ACC 113 – ACCOUNTING FOR BUSINESS COMBINATIONS

MODULES 7 – DAY 3
BUSINESS COMBINATION (PART 3)

PROBLEM 15-1

a. Investment in Polo Company stock 1,080,000

Cash 1,080,000
To record acquisition of 90% (90,000 / 100,000)
of the outstanding shares of Polo.

b. Working paper elimination entries:

(1) Common stock – Polo 400,000

Retained earnings – Polo 500,000
Investment in Polo company stock 810,000
Minority interest in net assets of subsidiary 90,000
To eliminate Polo’s equity accounts at date of acquisition.

(2) Inventories 30,000

Plant assets 60,000
Goodwill 189,000
Investment in Polo company stock 270,000
Minority interest in net assets of subsidiary 9,000
To allocate difference

Computation and allocation of difference:

Acquisition cost P1,080,000
Less: Book value of interest acquired
Common stock (P400,000 x90%) P360,000
Retained earnings (P500,000 x 90%) 450,000 810,000
Difference P 270,000
Allocation:
Inventories (30,000)
Plant assets (60,000)
Total (90,000)
Minority interest (P90,000 x10%) 9,000 ( 81,000)
Goodwill P 189,000
PROBLEM 15-2

a. Investment in Straw stock 600,000

Cash 600,000
To record acquisition of 100% of Straw stock.

b. Acquisition cost P600,000

Less: Book value of interest acquired (100%) 420,000
Difference 180,000
Allocation (100%:
Inventories P( 40,000)
Land ( 80,000)
Building 150,000
Equipment ( 20,000)
Patents ( 20,000) ( 10,000)
Goodwill P170,000

c. Working paper elimination entries:

(1) Common stock – Straw 100,000

Retained earnings – Straw 320,000
Investment in Straw stock 420,000
To eliminate equity accounts of Straw at
date of acquisition.

(2) Inventories 40,000

Land 80,000
Equipment 20,000
Patents 20,000
Goodwill 170,000
Buildings 150,000
Investment in Straw stock 180,000
To allocate difference.
PROBLEM 15-3

a. Investment in Soto stock 950,000

Cash 950,000
To record acquisition of 90% stock of Sotto.

b. Acquisition cost P950,000

Less: Book value of interest acquired (P900,000 x 90%) 810,000
Difference 140,000
Allocation:
Current assets P 50,000
Property and equipment (100,000)
Long-term debt ( 40,000)
Total P( 90,000)
Minority interest (10% thereof) 9,000 (81,000)
Goodwill P 59,000

c. Working paper elimination entries:

(1) Common stock – Sotto 100,000

APIC – Sotto 200,000
Retained earnings – Sotto 600,000
Investment in Sotto stock 810,000
Minority interest in net assets of subsidiary 90,000
To eliminate equity accounts of Sotto at date of
acquisition.

(2) Property, plant and equipment 100,000

Goodwill 59,000
Long-term debt 40,000
Current assets 45,000
Investment in Sotto stock 140,000
Minority interest in net assets of subsidiary 14,000
To allocate difference.
Problem 15-4

Paco Company and Subsidiary

Consolidated Balance Sheet
January 2, 2008

Current assets P475,000

Property, plant and equipment 285,000
Other assets 70,000
Total assets P830,000

Current liabilities P280,000

Mortgage payable 85,000
Common stock 200,000
Additional paid-in capital 65,000
Retained earnings (including income from subsidiary of P20,000) 200,000
Total liabilities and stockholders’ equity P830,000

Computation of income from acquisition:

Investment cost (20,000 shares x P6) P120,000
Less: Book value of interest acquired
Common stock P35,000
Retained earnings 80,000 115,000
Difference P 5,000
Allocated to property and equipment (25,000)
Income from acquisition P(20,000)
SAS 7

PROBLEM 1
Methods of Estimating Goodwill

1. Goodwill is equal to the average excess earnings capitalized at 25%. How much is the goodwill?

Average Earnings P 1,000,000

Normal Earnings (P 8,000,000 x 12%) (960,000)
Excess Earnings 40,000
Divide by: Capitalization Rate 25%
Goodwill P 160,000

2. Goodwill is measured by capitalizing the average excess earnings capitalized at 12%. How much is the
goodwill?

Average Earnings P 1,000,000

Divide b: Capitalization Rate 12%
Estimated Purchase Price 8,333,333
Fair value of Entity B’s net asset (8,000,000)
Goodwill P 333,333

3. Goodwill is measured at the undiscounted amount of total excess earnings expected to be earned
from the combination. How much is the goodwill?

Average Earnings P 1,000,000

Normal Earnings (P 8,000,000 x 12%) (960,000)
Excess Earnings 40,000
Multiply by: Probable duration of
excess earnings 5 years
Goodwill P 200,000

4. Goodwill is measured by discounting the average excess earnings at 9%. How much is the goodwill?

Average Earnings P 1,000,000

Normal Earnings (P 8,000,000 x 12%) (960,000)
Excess Earnings 40,000
Multiply by: PV of an ordinary
annuity @9%, n = 5 3. 88965
Goodwill P 155, 586

Reverse Acquisition

5. How much is the goodwill?

Entity A’s currently issued shares 2,000 25%
Shares issued to Entity B (2 x 3,000) 6,000 75%
 Total Shares after the combination 8,000 100%

Reverse – Entity B (Accounting Acquirer) issues shares to Entity A

Entity B’s currently issued shares 3,000 75%

Shares issued to Entity A 1,000 25%
[(3,000/75%) X 25%]
Total Shares after the combination 4,000 100%

Consideration transferred (1,000 x P300) P 300,000

Non-controlling interest in the acquire -
Previously held equity interest in the
acquiree -
Total 300,000
Fair value of Entity A’s net assets (260,000)
Goodwill P 40,000

PROBLEM 2
THEORY

1. After initial recognition, goodwill arising from a business combination is (use ‘full PFRSs’)
b. not amortized but tested for impairment at least annually

2. How is goodwill tested for impairment?

a. Goodwill is allocated to CGUs. The CGUs are the ones tested for impairment. Any
impairment is charged first to the allocated goodwill, and any excess is charged to the other assets in
the CGUs.

3. The costs of internally developed goodwill and the costs of maintaining a recognized goodwill are
a. capitalized as costs of goodwill.

4. In a reverse acquisition,
d. the legally acquired is the accounting acquirer.

5. How is the consideration transferred in a reverse acquisition transferred?

d. as an amount based on the number of equity interests the legal subsidiary (accounting
partner) would have had to issue to give the owners of the legal parent (accounting acquire)
the same percentage of equity interest in the combined entity that results from the reverse
acquisition.

PROBLEM 3
COMPUTATIONAL

1. How much is the total goodwill expected to arise from the business combination?
 GAMER CO. PLAYER CO. TOTAL
Average annual earnings 40,000 39,000
Normal earnings on assets (25,000) (19,000)
[500,000 x 25%] [380,000 x 25%]
Excess earnings 15,000 20,000
Divide by: Capitalization rate 20% 20%
Goodwill 75, 000 100,000 175,000

Answer: d. 175,000

2. How many shares will be issued to Gamer and Player respectively?

GAMER CO. PLAYER CO. TOTAL

Total Contribution (squeeze) 575,000 480,000 1,055,00
Fair value of net assets (500,000) (380,000)
Goodwill 75,000 100,000 175,000

575,000/1,055,000 = 54,500 480,000/1,055,000 = 45,500

Gamer Co. shares Player Co. shares

Answer: d. Gamer Co. = 54,500 ; Player Co. = 45,000

3. Which of the combining entities is most likely the acquirer?

Answer: a. Gamer Co.

4. How much is the estimated purchase price?

Average annual earnings P 138,000

[(P 650,000 + 40,000) x 5]
Normal earnings on assets (70,800)
(P 590,000 x 12%)
Excess earnings 67,200
Divide by: PV @10%, n=5 3.79079
Goodwill 254,741
Add: Fair value of net
identifiable assets acquired 590,000
Estimated Purchase Price P 844,741

Answer: b. 844,741

5. How much is the goodwill?

Sunday Co.’s currently issued shares 12,000 10%

 Shares issued to Monday Co. (12 x 9,000) 106,000 90%
Total Shares after the combination 120,000 100%

Reverse – Monday Co. (Accounting Acquirer) issues shares to Sunday Co.

Monday Co.’s currently issued shares 9,000 90%

Shares issued to Sunday Co. 1,000 10%
[(12,000/88.88%) X 11.11%]
Total Shares after the combination 10,000 100%

Consideration transferred (1,000 x P200) P 200,000

Non-controlling interest in the acquire -
Previously held equity interest in the
acquiree -
Total 200,000
Fair value of Sunday Co.’s net assets (120,000)
Goodwill P 70,000

Answer: d. 70,00