition?
a. (210,000) c. (610,000)
b. (100,000) d. (10,000)

2. Assuming that the market price of Taskmaster’s shares increased to P130 per share by December 31, 2021,
the journal entry on January 15, 2022 to settle the contingent consideration will include:
a. Credit to Share Premium – Contingent Share Consideration of 30,000
b. Credit to Share Capital of 90,000
c. Credit to cash of 120,000
d. Credit to Share Premium – of 80,000

STOCK ACQUISITION

Problem No. 1
On July 26, 2021, Hidilyn Diaz Holdings Corp (HDHC) acquired 75% of the outstanding voting shares of WWL
Corp, gaining control over the acquiree in the process. On this day immediately before the business
combination, the separate books of HDHC and WWL Corp had the following data:

HDHC WWL
Cash 10,000,000 500,000
Receivables 3,000,000 600,000
Inventory 4,000,000 450,000
PPE, net 14,000,000 1,200,000
Intangible assets, net 2,500,000 250,000
Good will 1,000,000 100,000
Short-term liabilities 5,000,000 700,000
Long-term liabilities 12,000,000 700,000
Ordinary shares (P10 par) 6,000,000 1,000,000
Share premium 5,500,000 200,000
Retained Earnings 6,000,000 500,000

On the date of acquisition, the receivables of HDHC and WWL are both overstated by P500,000 and P100,000
respectively. The fair value of the PPE of HDHC is higher than its book value by P1,000,000, while the book
value of the PPE of WWL is higher than its fair value by P200,0000.
1. Assuming that HDHC paid P1,300,000 cash to acquire the shares, that fair value of the non- controlling
interest is P400,000, and that the full goodwill method was opted for, how much is the consolidated assets
on the date of acquisition?
a. 34,900,000 c. 36,300,000
b. 35,300,000 d. 36,800,000

2. Assuming that HDHC paid P1,025,000 cash to acquire the shares, inclusive of P125,000 control premium,
and that the full goodwill method was opted for, how much should the measurement of non-controlling interest
be at the date of acquisition?
a. 300,000 c. 341,667
b. 325,000 d. 0

3. Assuming HDHC paid P1,350,000 to acquire the shares, that fair value of the non-controlling interest is
P425,000, and that the partial goodwill method was opted for, how much is the goodwill arising from business
combination at the date of acquisition?
a. 375,000 c. 500,000
b. 475,000 d. 0
4. Assuming HDHC paid P950,000 to acquire the shares, inclusive of P50,000 control premium, how much is
the consolidated shareholders equity on the date of acquisition?
a. 17,500,000 c. 17,825,000
b. 17,525,000 d. 17,850,000

Problem No. 2

On January 1, 2021, Ernest John Obiena Inc. (EJOI) had a 20% interest in MPV Corporation carried at
P300,000. On July 31, 2021, EJOI acquired an additional 50% interest in MPV Corporation for P800,000 cash
which was the fair value of the voting shares at that time. MPV Corporation had the following information on
December 31, 2020:

MPV
Book value Fair value
Current assets 560,000 680,000
Non-current assets 2,010,000 1,950,000
Liabilities 1,330,000 1,330,000
Ordinary shares 640,000
Retained earnings 600,000

MPV earned P300,000 for the 7 months prior to business combination and declared and paid dividends
amounting to P80,000 to its shareholders on April 30, 2021.
1. Assuming that EJOI did not have significant influence over MPV prior to business combination, how much is
the goodwill attributable to non-controlling interest on the date of acquisition?
a. 410,000 c. 90,000
b. 300,000 d. 0

2. Assuming that EJOI did not have significant influence over MPV prior to business combination, the entries in
the books of the parent on the date of acquisition will most likely include a:
a. Credit cash for P800,000
b. Credit to investment in subsidiary for P1,120,000
c. Debit to investment in equity securities held at FVPL for P320,000
d. No entry

3. Assuming that EJOI had significant influence over MPV prior to business combination, which of the following
is correct considering the given information?
a. Goodwill arising from business combination is P210,000
b. Total net amount that will affect the separate P/L of EJOI is P60,000
c. Non-controlling interest on date of acquisition amounts to P480,000
d. Investment in subsidiary to be presented in the consolidated FS amounts to P1,120,000

4. Assuming that EJOI had significant influence over MPV prior to business combination, how much is the
goodwill/gain on bargain purchase resulting from the business combination on July 31, 2021?
a. 410,000 c. 90,000
b. 300,000 d. 0