DRILL BUSINESS COMBINATION

PROBLEM 1
John Corporation concluded that the fair value of Carlo Company was P80,000 and paid that
amount to acquire all of its net assets. Carlo reported assets with a book value of P60,000 and fair
value of P98,000 and liabilities with a book value and fair value of P23,000 on the date of
combination. John also paid P3,000 to a search firm for finder’s fees related to the acquisition.
What amount will be recorded as goodwill by John Corp.?

PROBLEM 2
On April 1, 2010, Carlo Corp. paid cash of P620,000 for all of the net assets of John Company
appropriately accounted for as a merger. The recorded assets and liabilities of John Corporation
on April 5, 2010 follow:

Cash P 60,000
Inventory 180,000
Property, plant and equipment (net of accumulated depreciation of P220,000) 320,000
Goodwill (net of accumulated amortization of P50,000) 100,000
Liabilities (120,000)
Net assets P540,000

On April 1, 2010, John’s inventory had a fair value of P150,000, and the property, plant and
equipment (net) had a fair value of P380,000. The amount of goodwill recorded in the books of
Carlo as a result of the business combination should be:

PROBLEM 3
The Marc Company had these accounts at the time it was acquired by Francis Co.:

Cash P 72,000
Accounts receivable 914,000
Inventories 240,000
Plant, property and equipment 1,392,800
Accounts payable 701,600

Francis Co. paid P2,800,000 for net assets of Marc Company. It was determined that fair market
values of inventories and plant, property, and equipment were P266,000 and P1,800,000,
respectively. An assumed contingent liability arising from past events with a fair value amounting
to P20,000 and as such amount is considered reliable measurement.

In the books of Francis Co., this transaction resulted in:

A. Goodwill recorded at P882,800
B. Goodwill recorded at P449,600
C. Goodwill recorded at P469,600
D. Current assets increased by P469,600

PROBLEM 4
On December 1, 2010. Darlene Ltd. acquired all assets and liabilities of Shyndelle Ltd with
Darlene Ltd. issuing 100,000 shares to acquire these net assets. The fair value of Shyndelles Ltd’s.
assets and liabilities at this date were:

Cash P 50,000
Furniture and fittings 20,000
Accounts receivable 5,000
Plant 125,000
Accounts payable 15,000
Current tax liability 8,000
Provision for annual leave 2,000
The financial year for Darlene Ltd. is January- December. The fair value of each Darlene Ltd.
Share at acquisition date is P1.90. At acquisition date, the acquirer could only determine a
provisional fair value for the plant. On March 1, 2011, Darlene Ltd. received the final value from
the independent appraisal, the fair value at acquisition date being P131,000. Assuming the plant
had a further five-year life from the acquisition date.
The amount of goodwill arising from the business combination at December 1, 2010:

PROBLEM 5
Francis acquires assets and liabilities of Marc Company on January 1, 2011. To obtain these shares,
Francis pays P800 (in thousands) and issues 20,000 shares of P20 par value common stock on this
date. Francis stock had a fair value of P36 per share on that date. Francis also pays P30 (in
thousands) to a local investment firm for arranging the transaction. An additional P20 (in
thousands) was paid by Francis in stock issuance costs.

The book values for both Francis and Marc as of January 1, 2011 follow. The fair value of each of
Francis and Marc accounts is also included. In addition, Marc holds a fully amortized trademark
that still retains an P80 (in thousands) value. The figures below are in thousands. Any related
question also is in thousands.

Marc Company
Francis, Inc. Book Value Fair Value
Cash P1,800 P160 P160
Receivables 960 360 320
Inventory 1,320 520 600
Land 600 240 260
Buildings (net) 2,400 440 560
Equipment (net) 720 200 150
Accounts payable 960 120 120
Long-term liabilities 2,280 680 600
Common stock 2,400 160
Retained earnings 2,160 960

Assuming the combination is accounted for as an acquisition, immediately after the acquisition, in
the balance sheet of Francis:
 What amount will be reported for goodwill?
 Using the same information above, what amount will be reported for receivables?
 Using the same information above, what amount will be reported for inventory?
 Using the same information above, what amount will be reported for buildings (net)
 Using the same information above, what amount will be reported for equipment (net)?
 Using the same information above, what amount will be reported for long-term liabilities?
 Using the same information above, what amount will be reported for common stock?
 Using the same information above, what amount will be reported for retained earnings?
 Using the same information above, what amount will be reported for additional paid in capital?
 Using the same information above, what amount will be reported for cash after the purchase
transaction?

PROBLEM 6
On January 1, 2011, the fair values of Pia’s net assets were as follows:

Current Asset P200,000

Equipment 300,000
Land 100,000
Buildings 600,000
Liabilities 160,000
On January 1, 2011, Ruth Company purchased the net assets of Pia Company by issuing 200,000
shares of its P1 par value stock when the fair value of the stock was P6.20. It was further agrees
that Ruth’s would pay an additional amount on January 1, 2013, if the average income during the
2-year period of 2011-2012 exceeded P160,000 per year. The expected value of this consideration
was calculated as P268,000; the measurement period is one year.

 What amount will be recorded as goodwill on January 1, 2011?

 Using the same information above, assuming that on August 1, 2011 the contingent
consideration happens to be P340,000, what amount will then be recorded as goodwill on the
said date?
 Using the same information above, assuming that on January 1, 2013, the date of settlement of
the contingent consideration clause agreement for P350,000, the entry should be:

PROBLEM 7
Mark Corporation acquired Ray Company through an exchange of common shares. All of the
Ray’s assets and liabilities were immediately transferred to Mark. Mark’s common stock was
trading at P20 per share at the time of exchange. Following selected information is also available.

Before Acquisition After Acquisition

Par value of shares outstanding P200,000 P250,000
Additional paid in capital 350,000 550,000

 Based on the preceding information, what number of shares was issued at the time of the
exchange?
 Using the same information above, what is the par value of Mark’s common stock?
 Using the same information above, what is the fair value of Ray’s net assets, if goodwill of
P56,000 is recorded?

PROBLEM 8
AB Corporation acquired all the assets and liabilities of RG Corporation by issuing shares of its
common stock on January 1, 2010. Partial balance sheet data for the companies prior to the
business combination and immediately following the combination is provided:

AB Book Value RG Book Value Combination

Cash P 65,000 P 25,000 P 90,000
Accounts receivable 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
Buildings and equipment (net) 400,000 150,000 650,000
Goodwill ?
Total Assets P 570,000 P 240,000 P ?

Accounts Payable P 50,000 P 25,000 P 75,000

Bonds payable 250,000 100,000 350,000
Common stock, P2 par 100,000 25,000 160,000
Additional paid-in capital 65,000 20,000 245,000
Retained earnings 105,000 70,000 ?
Total Liabilities and Equities P 570,000 P 240,000 P ?

 What number of shares did AB issue for this acquisition?

 At what price was AB stock trading when stock was issued for this acquisition?
 What was the fair value of the net assets held by RG at the date of combination?
 What amount of goodwill will be reported by the combined entity immediately following the
combination?
 What balance in retained earnings will the combined entity report immediately following the
combination?
PROBLEM 9
Companies A and B decide to consolidate. Asset and estimated annual earnings contributions are
as follows:
Co. A Co. B Total
Net asset contribution P300,000 P400,000 P700,000
Estimated annual earnings contribution 50,000 80,000 130,000

Stockholders of the two companies agree that a single class of stock be issued, that their
contributions be measured by net assets plus allowances for goodwill, and that 10% be considered
as a normal rate of return. Earnings in excess of the normal rate of return shall be capitalized at
20% in calculating goodwill. It was also agreed that the authorized capital stock of the new
corporation shall be 20,000 shares with a par value of P100 a share.

 The amount of goodwill credited to Co. A

 Total contribution of Co. B (net assets plus goodwill):

PROBLEM 10
DG Inc., a new corporation formed and organized because of the recent consolidation of R Inc.
and G Inc., shall issue 10% participating preferred stocks with a par value of P100 for D Inc and
G Inc. net assets contributions, and common shares with a par value of P50 for the difference
between the total shares to be issued and the preferred shares to be issued. The total shares to be
issued by DG shall be equivalent to average annual earnings capitalized at 10%. Relevant data on
D Inc. and G Inc. follows:

D Inc. G Inc.
Total Assets P720,000 P921,600
Total Liabilities 432,000 345,600
Annual earnings (average) 46,080 69,120

 The total preferred shares to be issued by DG Inc.

 The amount of goodwill to be recognized by DG Inc.