Business Combination and Consolidation on Acquisition Date (Summary)

Part 1: Business Combination

1. Journal entries related to acquisition.
2. Computation of Goodwill or Gain on acquisition.
3. Computation of Total Assets, Total Liabilities and Total SHE after combination.

a. To record the business combination on Acquirer’s books:

Acquiree’s assets at FV xx
Goodwill (if applicable) xx
Acquiree’s Liabilities at FV xx
Contingent Consideration (if applicable) xx
Cash paid by acquirer (if applicable) xx
Common stock (if applicable) xx
APIC (if applicable) xx

b. To record acquisition-related costs:

Expense (Direct or indirect costs) xx

APIC (stock-issue costs) xx
Cash xx

c. To compute for Goodwill/Gain:

Price paid (if in cash, record at face value; if shares, use Fair value) xx
Contingent consideration/ Contingent fee (Fair value) xx
Total consideration xx
Less:: Fair value of net asset of acquiree (xx)
Goodwill (Gain) xx

d. Computation of total assets, total liabilities, and total SHE after combination:

BV of Assets of Acquirer xx
FV of Assets of Acquiree xx
Goodwill xx
Acquisition related costs (xx)
Cash paid (xx)
Total assets xx

BV of liabilities, Acquirer xx
FV of liabilities of Acquiree xx
Contingent consideration xx
Total liabilities xx

Total Assets xx
Total Liabilities (xx)
Total SHE xx
Or
SHE of Acquirer before combination xx
Shares issued (Fair Value) xx
Acquisition-related costs (xx)
Gain on acquisition xx
Total SHE xx
Part 2: Consolidation on Acquisition Date
1. Journal entries related to stock acquisition.
2. Computation of Excess, Goodwill/Gain, Total Assets, Total Liabilities and Total SHE.
3. Allocation of Goodwill
4. Determination and Allocation of excess schedule
5. Working paper entries

a. To record the acquisition of stock:

Investment in Subsidiary xx
Cash xx
Common Stock xx
APIC xx

b. To record acquisition-related costs:

Acquisition Expense (R.E) xx
APIC xx
Cash xx

c. To compute for Goodwill:

Price paid xx
NCI xx
Previously-held interest xx
Total xx
Fair value of Net assets (xx)
Goodwill/Gain xx

d. Allocation of Goodwill to Parent and NCI and floor test:

Parent Non-controlling interest

Fair Value Xx (1)Xx
FV of Net assets (xx) (2)(xx)

Goodwill Xx Xx

Floor test: Fair value of NCI (1) should be greater than or equal to NCI share in FV of
Net Assets (2). If FV of NCI (1) is less than NCI in FV of Net Assets (2), use NCI in FV
as the Fair Value of NCI.

e. Determination and Allocation of Excess Schedule:

Total Parent NCI

Fair Value of Subsidiary Xx Xx Xx
(1)Less: BV of acquire Xx Xx Xx
(2)Excess Xx Xx Xx
Adjustment of accounts
Assets (FV>BV) (xx)
Assets(FV<BV) Xx
Liabilities (FV>BV) Xx
Liabilities (FV<BV) (xx)
Goodwill xx

f. Working paper entries:

(1) Eliminate BV of SHE of Acquiree on acquisition date:
SHE (acquiree) xx
Investment in Subsidiary xx
NCI (if applicable) xx
 (2) To allocate the excess:
Goodwill xx
Assets (FV>BV) xx
Liabilities (FV<BV) xx
Investment in Subsidiary xx
NCI (if applicable) xx
Assets (FV < BV) xx
Liabilities ( FV>BV) xx

g. Computation of Total Assets, Liabilities, SHE, and NCI on Consolidated FS.

BV of assets of acquirer xx
FV of assets of acquiree xx
Goodwill xx
Cash paid (xx)
Acquisition-related costs (xx)
Total Assets xx

BV of Liabilities of acquirer xx
FV of Liabilities of acquiree xx
Total Liabilities xx

Total Assets: xx
Total Liabilities (xx)
Total SHE xx
Or
SHE of Acquirer before consolidation xx
Stock issued at FV xx
NCI at FV xx
Acquisition-related costs (xx)
Total SHE xx

Problems
Part 1: Net Asset Acquisition

1. On January 1, 2011, Polo Company pays P270, 000 cash and also issue 18, 000
shares of P10 par common stock with a market value of P330, 000 for the net
asset of Sure Company. In addition, Polo pays P30, 000 for registering and
issuing the 18, 000 shares and P70, 000 for professional fees to effect the
combination. Summary balances immediately before the combination is as
follows:

Polo Sure Sure

Book Value Book Value Fair Value
Cash P350, 000 P40, 000 P40, 000
Inventories 120, 000 80, 000 100, 000
Other current assets 30, 000 20, 000 20, 000
Plant assets – net 260, 000 180, 000 180, 000
Total assets P760, 000 P320, 000 P340, 000

Current Liabilities P160, 000 P30, 000 P30, 000

Other liabilities P80, 000 50, 000 40, 000
Common stock, 10 par 420, 000 200, 000
Retained earnings 100, 000 40, 000
Total liabilities and equity P760, 000 P320, 000
• Prepare journal entries, compute for goodwill/gain, total assets, total liabilities
and total SHE after the acquisition.
 2. Condensed Statement of Financial Position for Pablo and Siso Corporations at
December 31, 2010, are as follows (in thousands):
Pablo Siso
Current Assets P130 P60
Non-current Assets 570 440

Total Assets P700 P500

Current Liabilities P50 P60

Capital Stock, P10 par 500 200
Additional paid-in capital 50 140
Retained earnings 100 100

Total Liabilities and shareholders’ equity P700 P500

On January 2, 2011, Pablo issues 30, 000 shares of its stock with a market value
of P20 per share for the assets and liabilities of Siso Corporation. Siso is
dissolved. The book values reflect their fair values, except a non-current asset of
Pablo, which have a fair value of P400, 000, and the current assets of Siso which
have a net realizable value of P100, 000.

Pablo pays the following expenses in connection with the business combination:

Cost of registering and issuing securities issued P15, 000

Other acquisition costs of combination 25,
000

Contract for contingent consideration to be paid to Siso, P75, 000. This is

determined on the date of acquisition.

• Prepare journal entries, compute for the goodwill/gain, total assets, total
liabilities, and total SHE after acquisition.

Part 2: Stock Acquisition

1. The June 1, 2011 statement of financial position of Straw Company at book value
and fair market values are as follows:

Book Value Fair Value

Current assets P240, 000 P280, 000
Land 20, 000 100, 000
Building and equipment (net) 400, 000 270, 000
Patents 10, 000 30, 000

Total Assets 670, 000 P680, 000

Liabilities P250, 000 P250, 000

Common stock 100, 000
Retained earnings 320, 000 430, 000

Total liabilities and shareholder’s equity P670, 000 P680, 000

On June 1, 2011 Pepsi Inc. purchased all of Straw Company’s stock for P600,
000.
Required: Prepare journal entries, schedule of D & A of excess, and working
paper entries.
 2. The January 1, 2011 statement of financial position of Sotto Company at book
and market values are as follows:

Book Value Fair Value

Current assets P800, 000 P750, 000
Property, Plant and Equipment (net) 900, 000 1, 000,000

Total Assets P1,700,00 P1,750, 000

Current liabilities P300, 000 P300, 000

Long-term liabilities 500, 000 460, 000
Common stock, Par P1 100, 000
Additional paid-in capital 200, 000
Retained earnings 600, 000

Total liabilities and shareholders’ equity P1,700, 000

Pedro Company paid P950, 000 in cash for 80% of Sotto Company’s common
stock. Pedro Company also pays P80, 000 of professional fees to effect the
combination. The fair value of the NCI is assessed to be P230, 000.

Required: Journal entries, D & A of excess schedule, working paper entries.

3. Statement of financial position for Puro Corporation and Sato Company on

December 31, 2010 are given below.

Puro Corporation Sato Company

Cash and cash equivalents P330, 000 P90, 000
Inventory 100, 000 60, 000
Property, plant and equipment (net) 500, 000 250, 000

Total Assets P930, 000 P400, 000

Current Liabilities P180, 000 P60, 000

Long-term liabilities 200, 000 90, 000
Common stock 300, 000 100, 000
Retained earnings 250, 000 150, 000
Total Liabilities and shareholders’ equity P930, 000 P400, 000

` Puro Corporation purchased 80% ownership of Sato Company on December 31,

2011, for P260, 000. On that date, Sato Company’s property and equipment had a
fair value of P50, 000 more than the book value shown. All other book values
approximated fair value.

Required: Working paper entries, D & A excess schedule, goodwill or gain, total
assets, liabilities and SHE.
 Challenge Problem:

Primo Corporation acquired majority of the stock of Sonia Company on January

2, 2011, and a consolidated statement of financial position was prepared. Partial
statement of financial position for Primo, Sonia, and the consolidated entity
follow:

Primo Corporation and Sonia Company

Partial Statement of Financial Position
January 2, 2009

Accounts Primo Sonia Consolidated

Corporation Company Entity

Cash and Cash Equivalents P100, 000 P40, 000 P140, 000
Accounts Receivable 80, 000 20, 000 100, 000
Inventory 200, 000 100, 000 340, 000
Equipment 500, 000 200, 000 800, 000
Investment in Sonia
Company ? 10, 000
Goodwill ________ _________ 10, 000

Total P ?______ P360, 000 P1,390, 000

Accounts payable P70, 000 P40, 000 P110, 000

Bonds payable 300, 000 300, 000
Common stock ? 150, 000 250 ,000
Retained earnings 567 ,000 170, 000 ?
Non-controlling interest ________ ________ 163, 000

Total P ?_____ P360, 000 P1,390, 000

Required:
1. Consolidated retained earnings
2. FV of inventory of Sonia on Janauary 2, 2011
3. FV of Sonia’s Net Assets
4. Amount Primo paid to acquire the stock in 2011
5. Allocation of Goodwill to Controlling and NCI