AFAR.

04 Business Combination (Drill)

Question 1
A Company issued 120,000 shares of its P25 par common stock for all the outstanding stocks of
B Corporation in a business combination completed on August 1, 2019. A Company’s stock has
a FMV of P32 per share. B Corporation’s net assets are worth P3.04 million   at book value. Out
of pocket costs of the combination were as follows:
  

Legal fees P20,800

Contingent consideration  
(reasonable & measurable) 14,400

Printing costs of stock certificates 6,400

Finder’s fees 21,600

Professional fees paid to a CPA 16,800

Fees paid to company lawyers 8,000

Fees paid to company accountants 12,000

 
If the combination is treated as a purchase transaction, the cost of the combination will be:
Response: P3,940,000
Feedback: 120,000 * 32 = 3,840,000
Correct answer: P3,840,000
Score: 0 out of 1 No

Question 2
Romeo Company issued 120,000 shares of P10 par ordinary shares with a fair value of
P3,160,000 for all the net assets of Juliet Company and a deferred cash payment of P500,000
payable one year after the acquisition date. Market rate of interest is 10%. Romeo’s retained
earnings prior to business combination amounted to P600,000. Romeo incurred the following
additional costs:

Legal fees to arrange the business combination P30,000

Accounting and consultancy fees related with the  

business combination 15,000

Cost of printing and issuing new stock certificates 3,000

Indirect costs of combining, including allocated  

overhead and Executive salaries   25,000

Broker’s and Finder’s fees related with the business  

combination 28,000

 
Immediately before the business combination in which Juliet Company was dissolved, Juliet’s
assets and equities were as follows

  Book Value Fair Value

Current assets P1,000,000 P1,100,000

Plant assets 1,500,000 2,200,000

Liabilities 300,000  

Ordinary shares 2,000,000  

Retained earnings 200,000  

                                                    
Determine the goodwill as a result of the business combination.
Response: P461,465
Feedback:
Cost:
    Shares                                                      3,160,000
    Deferred pymt (500k *90909…)               454,546
    TOTAL                                                      3,614,546
FV of NA                                                      3,000,000
Goodwill                                                         614,546
Correct answer: P614,546
Score: 0 out of 1 No

Question 3
 Quad Corporation purchases all of the net assets of Chrome, Inc., for P320,000. Immediately
prior to the combination, Chrome’s net assets were carried on the books at P180,000, and
Chrome had retained earnings of P24,000. The fair value of Chrome’s net assets at the date of
combination is P248,000. Quad Corporation had retained earnings of P40,000 and no goodwill
immediately prior to the combination

Immediately after the combination, the combined company reports goodwill and retained
earnings of:
Response: Goodwill: P72,000 Retained Earnings: P40,000
Feedback: GW: 320,000 - 248,000 = 72,000
RE: 40,000 (No IFA and expenses)
Correct answer: Goodwill: P72,000 Retained Earnings: P40,000
Score: 1 out of 1 Yes

Question 4
A Company issued 120,000 shares of its P25 par common stock for all the outstanding stocks of
B Corporation in a business combination completed on August 1, 2019. A Company’s stock has
a FMV of P32 per share. B Corporation’s net assets are worth P3.04 million   at book value. Out
of pocket costs of the combination were as follows:
  

Legal fees P20,800

Contingent consideration  
(reasonable & measurable) 14,400
 Printing costs of stock certificates 6,400

Finder’s fees 21,600

Professional fees paid to a CPA 16,800

Fees paid to company lawyers 8,000

Fees paid to company accountants 12,000

 
The goodwill from the combination is:
Response: P900,000
Feedback: GW: 3,840,000 - 3,040,000 = 800,000
Correct answer: P800,000
Score: 0 out of 1 No

Question 5
The Carl Company will issue P10 par value common stock for the net assets of PBA Company.
The fair market value per share of Carl’s common stock is P40.  The following is the list of
accounts of PBA Company on the date of the acquisition.

Book Fair Market

 
Value Value

Current assets P280,000 P   320,000

Plant assets (net) 680,000 1,280,000

Liabilities 320,000  

Common stock   64,000

Additional paid-in capital   256,000

 Retained earnings   320,000

To have an income from acquisition of P120,000, the number of shares to be issued by Carl
Company should be”
Response: 35,000 Shares
Feedback:
Cost = FV - IFA
         = 1,280,000 - 120,000 = 1,160,000
 
# of Shares = 1,160,000/40= 29,000
Correct answer: 29,000 Shares
Score: 0 out of 1 No

Question 6
On August 1, 2019, Blite Company paid P850,000 for all the net assets of Ong Enterprises in a
transaction properly recorded as a purchase. The recorded assets and liabilities of Ong
Enterprises on August 1, 2019, follow:
 

Cash P80,000

Inventory 240,000

Property and equipment, net 480,000

Liabilities (180,000)

 
On August 1, 2019 it was determined that the inventory of Ong had a fair market value of
P190,000, and the property and equipment (net) had a fair market value of P560,000.
 
What is the amount of goodwill resulting from the business combination?
Response: P0
Feedback:
GW: 850,000 - (80,000+ 190,000+ 560,000-180,000)
       :  200,000
Correct answer: P200,000
Score: 0 out of 1 No

Question 7
Summary information is given for P Company and S Company at July 1, 2019.   The
quoted market price of P Co.’s stock on July 1, 2019 is P 32 per share.

P S S
  Company Per Company Per Company Fair
books books values

Current assets P19,200,000  P6,400,000 P7,200,000

Plant assets 20,800,000 17,600,000 20,800,000

Liabilities 12,000,000 4,000,000  

Common stock, P10 par 16,000,000 8,000,000  

Additional paid-in capital 800,000 800,000  

Retained earnings 11,200,000 11,200,000  

                                                   

Assume that P Company issues 1,000,000 shares of its own stock for the net assets of
S Company on July 1, 2019, in a purchase business combination in which S Company
is dissolved.

P Company incurred the following costs:

Legal fees to arrange the business combination 20,000

Cost of SEC registration 9,600

Cost of printing and issuing new stock certificates    2,400

Indirect costs of combining 16,000

 
The total RE of P Company immediately after the business combination
Response: P11,164,000
Feedback: RE:11.2M - 20,000 - 16,000 = 11,164,000
Correct answer: P11,164,000
Score: 1 out of 1 Yes

Question 8
Summary information is given for P Company and S Company at July 1, 2019.   The
quoted market price of P Co.’s stock on July 1, 2019 is P 32 per share.

P S S
  Company Per Company Per Company Fair
books books values

Current assets P19,200,000  P6,400,000 P7,200,000

Plant assets 20,800,000 17,600,000 20,800,000

Liabilities 12,000,000 4,000,000  

Common stock, P10 par 16,000,000 8,000,000  

Additional paid-in capital 800,000 800,000  

Retained earnings 11,200,000 11,200,000  

                                                   

Assume that P Company issues 1,000,000 shares of its own stock for the net assets of
S Company on July 1, 2019, in a purchase business combination in which S Company
is dissolved.

P Company incurred the following costs:

Legal fees to arrange the business combination 20,000

Cost of SEC registration 9,600

Cost of printing and issuing new stock certificates    2,400

Indirect costs of combining 16,000

 
The goodwill from the business combination is
Response: P10,040,000
Feedback: GW: 32,000,000 - 24,000,000 = 8,000,000
Correct answer: P8,000,000
Score: 0 out of 1 No

Question 9
Romeo Company issued 120,000 shares of P10 par ordinary shares with a fair value of
P3,160,000 for all the net assets of Juliet Company and a deferred cash payment of P500,000
payable one year after the acquisition date. Market rate of interest is 10%. Romeo’s retained
earnings prior to business combination amounted to P600,000. Romeo incurred the following
additional costs:

Legal fees to arrange the business combination P30,000

 
Accounting and consultancy fees related with the business combination
15,000

Cost of printing and issuing new stock certificates 3,000

 
Indirect costs of combining, including allocated overhead and Executive salaries  
25,000

 
Broker’s and Finder’s fees related with the business combination
28,000

 
Immediately before the business combination in which Juliet Company was dissolved, Juliet’s
assets and equities were as follows

  Book Value Fair Value

Current assets P1,000,000 P1,100,000

Plant assets 1,500,000 2,200,000

 Liabilities 300,000  

Ordinary shares 2,000,000  

Retained earnings 200,000  

                                                    
How much is the retained earnings of Romeo Company after the business combination?
Response: P486,870
Feedback: RE: 600,000- 30,000- 15,000- 25,000- 28,000= 502,000
Correct answer: P502,000
Score: 0 out of 1 No

Question 10
The Carl Company will issue P10 par value common stock for the net assets of PBA Company.
The fair market value per share of Carl’s common stock is P40.  The following is the list of
accounts of PBA Company on the date of the acquisition.

Book Fair Market

 
Value Value

Current assets P280,000 P   320,000

Plant assets (net) 680,000 1,280,000

Liabilities 320,000  

Common stock   64,000

Additional paid-in capital   256,000

Retained earnings   320,000

To have a goodwill of P 120,000, the number of shares to be issued by Carl Company should be
Response: 30,400 Shares
Feedback:
Cost = FV = GW
         = 1,280,000+120,000 = 1,400,000
 
# of Shares = 1,400,000/40 = 35,000
Correct answer: 35,000 Shares
Score: 0 out of 1