BUSINESS COMBINATION - ASSET ACQUISITION

In January 1, 2014, Nokia Company decide to engage in a statutory merger, acquiring all of Apple's assets (except cash) and
liabilities. The trial balance of the two companies prior to any transaction related to the combination at January 1, 2014 are shown
below.

Nokia Apple
Book value Fair value Book value Fair value
Cash 600,000.00 600,000.00 210,000.00 210,000.00 -
Accounts receivable, net 60,000.00 66,000.00 21,000.00 21,000.00 -
Trading securities 150,000.00 225,000.00 -
Merchandise inventory 40,000.00 44,000.00 14,000.00 15,400.00 (1,400)
Property, Plant and Equipment, net 700,000.00 770,000.00 245,000.00 269,500.00 (24,500)
Deferred tax asset 2,100.00
Goodwill - 5,000.00
Accounts payable (45,000.00) (45,000.00) (15,750.00) (15,750.00)
Deferred tax liability (42,000.00)
Bonds payable (240,000.00) (264,000.00) (84,000.00) (92,400.00) 8,400
Ordinary shares (500,000.00) (175,000.00)
Share premium (300,000.00) (105,000.00)
Retained earnings (423,000.00) (117,350.00)

Additional information:
1) Nokia company will acquire Apple Company by paying cash of 200,000.

2) Ordinary shares of 10,000 which has a 20 fair value per share shall also be issued by Nokia, in addition to cash. Nokia has
a par value of 10.

3)
6,000 shares of Nokia's Trading securities in Samsung will be transferred to the former owners of Apple. Samsung's ordinary
share has a fair value per share of 15. Nokia's ownership in Samsung is at 15,000 shares.

4) Nokia will issue additional ordinary shares equal to twice the amount in which average cash flow during 2014 and 2015 will
exceed 60,000. At acquisition date, it is estimated that it is 40% probable that cash flows will exceed by 32,000, while
there is a 60% chance that the average cashflow will not exceed 60,000. The cash flows during 2014 and 2015 are
70,000 and 80,000, respectively. The number of shares to be issued will be based on the fair value of Nokia's ordinary
share at settlement date. The discount rate used is 5% to consider the time value of money.

5) Apple Company has disclosed a 100,000 liability for a pending litigation. The fair value of such liability as of acquisition
date is 70,000.

6) The deferred taxes in the books of Nokia and Apple pertains to the temporary difference between the book value and tax
base of property, plant and equipment. The tax rate is 30%.

7) The carrying amounts of Nokia's and Apple's assets and liabilities are equal to their tax bases except for the items mentioned
above.

8) Nokia agreed that it will only assume Apple's remaining accounts payable amounting to 11,250.
 9) Additional cash shall be paid by Nokia in case the fair value of its ordinary share falls by at least 3 in 12-31-2015. At
acquisition date, it was estimated that the fair value of Nokia's share will be 12. The fair value of Nokia's ordinary share at
the end of 2014 and 2015 is 13 and 11 per share, respectively. The contingent cash payment to be made by Nokia is to
compensate the decrease in the fair value of its ordinary share that is suffered by Apple for more than 3 per share. The
discount rate used is 5% to consider the time value of money.

10) Acquisition-related-cost are paid by Apple for the following amounts in behalf of Nokia:
Indirect costs 5,000
Stock issuance costs 6,000

11) As of acquisition date, Apple has a claim from Nokia amounting to 6,000, of which, 6,000 were paid at acquisition date
( not included in the amount of cash transferred mentioned above).

Required:
1) Determine the acquisition cost and fair value of net assets acquired (Consider the deferred taxes on temporary differences).

2) Prepare the journal entry in the books of Nokia at date of acquisition.

3) Prepare the combined statement of financial position of Nokia Company.
4) Prepare the journal entries at end of each reporting period until the settlement date related to the stock contingency.

5) Prepare the journal entries at end of each reporting period until the settlement date related to the cash contingency.

SOLUTIONS:

Journal entries in the books of Apple at acquisition

Accounts receivable, net 11,000
Cash 11,000

Cash 6,000
Accounts receivable, net 6,000
Pre-
Apple Debit Credit combination
Cash 210,000 6,000 11,000 205,000
Accounts receivable, net 21,000 11,000 6,000 26,000
Trading securities - - - -
Merchandise inventory 14,000 - - 14,000
Property, Plant and Equipment, net 245,000 - - 245,000
Deferred tax asset 2,100 - - 2,100
Goodwill 5,000 - - 5,000
Accounts payable (15,750) - - (15,750)
Deferred tax liability - - - -
Bonds payable (84,000) - - (84,000)
Ordinary shares (175,000) - - (175,000)
Share premium (105,000) - - (105,000)
Retained earnings (117,350) - - (117,350)
- 17,000 17,000 -

Requirement no. 1
ACQUISITION ANALYSIS 1
Consideration transferred
Cash 200,000 - 200,000.00
 Issuance of equity 10,000 20 200,000.00
Trading securities 6,000 15 90,000.00
Stock contingency
60,000 2 0.40 0.907029 43,537.41
Cash contingency 10,000 20 200,000.00
10,000 12 120,000.00
Estimated decrease in fair value 80,000.00
Threshold 3 30,000.00
Estimated cash payment 50,000.00
PV factor 0.907029 45,351.47
Total 578,888.89
Fair value of net assets acquired
Accounts receivable, net 21,000.00
Merchandise inventory 15,400.00
Property, Plant and Equipment, net 269,500.00
Accounts payable (11,250.00)
Contingent liability (70,000.00)
Bonds payable (92,400.00)
Deferred tax asset
Tax base Acctg base
Merchandise inventory 14,000.00 15,400.00
PPE ( 2,100 30%) +245000 252,000.00 269,500.00
Contingent liability - (70,000.00)
Bonds payable (84,000.00) (92,400.00)
182,000.00 122,500.00
Temporary difference 59,500.00
Tax rate 30% 17,850.00 (150,100.00)
Goodwill 428,788.89
(0.11)
ACQUISITION ANALYSIS 2
Consideration transferred 578,888.89
Book value of net assets acquired
Ordinary shares 175,000.00
Share premium 105,000.00
Retained earnings 117,350.00
Cash not acquired by Nokia (205,000.00)
Goodwill (5,000.00)
Pre-existing relationship -
Payment of acquirer's acquisition related cost (11,000.00)
AP not assumed by Nokia (15,750 less 11,250) 4,500.00 180,850.00
Allocated excess 398,038.89
Difference between FV and BV FV BV
Accounts receivable, net -
Merchandise inventory 15,400.00 14,000.00 1,400.00
Property, Plant and Equipment, net 269,500.00 245,000.00 24,500.00
Bonds payable (92,400.00) (84,000.00) (8,400.00)
Contingent liability (70,000.00) (70,000.00)
Deferred tax (liability) asset 17,850.00 2,100.00 15,750.00
140,350.00 177,100.00 (36,750.00)
Goodwill 434,788.89

Requirement no. 2 (6,000.00)

Journal entry in the books of Nokia
Accounts receivable, net 21,000
 Merchandise inventory 15,400
Property, Plant and Equipment, net 269,500 752,539
Deferred tax asset 17,850 752,539
Goodwill 428,789
Accounts payable 11,250
Contingent liability 70,000
Bonds payable 92,400
Cash 200,000
Ordinary shares 100,000
Share premium 100,000
Trading securities 60,000
Retained earnings * 30,000 Gain on exchange
Share premium - stock contingency 43,537
Estimated liability on contingent consideration 45,351Note
To record acquisition of Apple Co. 0 :
Gain
on
Accounts payable 6,000
excha
Cash 6,000nge
To record payment of account not part of business combination

Retained earnings 5,000 Acquisition related expenses

Share premium 6,000
Accounts payable 11,000
To record acquisition related costs paid by Apple

Requirement no. 3 Nokia Debit Credit Post-combination

Cash 600,000 - 211,000 389,000
Accounts receivable, net 60,000 21,000 - 81,000
Trading securities 150,000 - 60,000 90,000
Merchandise inventory 40,000 15,400 - 55,400
Property, Plant and Equipment, net 700,000 269,500 - 969,500
Deferred tax asset - 17,850 - 17,850
Goodwill - 428,789 - 428,789
Total Assets 1,550,000 752,539 271,000 2,031,539

Accounts payable (45,000) 11,250 (56,250)

Contingent liability - 70,000 (70,000)
Estimated liability on contingent consideration - 45,351 (45,351)
Deferred tax liability (42,000) - - (42,000)
Bonds payable (240,000) - 92,400 (332,400)
Ordinary shares (500,000) - 100,000 (600,000)
Share premium (300,000) 6,000 100,000 (394,000)
Share premium - stock contingency - 43,537 (43,537)
Retained earnings (423,000) 5,000 30,000 (448,000)
(1,550,000) 11,000 492,539 (2,031,539)
G174: Note:
Gain on exchange