BUSINESS COMBINATION

1. The condensed Statements of Financial Position of GM and SR on January 1, 2016 are as

follows:

GM SR
Total Assets 10,250,000 3,057,500

Liabilities 2,775,000 800,000

Ordinary Shares 3,100,000 1,295,000
Share Premium 1,250,000 100,000
Retained Earnings 3,125,000 862,500

SD Corp. acquired the net assets of both GM and SR. Paying cash in the amount of P185,000
and by issuing 198,500 shares to GM. Paying cash in the amount of P72,000 and by issuing
54,350 shares to SR. The par value of these shares is P35/share and market value as of January
1, 2016 is P40/share. SD Corp. also incurred the following unpaid expenses:

GM SR
Indirect Costs 93,750 101,250
Finder’s fee 66,250 35,000
Accounting and legal fees for SEC registration 343,750 362,500
Printing costs of stock certificates 125,000 93,750

SD’s retained earnings account has a balance of P10,750,000 on January 1,2016 immediately
before the acquisition.

As a result of the merger:

1. What is the Goodwill recognized at the date of acquisition?

a. 638,500
b. 650,000
c. 661,500
d. 671,800
2. What is the net increase or (net decrease) in retained earnings of SD Corporation?
a. (284,750)
b. (469,250)
c. 284,750
d. 469,250
3. What is the net increase of (net decrease) in the shareholders’ equity of SD Corporation?
a. 8,928,750
b. 8,632,500
c. 8,904,250
d. 8,744,250
4. What is the net increase or (net decrease) in the identifiable assets of SD Corporation?
a. 13,700,500
b. 13,307,500
c. 13,957,500
d. 13,050,500

2. On July 1, 2016, Giordano, Inc. acquired most of the outstanding ordinary shares of Esprit
Company for cash. The incomplete working paper elimination entries on that date for the
consolidated statement of financial position of Giordano, Inc. and its subsidiary are shown
below:

Shareholders’ equity- Esprit 2,437,500

Investment in Esprit 1,584,375
Noncontrolling interest 853,125
Inventories 62,500
Equipment 312,500
Patent 61,250

7927
 Goodwill ?
Investment in Esprit 468,750
Noncontrolling interest ?

1. Assuming noncontrolling interest is measured at fair value, what is the goodwill to be

reported in the consolidated statement of financial position at the date of acquisition?
a. 179,135
b. 247,885
c. 284,904
d. 185,188

2. Assuming noncontrolling interest is measured at the proportionate or relevant share. What is

the goodwill to be reported in the consolidated statement of financial position at the date of
acquisition?
a. 253,938
b. 284,904
c. 185,188
d. 179,135

3. Assuming noncontrolling interest is measured at fair value in the amount of 1,150,000, what
is the goodwill to be reported in the consolidated statement of financial position at the date
of acquisition?
a. 329,375
b. 398,125
c. 260,625
d. 276,625

3. Tom Company acquired all of Jerry Corporation’s assets and liabilities on October 2, 2016, in a
business combination at that date. Jerry reported assets with a carrying amount value of
P2,496,000 and liabilities of P1,424,000. Tom noted that Jerry had P160,000 of research and
development costs at the acquisition date that did not appear of any value. Tom also determined
that patents developed by Jerry had a fair value of P480,000, but had not been recorded by Jerry.
Except for building and equipment, Tom determined the fair value of all other assets and
liabilities reported by Jerry approximated the recorded amounts. In recording the transfer of
assets and liabilities in its books, Tom recorded goodwill of P372,000. Tom paid P2,068,000 to
acquire Jerry’s assets and liabilities.

If the carrying amount of Jerry’s building and equipment was P1,364,000, what was their fair
value?

a. 1,508,000
b. 304,000
c. 144,000
d. 1,668,000.

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 CPA REVIEW SCHOOL OF THE PHILIPPINES
MANILA

1. Condensed statements of financial position of Care Corp. and Charm Corp. as of December
31,2016 are as follows:

Care Charm
Current Assets 43,750 16,250
Noncurrent Assets 181,250 106,250
Total Assets 225,000 122,500

Liabilities 16,250 8,750

Common stocks, P20 par 137,500 75,000
Additional Paid-in Capital 8,750 6,250
Retained Earnings 62,500 32,500

On January 1, 2017, Care Corp. issued 8,750 shares with a market value of P25/share for the
assets and liabilities of Charm Corp. The book value reflects the fair value of the assets and
liabilities, except that the noncurrent assets of Charm have a temporary appraisal of P157,500
and the noncurrent assets of Care are overstated by P7,500. Contingent consideration, which is
determinable, is equal to P3,750. Care also paid for the share issuance costs worth P8,500 and
other acquisition costs amounting P4,750. On March 1, 2017 the contingent consideration has a
determinable amount P5,000 and on the same date the provisional fair value of the noncurrent
assets of Charm increased by P2,250.

1. What is the goodwill at the end of 2017?

a. 57,500
b. 56,500
c. 58,750
d. 55,250
2. What is the amount of total assets at the end of 2017?
a. 435,500
b. 443,000
c. 442,000
d. 444,250

2. On September 18, 2016, DG Co. acquired all the AX Inv.’s P2,150,000 identifiable assets and
P530,000 liabilities. Book values of the AX’s assets and liabilities equal to their fair values
except for the overvalued furniture and fixtures. As a consideration, DG issued its own shares
with a market value of P1,715,000 and cash amounting to P375,000. Contingent consideration is
determined to be P148,000 on the date of acquisition. The merger resulted into P647,000
goodwill. DG Co. had P4,890,000 total assets and P2,731,000 total liabilities prior to the
combination an no additional cash payments were made but expenses were incurred for P28,000.

1. As a result of the merger, what is the amount of combined total assets in the books of the
acquirer?
a. 7,283,000
b. 7,128,000
c. 7,658,000
d. 7,255,000

2. As a result of the merger, what is the increase in liabilities in the books of the acquirer?
a. 678,000
b. 693,000
c. 703,500
d. 706,000

3. Acquirer Company acquired 25% of Acquired Company’s ordinary shares for P190,000 cash
carried the investment using the cost method. After three months, Parent purchased another 60%
of Subsidiary’s ordinary shares for P540,000. On this date, acquired company reported
identifiable net assets with carrying value of P720,000 and fair value of P920,000. The liabilities
of the acquired company had a book value and a fair value of P280,000. The fair value of the
15% noncontrolling interest is P125,000.
What is the goodwill or (gain on acquisition)
 a. (17,000)
b. 250,000
c. (30,000)
d. 263,000

4. Blue Co. merged into Soda Corp. on June 30,2016. In exchange for the net assets at fair value
market value of Blue Co. amounting to P2,785,800, soda issued 68,000 ordinary shares at P36
par value, with a market price of P41 per share. Relevant data on ordinary shareholder’s equity
immediately before the combination show:

Soda Blue
Share Capital 8,790,000 2,030,000
Share premium 3,834,000 782,000
Retained Earnings (deficit) (1,516,000) 495,000

Out of pocket cost of the combination were as follows:

o Legal fees for the contract of business combination 174,700

o Audit fee for SEC registration of stock issue 198,400
o Printing costs of stock certificates 144,900
o Broker’s fee 135,000
o Accountant’ fee for pre-acquisition audit 161,000
o Other direct cost of acquisition 90,400
o General and allocated expenses 115,300
o Listing fees in issuing new shares 172,000

 Included as part of the acquisition agreement is the additional cash consideration of P163,000 in
the event Soda Co,s share price will reach P32 per share by year-end
 At acquisition date, the share price is P27.50, and increased by P4.80 by December 31, 2016.
 At acquisition date, there was only a low probability of reaching the target share price, so the fair
value of the additional consideration was determined at P74,000.

What is the amount of expense to be recognized in the statement of comprehensive income for the
year ended December 31,2016?

a. 676,400
b. 851,700
c. 765,400
d. 940,700

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