Items 21 and 22 are based on the following information:

Balance sheet information for Hope Corporation at January 1, 20x4, is summarized as follows:

Current assets- P 920,000

Plant asset - 1,800,000

Liabilities- 1,200,000

Capital stock P10 par- 800,000

Retained Earnings- 720,000

Hope’s assets and liabilities are fairly valued except for plant assets that are undervalued by P200,000.
On January 2, 20x4, Robin Corporation issues 80,000 shares of its P10 par value common stock for all of
Hope’s net assets and Hope is dissolved. Market quotations for the two stocks on this date are:

Robin common: P28 Hope common: P19

Robin pays the following fees and costs in connection with the combination:

Finder’s fee, P10,000

Costs of registering and issuing stock, P5,000

Legal and accounting fees, P6,000

21. Calculate the amount of consideration transferred:

a. P2,240,000 c. P2,256,000
b. P2,251,000 d. Not determinable

ANSWER: A. P2,240,000 (80,000 x 28)

22. Calculate any goodwill from the business combination.

a. P475,000 c. P531,000

b. P520,000 d. Not determinable

ANSWER: B. P520,000

Consideration Transferred P2,240,000

Fair value net identifiable assets- Hope

(2,270,000 + 200,000 + 1,200,000) (1,720,000)

Goodwill P520,000
23. Pretzel Company acquired the assets (except for cash) and assumed the liabilities of Salt Company
on January 2, 20x4. As compensation, Pretzel Company gave 30,000 shares of its common stock, 15,000
shares of its 10% preferred stock and cash of P50,000 to the stockholders of Salt Company. On the
acquisition date, Pretzel Company stock had the following characteristics:

Stock

Common- Par Value P10 Fair Value- P25

Preferred- Par Value P100 Fair Value- P100

Immediately prior to the acquisition, Salt Company’s balance sheet reported the following book values
and fair values:

Book Value Fair Value

Cash P 165,000 P 165,000

Accounts Receivable (net of P11,000 allowance) 220,000 198,000

Inventory- FIFO cost 275,000 330,000

Land 396,000 550,000

Buildings and Equipment (net) 1,144,000 1,144,000

Current liabilities 275,000 275,000

Bonds Payable, 10% 450,000 495,000

Common stock, P5 par value 770,000

Other contributed capital 396,000

Retained earnings 309,000

Calculate any goodwill from the business combination.

a. P0 c. P798,000
b. P683,000 d. P848,000

ANSWER: D. P848,000

Accounts Receivable P198,000

Inventory 330,000

Land 550,000
Buildings and equipments(net) 1,144,000

Fair value of gross assets P2,222,000

Less: Liabilities

Current Liabilities (275,000)

Bonds Payable (495,000)

Fair Value of net assets P1,452,000

Calculation of goodwill

30,000 common shares @ 25 fair value P750,000

15,000 preferred shares @ 100 fair value 1,500,000

Cash payment 50,000

Total purchase price P2,300,000

Less: Fair value of net assets of Salt Co. 1,452,000

Goodwill P848,000

24. Air Philippines June 1, 20x5 balance sheet is as follows (in millions):

Assets Liabilities & Equity

Cash P1,400 Current liabilities P3,200

Receivables 650 Long term debt 5,000

Investments 1,000 Common stock, P.01 Par 1

Maintennace supplies 150 Additional Paid in capital 5,500

Flight equipment (net 8,500 Retained earnings (deficit) (2,300)

Of P2,000 accumulated dep.) Accumulated other comprehensive

Income 1,999

International routes 700 Treasury stock (1,000)

Total P12,400 P12,400

Philippine Airlines acquired Air Philippines on June 1, 20x5. Philippine Airlines accounted for the
acquisition by putting Air Philippines’ assets and liabilities directly on its own books. Air Philippines’ cash
and receivables, investments and current liabilities were reported at market value. Its maintenance
supplies had a fair value of P400 million, flight equipment had P12,000 million, and international routes
were worth P500 million. Long-term debt had a fair value of P6,000 million. Air Philippines also had an
unrecorded intangible, representing leases with favorable terms, worth P800 million. Philippine Airlines
paid P8,000 million in cash for Air Philippines. The gain/goodwill arising from the business combination (in
millions):

a. P1,250 gain c. P450 goodwill

b. P1,650 gain d. P850 goodwill

ASNWER: C. P450 GOODWILL

Cash 1,400

Accounts Receivable 650

Investment 1,000

Maintenance supply 400

Flight equipment 12,000

International routes 500

Leases 800

Goodwill 450

Current Liabilities 3,200

Long term debt 6,000

Cash 8000

24. Edina Company acquired the assets (except cash) and assumed the liabilities of Burns Company on
January 1, 20x4, paying P2,600,000 cash. Immediately prior to the acquisition, Burns Company’s balance
sheet was as follows:

Book Value Fair Value

Accounts Receivable P 240,000 P 220,000

Inventory 290,000 320,000

Land 960,000 1,508,000

Buildings(net) 1,020,000 1,392,000

Total P2,510,000 P3,440,000

Accounts Payable P 270,000 P 270,000

Note Payable 600,000 600,000

Common stock, P5 par 420,000

Other contributed capital 640,000

Retained earnings 580,000

Total P2,510,000

Edina Company agreed to pay Burns Company’s former stockholders P200,000 cash in 20x6 if post-
combination earnings of the combined company reached P1,000,000 during 20x5. Calculate the gain on
contingent consideration for Edina Company in 20x6 assuming the earnings contingency was not met:

a. P 0 c. P 200,000
b. P 30,000 d. P 230,000

ANSWER: C. P 200,000

Accounts Receivable P 220,000

Inventory 320,000

Land 1,508,000

Buildings 1,392,000

Goodwill 230,000

Accounts Payable 270,000

Notes Payable 600,000

Cash 2,600,000

Estimated contingent consideration 200,000

Consideration transferred:

Cash paid P2,600,000

Estimated contingent consideration 200,000

 Total P2,800,000

Fair value of net identifiable assets acquired

(3,440,000- 870,000) 2,570,000

Goodwill 230,000

Estimated liability for contingent consideration 200,000

Gain on contingent consideration 200,000

Items 25 and 26 are based on the following information:

On January 1, 20x5, Kim Co. acquired all of the identifiable assets and assumed all liabilities of Dorothy,
Inc. by paying cash of P4,800,000. On this date, identifiable assets and liabilities assumed have fair value
of P7,680,000 and P4,320,000, respectively. Kim has estimated restructuring provisions of P960,000
representing exit cost of the acquiree’s activities, termination costs of employees of Dorothy and
relocation costs of the said employees. The restructuring plan is conditional until the business
combination process is done. If the combination will not happen, no restructuring will happen.

25. For purposes of computing the goodwill (gain on bargain purchase), how much is the fair value of net
assets to be deducted from the consideration transferred?

a. P 2,400,000 c. P 5,280,000

b. P 3,360,000 d. None of the above

ANSWER: B. P 3,360,000

(P7,680,000- P4,320,000= 3,360,000)

26. How much is the goodwill (gain on bargain purchase) on the business combination:

a. (P 480,000) c. P2,400,000

b. P 1,440,000 d. None of the above

ANSWER: B. P 1,440,000

Consideration transferred 4,800,000

Fair value of net assets (3,360,000)

Goodwill P1,440,000
27. On January 1, 20x5, Drei Co. acquired all of the identifiable assets and assumed all liabilities of
Cerise, Inc. by paying P4,800,000. On this date, identifiable assets and liabilities assumed have fir value
of P7,680,000 and P4,320,000, respectively. Terms of the agreement are as follows:

 20% of the price shall be paid on January 1, 20x5 and the balance on December 31, 20x6 (the
prevailing market rate on the same date is 10%)
 The acquires shall also transfer its piece of land with book and fair value of P2,400,000 and
P1,440,000, respectively. Included in the liabilities assumed is an estimated warranty liability.

The carrying amount and fair value of this warranty liability amounted to P576,000 and P468,000,
respectively. The acquiree guarantees that the warranty liability would only be settled for P480,000. How
much is the goodwill on the business combination?

a. P 2,105,376 c. P 2,213,376
b. P 2,201,376 d. None of the above

ANSWER: B. P 2,201,376

Consideration transferred:

20x5 – 20% x 4,800,000 960,000

Land 1,440,000

Consideration payable:

20x6 – 80% x 4,800,000x .8264 3,173,376

Total 5, 573,376

Fair Value warranty liability 468,000

Estimated warranty liability (480,000)

Fair value of net assets:

(7,680,000 – 4,320,000) (3,360,000)

Goodwill P 2,201,376
Items 28-32 are based on the following information:

On January 1, 20x4, NT Company exchanges 15,000 shares of its common stock for all of the assets and
liabilities of OTG. Inc. Each of NT’s shares has a P4 par value and a P50 fair value. The fair value of the
stock exchanged in the acquisition was considered equal to OTG’s fair value. NT also paid P25,000 in
stock registration and issuance costs in connection with the merger.

Several of OTG’s accounts have fair values that differ from their book values on this date:

Book Value Fair Value

Receivables P 65,000 P 63,000

Trademarks 95,000 225,000

Record music catalog 60,000 180,000

In-process research and development 0 200,000

Notes payable 50,000 45,000

Pre-combination January 1, 20x4, book values for the two companies are as follows:

NT OTG

Cash P 60,000 P 29,000

Receivables 150,000 65,000

Trademarks 400,000 95,000

Record music catalog 840,000 60,000

Equipment(net) 320,000 105,000

Totals P1,770,000 P354,000

Accounts payable P 110,000 P 34,000

Notes payable 370,000 50,000

Common stock 400,000 50,000

Additional paid-in capital 30,000 30,000

Retained earnings 860,000 190,000

Totals P1,770,000 P354,000

Assume that this combination is a statutory merger so that OTG’s accounts will be transferred to the
records of NT. OTG will be dissolved and will no longer exist as a legal entity. Immediately the business
combination using the acquisition method, determine:

28. The total assets amounted to:

a. P 2,124,000 c. P 2,574,000

b. P 2,547,000 d. P 2,599,000

ANSWER: C. P 2,574,000

Initial Asset – NT P 1,770,000

Cash paid for stock registration and issuance cost (25,000)

Fair value of net identifiable assets acquired:

Cash 29,000

Receivables 63,000

Trademarks 225,000

Record music catalog 180,000

PPE 105,000

R&D 200,000 802,000

Total Assets P 2,574,000

29. The total liabilities amounted to:

a. P 84,000 c. P 564,000

b. P 480,000 d. P 559,000

ANSWER: D. P559,000

Initial liabilities – NT (110,000 + 370,000) P480,000

Fair value of net identifiable assets acquired

Accounts Payable 34,000

Notes Payable 45,000 79,000

Total Liabilities P559,000

30. The common stock amounted to:

a. P 50,000 c. P 450,000

b. P 400,000 d. P 460,000

ANSWER: D. P 460,000

Initial common stock- NT P 400,000

Issue (15,000x4) 60,000

Total Common Stock P460,000

31. The additional paid-in capital amounted to:

a. P 30,000 c. P 695,000

b. P 60,000 d. P 720,000

ANSWER: D. P 720,000

Initial APIC P 30,000

Issuance (15,000x46) 690,000

Total APIC P720,000

32. The retained earnings amounted to:

a. P 190,000 c. P 860,000

b. P 835,000 d. P 1,050,000

ANSWER: C. P 860,000

Common stock P 460,000

APIC 695,000

Retained earnings 860,000

Total Shareholders’ Equity P 2,015,000

Items 24 to 30 are based on the following information:

On December 31, 20x4, PP Inc. acquired assets and liabilities of SS Company. PP will maintain SS as a
wholly owned subsidiary with its own legal and accounting entity. The consideration transferred to the
owner of SS included 50,000 newly issued PP common shares (P20 market value, P5 par value) and an
agreement to pay an additional P130,000 cash if SS meets certain project completion goals by December
31, 20x5. PP estimates a 50 percent probability that SS will be successful in meeting these goals and
uses a 4 percent discount rate to represent the time value of money.

Immediately prior to the acquisition, the following data for both firms were available:

SS PP

PP Book Value Fair Value

Revenues (P 1,200,000)

Expenses 875,000

Net Income ( P 325,000)

Retained Earnings, 1/1/20x4) (950,000)

Net Income (325,000)

Dividends paid 90,000

Retained earnings 12/31/20x4 (P 1,185,000)

Cash P 85,000 P 85,000

Receivables and inventory 190,000 180,000

PPE 450,000 600,000

Trademarks 300,000 160,000 200,000

Total Assets P 2,560,000 P 885,000

Liabilities (500,000) (180,000) (180,000)

Additional paid-in capital (400,000) (200,000)

Common stock (475,000) ( 70,000)

Retained earnings (1,185,000) (435,000)

Total liabilities and equities P 2,560,000 (P 885,000)

In addition, PP assessed a research and development project under way at SS to have a fair value of
P100,000. PP paid legal and accounting fees of P15,000 in connection with the acquisition and P9,000 in
stock issue and registration costs. Use a 0.961538 present value factor where applicable.

24. The consideration transferred amounted to:

a. P 1,000,000 c. P 1,030,000

b. P 1,015,000 d. P 1,062,500

ANSWER: D. P 1,062,500

Consideration transferred:

Issued shares (50,000x20) 1,000,000

Consideration payable:

20x6 – 50%x 130,000x 0.961538 62,500

Total P 1,062,500

25. The additional paid-in capital after combination amounted to:

a. P 400,000 c, P 1,141,000

b. P 600,000 d. P 1,150,000

ANSWER: C. P 1,141,000

Initial APIC 400,000

Issued (50,000x15) 750,000

Total 1,135,000

Stock issued and registration cost (9,000)

Total P 1,141,000

26. The expenses for 20x4 amounted to:

a. P 0 c. P 884,000

b. P 875,000 d. P 890,000

ANSWER: D. P 890,000

Initial 875,000
Legal and accounting fees 15,000

Total P 890,000

27. The net income for 20x4 amounted to:

a. P 0 c. P 316,000

b. P 310,000 d. P 325,000

ANSWER: B. P 310,000

Initial 325,000

Legal and accounting fees 15,000

Total P 310,000

28. The retained earnings on December 31, 20x4 amlounted to:

a. P 435,000 c. P 1,185,000

b. P 1,170,000 d. P 1,620,000

ANSWER: B. P 1,170,000

Initial 1,185,000

Legal and accounting fees (15,000)

Retained earnings P 1,170,000

29. Assuming that on June 15, 20x5, the contingent performance obligation was revised to P75,000 due
to facts and information that exists on December 31, 20x4, determine the amount of goodwill?

a. P 0 c. P 75,000

b. P 62,500 d. P 90,000

ANSWER: D. P 90,000

Consideration transferred:

Issued shares (50,000x20) 1,000,000

Contingent performance obligation 75,000

Total P 1,075,000

Fair value of net assets acquired:

 (1,065,000 – 180,000) (885,000)

R&D (100,000)

Goodwill P 90,000

30. In relation to no. 29, assuming that in July 31, 20x6, the contingent performance obligation was
revised to P80,000 due to facts and information that exists on December 31, 20x4 determine the amount
of goodwill and contingent performance obligation?

Goodwill Obligation Goodwill Obligation

a. P90,000 P75,000 c. P95,000 P75,000

b. P90,000 P80,000 d. P95,000 P80,000

ANSWER: B. GOODWILL P90,000, OBLIGATION P80,000