Chapter 8: Business Combination

1. On April 1, 2011, Queen Corporation paid P800,000 for the assets and liabilities of Jack Company. The
book value of the assets and liabilities of Jack Company on April 1, 2011, follow:

Cash P80,000
Inventory 240,000
Plant and equipment (net of accumulated depreciations
Of P320,000) 480,000
Liabilities 180,000

O April 1, 2011, it was determined that the inventory of Jack had a fair value of P190,000 and the plant
and equipment (net) had a fair value of P560,000

What is the amount of goodwill resulting from the business combination?

a. P 0
b. P50,000
c. P150,000
d. P180,000

2. Plata Corporation paid P100,000 cash for the net assets of Oro Company, which consisted of the
following:
Book value Fair value
Current assets P20,000 P28,000
Property and Equipment 80,000 110,000
Liabilities assumed 20,000 18,000

The property and equipment acquired in the business combination should be recorded at:

a. P110,000
b. P100,000
c. P91,666
d. P90,000

3. On June 30, 2011, White Corporation issued 100,000 shares of its P20 par value common stock for the
net assets of Black Company. The market value of White’s common stock on June 30 was P36 per share.
White paid a fee of P100,000 to the broker who arranged this acquisition. Costs of SEC registration ad
issuance of the equity securities amounted to, P50,000.

Contingent consideration determined to be paid after acquisition amounts to P120,000.

What amount should White capitalize as the cost of acquiring Black’s net assets.

a. P3,700,000
b. P3,650,000
c. P3,720,000
d. P3,750,000
4. When Pedro Company acquired Sam Company’s net assets by issuing its own capital stock, it had the
following expenditures:

Broker’s fee P50,000

Pre-acquisition audit fee 40,000
Legal fees for merger agreement 47,000
Audit fee for SEC registration of stock issue 46,000
Printing of stock certificates 11,000

Under IFRS-3 (2008), the expenditures that should be debited to Additional Paid-in Capital (APIC)
account is:

a. P57,000
b. P137,000
c. P 0
d. P46,000

5. On May 1, 2011, Queen Corporation paid cash of P600,000 for all of the net assets of Prince Company
and Prince is dissolved. The carrying value of the assets and liabilities of Prince on May 1, 2011 follows:

Cash P60,000
Inventory 180,000
Plant and equipment (net of accumulated
Depreciation of P220,000) 320,000
Goodwill 100,000
Liabilities 120,000

O May 1, 2011, Prince inventory had a fair value of P150,000, and the plant and equipment (net) had a
fair value of P380,000.

What is the amount of Goodwill recorded in the books of Queen as a result of the business
combination?

a. P130,000
b. P30,000
c. P100,000
d. P 0

6. On May 31, 2011, Dear Company has assets and liabilities with the following fair values:

Current assets P180,000

Non-current assets 220,000
Liabilities 40,000

On June 1, 2011, Love Corporation purchases the net assets of Dear Company for P310,000 cash.

In the books of Love Corporation, the acquisition resulted in:

a. Negative goodwill of P50,000.
b. Income from acquisition of P50,000.
c. Reduction from current assets of P50,000.
d. Deduction from non-current assets of P50,000.

7. The stockholders’ equities of Par Corporation and Son Company at July 1, 2011 were as follows:

Par Son
Capital stock, P100 par P15,000,000 P8,000,000
Additional paid in capital 2,000,000 4,000,000
Retained earnings 6,000,000 3,000,000

Om July 2, 2011, Par issued 150,000 of its shares with a market value of P120 per share for the assets
and liabilities of Son, and Son was dissolved. On the same day, Par paid P150,000 for professional fees
and P100,000 for SEC registration of equity securities.

After the combination, what is the total stockholders’ equity of Par Corporation?

a. P41,000,000
b. P40,850,000
c. P41,150,000
d. P40,900,000

8. Red Corporation will issue common shares with a par value P10 for the net assets of Blue Company.
Red’s common stock has a current market value of P40 per share. Blue’s statement of financial position
on the date of acquisition follow:

Current assets 320,000 Common stock, P5 par P80,000

Property and equipment 880,000 Additional paid in capital 320,000
Liabilities 400,000 Retained earnings 400,000

Blue’s current assets are appraised at P400,000 and the property and equipment was also appraised at
P1,600,000. Its liabilities are fairly valued. Accordingly, Red Corporation issued shares of its common
stock with a total market value equal to that of Blue’s net assets including goodwill.

To recognized goodwill of P200,000, how many shares were to be issued by Red?

a. 45,000
b. 40,000
c. 50,000
d. 55,000

9. Rock Corporation was merged into Horse Company in a combination properly accounted for as an
acquisition. Their condensed statement of financial position before the combination are:

Rock Horse
Current assets P3,288,888 P1,627,600
Property and equipment 4,654,000 1,040,000
Patents - 260,000
_________ _________
Total assets P7,942,000 P2,927,000

Liabilities P3,704,000 P171,600

Capital stock, Par P100 2,600,000 1,300,000
Additional paid in capital 390,000 350,000
Retained earnings 1,248,000 1,106,000
_________ _________
Total liabilities and equity P7,942,000 P2,927,000

Per appraisal’s report, Horse assets have fair values of:

Current assets P1,653,000

Property and equipment 1,248,000
Patents 338,000

Rook Corporation purchases the net assets of Horse for P3,168,000 cash.

What is the total net asset of Rock Corporation after the combination?

a. P7,354,000
b. P7,254,000
c. P8,113,600
d. P9,181,600

10. Pete Corporation and Sol Company agreed to combine their businesses, with Pete corporation as the
surviving entity. Pete will issue 48,000 shares of its capital stock, with a par value of P100 per share, and
a fair market value of P175 per share. Pete incurred the following additional acquisition-related costs:

Professional fees P120,000

Broker’s fees 80,000
Costs to register and issue stock 50,000

Before combination, their respective statement of financial position showed stockholders’ equity
accounts as follows:
Pete Sol
Capital stock P7,200,000 P3,600,000
Additional paid in capital 3,120,000 360,000
Retained earnings 6,000,000 2,040,000

The total stockholder’s equity of Pete Corporation after the combination is:

a. P24,720,000
b. P24,470,000
c. P24,670,000
d. P24,890,000
11. Papa Corporation issued 120,000 shares of P10 par common stock with affair value of P2,550,000 for
all the outstanding stock of Mama Company. In addition, Papa incurred the following costs:

Professional fees to arrange the business combination P27,000

Cost SEC registration 12,000
Costs of printing and issuing stock certificates 3,000

Immediately before the business combination in which Mama Company was dissolved, Mama’s assets
and equities were as follows (in thousands):
Book value Fair value
Current assets P1,000 P1,100
Plant assets 1,500 2,200
Liabilities 300 300
Common stock 2,000
Retained earnings 200

What is the amount of goodwill (gain on acquisition)?

a. P450,000
b. P(550,000)
c. P(450,000)
d. P500,000

12. Using the data in No. 11, how much additional paid in capital is recorded by Papa?

a. P1,350,000
b. P1,335,000
c. P1,365,000
d. P1,330,000

13. Using the data in No. 11, Papa should recognize expense of:

a. P32,000
b. P27,000
c. P15,000
d. P12,000

14. Using the data in No. 11, the net increase (decrease) in the retained earnings of Papa is:

a. P2,600,000
b. P3,000,000
c. P3,300,000
d. P2,200,000

15. On Jan 2, 2011, New Corporation pays P200,000 cash and also issues 18,000 shares of P10 par
common stock with a market value of P330,000 for all the outstanding stock of Old Company in addition,
New pays P30,000 for registering and issuing the 18,000 shares and P70,000 for accounting and legal
fees of the business combination, in which Old Corporation is dissolved, Summary information for the
companies immediately before the merger is as follows (in thousands):

New Book Value Old Book Value Old Fair Value

Cash P350 P40 P40
Inventories 150 100 120
Property and equipment,net 260 180 280

Total assets P760 P320 P440

Liabilities P240 P80 P70

Common stock 420 200
Retained earnings 100 40

Total liabilities and equity P760 P320

What is the amount of goodwill to be recognized by New Corporation?

a. P230,000
b. P160,000
c. P370,000
d. P260,000

16. Malakas Company acquired all of Maganda Corporation’s assets and liabilities on Jan 2, 2011, I a
business combination, at that date, Maganda reported assets with a book value of P624,000 and
liabilities of P356,000. Malakas noted that Maganda had P40,000 of research and development costs on
its books at the acquisition date that did not appear to be of value. Malakas also determined that
patents developed by Maganda had a fair value of P120,000 but had not been recorded by Maganda.
Except for building and equipment, Malakas determined the fair value of all other assets and liabilities
reported by Maganda approximated the record amounts. In recording the transfer of assets and
liabilities of its books, Malakas recorded goodwill of P93,000. Malakas paid P517,000 to acquire
Maganda’s assets and liabilities.

If the book value of Maganda’s building and equipment was P341,000 at the date of acquisition, what is
their fair value?

a. P441,000
b. P417,000
c. P341,000
d. P417,500

Use the following data to answer Nos. 17-19:

Chico Company acquired Atis Corporation on Jan 2, 2011, by issuing common shares. All of Atis’ assets
and liabilities were immediately transferred to Chico, which reported total par value of shares
outstanding of P218,400 and P327,600 and additional paid in capital of P370,000 and P650,800
immediately before and after the business combination, respectively.
17. Assuming that Chico’s common stock had a market of P25 per share at the time of acquisition, what
number of shares was issued?

a. P15,000
b. P10,500
c. P15,600
d. P10,000

18. What is the par value per share of Chico’s common stock?

a. P10
b. P7
c. P8
d. P9

19. Assuming that Atis’ identifiable assets had a fair value of P476,000 and its liabilities had a fair value
of P120,000, what amount of goodwill did Chico record at the time of the business combination?

a. P30,000
b. P34,000
c. P35,000
d. P40,000

Use the following data to answer No. 20-25:

On Jan 2, 2011 Narra Corporation acquired all of Yakal’s Corporation’s assets and liabilities by issuing
shares of its common stock. Partial statement of financial position data for the companies prior to the
business combination and immediately after the combination are as follows:

Narra Corp. Yakal Corp Combined

Book value Book value entiry
Cash P40,000 P10,000 P50,000
Accounts receivable 60,000 30,000 88,000
Inventory 50,000 35,000 96,000
Buildings and equipment(net) 300,000 110,000 430,000
Goodwill ?
________ ________ ________
Total assets P450,000 P185,000 P?

Accounts payable P188,000 P84,000 P272,000

Common stock, P15 par 100,000 40,000 126,000
Additional paid in capital 65,000 28,000 247,000
Retains earnings 97,000 33,000 ?
________ ________ ________
Total liabilities and equities P450,000 P185,000 P?

20. What numbers of shares did Narra issue to acquire Yakal’s assets and liabilities?
a. 5,000
b. 5,200
c. 4.500
d. 2,500

21. What was the market value of the shares issued by Narra?

a. P208,000
b. P200,000
c. P250,000
d. P208,500

22. What was the fair value of the inventory held by Yakal at the date of combination?

a. P40,000
b. P46,000
c. P35,000
d. P64,000

23. What was the fair value of the net assets held by Yakal at the date of combination?

a. P130,000
b. P135,000
c. P140,000
d. P125,000

24. What amount of goodwill, if any, will be reported by the combined entity immediately following the
combination?

a. P88,000
b. P78,000
c. P87,000
d. P75,000

25. If the depreciable assets held by Yakal had an average remaining life of 10 years at the date of
acquisition, what amount of depreciable expense will be reported on those assets on Dec 31,2011?

a. P15,000
b. P14,000
c. P13,000
d. P12,000