Advanced Financial Accounting and Reporting

Business Combination
February 14, 2019

Theoretical

1. A business combination may be legally structured as a merger, a consolidation, an investment in stock, or a

direct acquisition of assets. Which of the following describes a business combination that is legally structured
as a merger?
A. The surviving company is one of the two combining companies.
B. The surviving company is neither of the two combining companies.
C. An investor-investee relationship is established
D. A parent-subsidiary relationship is established.

2. Should the following costs be included in the consideration transferred in a business combination, according to
IFRS 3, Business Combination?

I- Costs of maintaining an acquisitions department

II- Fees paid to accountants to effect the combination

Cost (I) Cost (II)

A. No No
B. No Yes
C. Yes No
D. Yes Yes

3. In a purchase business combination, the direct acquisition, indirect acquisition, and security issuance costs are
accounted for as follows:

Direct Acquisition Indirect Acquisition Security Issuance

A. Added to price paid Added to price paid Added to price paid
B. Added to price paid Expensed Deducted from value of security issued
C. Expensed Expensed Deducted from value of security issued
D. Expensed Expensed Expensed

4. Lea Co. acquired all of the assets and liabilities of Sherilyn Co. for cash in a legal merger. Which one of the
following would not be recognized by Lea in its books in recording the business combination?
A. Accounts receivable
B. Investment in Sherilyn
C. Intangible asset- patent
D. Accounts payable

5. Gabriel Co. acquired controlling interest in Eddezon Co. is a legal acquisition. Which one of the following could
not be part of the entry to record the acquisition?
A. Debit: Investment in Eddezon
B. Debit: Goodwill
C. Credit: Cash
D. Credit: Common stock

6. Business combinations are accomplished either through a direct acquisition of assets and liabilities by a surviving
corporation or by stock investment in one or more companies. A parent-subsidiary relationship always arise from
a
A. Tax-free reorganization.
B. Vertical combination.
C. Horizontal combination.
D. Greater than 50% stock investment in another company.
Advanced Financial Accounting and Reporting
Business Combination
February 14, 2019

Computational

Problem I

On July 1, 2019, Krizianhor, Inc. acquired most of the outstanding common stock of Kevin Company for cash. The
incomplete working paper elimination entries on that date for the consolidated statement of financial position of
Krizianhor, Inc. and its subsidiary are shown below:

Stockholders’ equity - Kevin P2,437,500

Investment in Kevin P1,584,375
Non-controlling interest 853,125

Inventories 62,500
Equipment 312,500
Patent 61,250
Goodwill ?
Investment in Kevin 468,750
Non-controlling interest ?

Included in the purchase price is a control premium of P68,750.

Compute the amount of goodwill (gain on acquisition) to be reported in the consolidated statement of financial
position on July 1, 2019, assuming non-controlling interest is measured at
1. Fair value.
2. Proportionate or relevant share.
3. Fair value and the fair value of the non-controlling interest is P1,150,000.

Problem II

The Statement of Financial Position of Earl Corporation on June 30, 2019 is presented below:

Current assets P 3 2,500

Land 220,000
Building 110,000
Equipment 87,500
Total Assets P450,000

Liabilities P 87,500
Capital stock, P5 par 150,000
Additional paid in capital 137,500
Retained earnings 75,000
Total equities P450,000

All the assets and liabilities of Earl assumed to approximate fair value except for land and building. It is estimated
that the land have a fair value of P350,000 and the fair value of the building increased by P80,000.

Dennica Corporation acquired 80% of Earl’s capital stock for P500,000.

Compute the amount of goodwill (gain on acquisition) to be reported in the consolidated statement of financial
position on June 30, 2019, assuming the consideration paid
1. Includes control premium of P142,000.
2. Excludes control premium of P23,000 and the fair value of the non-controlling interest is P122,750.
3. Includes control premium of P37,000.

2
Advanced Financial Accounting and Reporting
Business Combination
February 14, 2019

Problem III

On September 18, 2019, John Co. acquired all the Prince Inc.’s P2,150,000 identifiable assets and P530,000
liabilities. Book values of the Prince’s assets and liabilities equal to their fair values except for the overvalued
furniture and fixtures. As a consideration, John issued its own shares of stock with a market value of P1,715,000 and
cash amounting to P375,000.

Contingent consideration is determined to be P148,000 on the date of acquisition. The merger resulted into P647,000
goodwill. John Co. had P4,890,000 total assets and P2,731,000 total liabilities prior to the combination and no
additional cash payments were made but expenses were incurred for related cost amounting to P28,000.

After the merger, compute for the amount of

1. Total assets
2. Increase in liabilities

Problem IV

On January 2, 2019, the Statement of Financial Position of Jayson and Shaira Company prior to the combination are:

Jayson Co. Shaira Co.

Cash P 450,000 P 15,000
Inventories 300,000 30,000
Property and equipment (net) 750,000 105,000
Total assets P1,500,000 P 150,000

Current liabilities P 90,000 P 15,000

Common stock, P100 par 150,000 15,000
Additional paid in capital 450,000 30,000
Retained earnings 810,000 90,000
Total liabilities and stockholder’s equity P1,500,000 P 150,000

The fair value of Shaira Co.’s equipment is P153,000.

Assume the following independent cases:

1. Assuming Jayson Company acquired 80% of the outstanding common stock of Shaira Co. for P136,800 and non-
controlling interest is measured at non-controlling interest’s proportionate share of Shaira Co.’s identifiable
net assets, how much is the consolidated stockholder’s equity on the date of acquisition?
2. Assuming Jayson Company acquired 90% of the outstanding common stock of Shaira Co. for P243,000 and non-
controlling interest is measured at fair value, how much is the total consolidated assets on the date of
acquisition?