C1 Business Combi Assignment

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Business Combination Assignment January 26, 2024

Problem 1.On October 1, 20x1, FRED Corporation acquired all the assets and assumed all the liabilities of
CHENG Corporation by issuing 20,000 shares with a fair value of P67.50 per share and an obligation to pay
a contingent consideration with a fair value of P750,000

In addition, FRED paid the following acquisition related costs:


Legal fees 105,600
Audit fee for SEC registration of stock issue 320,400
Costs of stock certificates 35,000
Broker's fee 49,000
Other direct cost of acquisition 50,000
General and allocated expenses 14,000
The Statement of Financial Position as of September 30, 20x1 of FRED and CHENG, together with the
fair market value of the assets and liabilities are presented below:

FRED CHENG
Book Value Fair Value Book Value Fair Value
Cash 640,000 640,000 45,000 45,000
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 700,000 585,000 361,500 360,000
Goodwill 300,000
Total assets 5,000,000 5,750,000 2,500,000 2,860,000

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 5,000,000 2,500,000

Compute for the balances that will be shown on the October 1, 20x1 statement of financial position of the
surviving company:
Questions:
1. What is the total amount of goodwill to be reported by the surviving company- FRED?
2. What is the total amount of cash to be reported by the surviving company -FRED?
3. What is the total amount of inventories to be reported by the surviving company -FRED?
4. What is the total amount of land and building to be reported by the surviving company -FRED?
5. What is the total amount of equipment to be reported by the surviving company -FRED?
6. What is the total amount of notes payable to be reported by the surviving company -FRED?
7. What is the total amount of liabilities to be reported by the surviving company -FRED?
8. What is the total amount of share capital to be reported by the surviving company -FRED?
9. What is the total amount of share premium to be reported by the surviving company -FRED?
10. What is the total amount of retained earnings to be reported by the surviving company -FRED?
11. What is the total amount of assets to be reported by the surviving company?

Problem 2.On February 1, 20x1, Pipe Corp. acquires the net assets of Solomon Corp. For P31,250,000 The
financial position of Solomon on the date:
Book Value Fair Value
Inventory 1,562,500 2,187,500
Property, plant and equipment 18,750,000 25,000,000
Accounts payable 12,500,000 12,812,500
Pipe Corp. determines that Solomon has the following intangible assets that were not reported on its
statement of financial position.

Advertising contracts 312,500


Trademark 3,125,000
Customers Lists 937,500
Non-contractual customer relationships 625,000
Potentially skilled workers 5,000,000
Potentially profitable future contracts 2,812,500
Patented technology 1,875,000
Solomon has not also recorded the expected liability from pending lawsuit which is currently estimated at
P1,875,000. How much is the goodwill to be presented in the books of the Pipe Corp. after the date of
combination?

Problem 3. Pedro Corp. Issues 1,000,000 shares of its own P2 par ordinary share for the net assets of Jack
in a merger consummated on July 1, 20x1. On this date, the market price per share of Pedro’s shares is P9.
The stockholders’ equity section of the balance sheets of the two companies at date of acquisition follow:
Pedro Jack
Ordinary shares 40,000,000 6,000,000
Share premium 6,000,000 2,000,000
Retained earnings 10,000,000 4,000,000
Total 56,000,000 12,000,000
The amount of retained earnings that will be shown in Pedro’s balance sheet after the acquisition of Jack is

Problem 4. Sheman Corporation exchanged its common stock, worth P500,000 f all of the net assets of
Darna Company in a business combination treated as a purchase. At the date of combination, Sheman’s net
assets had a book value of P650,00 and a fair value of P900,000. Darna Company’s net assets had a book
value of P450,000 and a fair value of P460,000. Immediately following the combination, the net assets of the
combined company should have been reported at what amount?

Problem 5. Bolton Company acquires the net assets of Pamelia Company for a cash consideration of
P100,000. One half is to be paid on acquisition date and one half is payable in one year’s time. The
appropriate discoun rate is 10% p.a. The present value of the cash outflow in ne year’s time is

Problem 6. The Geek Company acquired net assets of The Okay Company for a consideration transferred
P112 million. At the acquisition date the carrying amount Okay’s net assets was P100 million and their fair
value was P120 million. How should the difference between the consideration transferred and the net assets
acquired be presented in Geek’s financial statements, according to PFRS 3 Business combinations?
a. Gain on bargain purchase of P8 million recognized in other comprehensive income
b. Gain on bargain purchase of P8 million deducted from other tangible assets
c. Gain on bargain purchase of P8 million recognized in profit or loss
d. Goodwill of P12 million as an intangible asset

Problem 7. CRIS Corporation acquired the net assets of BRIAN Company on January 1, 20x1. Assets
acquired from BRIAN Co. at fair value include Current Assets, P1,150,000; Equipment, P1,700,000; Land,
P600,000; Building, P3,600,000.Liabilities assumed from the acquired company amount to P640,000. Fair
value of ordinary shares issued amount to P7,440,000.

The agreement further provides that additional cash payments would be made on January 1, 20x3 equal
to135% of the amount by which annual earnings of CRIS Company exceed P265,000 per year, prior to
January 1, 20x3. Net income was P367,500 in 20x1 and P462,500 in 20x2. Assume that the liabilities
recorded on January 1, 20x1 exclude an estimated contingent liability recorded at a estimated amount of
P320,2000.

The amount of the estimated contingent liability was determined to be at P272,500 in November 2, 20x1.
The estimated amount of the contingent liability was determined to increase by P85,000 in August 1, 20x2
from the last date of the change in estimate.

Questions:
1. What amount of goodwill is presented in the separate statement of financial position of the acquirer
company on the date of acquisition?
2. What amount of goodwill is presented in the separate statement of financial position of the acquirer
company as of January 1, 20x2?

3. What amount of goodwill is presented in the separate statement of financial position of the acquirer
company as of January 1, 20x3?
4. As a result of the additional cash payments made in 20x3 (if any), how much will affect profit or loss in
20x3?

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