BA 118.3 (D. Salazar/R. Placido/K.

Dela Cruz)
Problem Set 2

1. X Corporation has been looking to expand its operations and has decided to acquire the assets of Y
Company and Z Company and Y Company and Z Company will be dissolved. X will issue 30,000 shares of
its P
=10 par common stock to acquire the net assets of Y Company and will issue 15,000 shares to acquire
the net assets of Z Company. Y and Z had the following balance sheets as of December 31, 2017:

Y Z
ASSETS
Accounts receivable P200,000
= P80,000
=
Inventory 150,000 85,000
Property, plant and equipment:
Land 150,000 50,000
Building and equipment 500,000 300,000
Accumulated depreciation (150,000) (110,000)
Total Assets P
=850,000 P
=405,000

LIABILITIES AND EQUITY

Liabilities
Current liabilities P160,000
= P55,000
=
Bonds payable 100,000 100,000
Total Liabilities 260,000 155,000

Stockholders’ Equity
Common stock (P =10 par value) 300,000 100,000
Retained earnings 290,000 150,000
Total Equity 590,000 250,000
Total Liabilities and Stockholders’ Equity P
=850,000 P
=405,000

The following fair values are agreed upon by the two firms:
Assets Y Z
Inventory =200,000
P =100,000
P
Bonds payable 90,000 95,000
Land 300,000 80,000
Buildings and equipment 450,000 400,000

X’ stock is currently trading at P

=40 per share. X will incur the following costs:
Y Z
Direct acquisition costs =13,000 P
P =11,000
Indirect acquisition costs 7,000 6,000
X’ stockholders’ equity is as follows:
Common stock (P =10 par value) =1,200,000
P
Paid-in capital in excess of par 800,000
Retained earnings 750,000

Requirements:
1. Prepare all the necessary journal entries to record the acquisition of Y and Z.
2. Determine the following:
a. Cost of acquisition
 b. Goodwill/gain arising from business combination
c. Increase in assets of X resulting from business combination
d. Total stockholders’ equity of X after business combination

Refer to the following balance sheets dated as of December 31, 2017

Go Binggo
Book Value Fair Value Book Value Fair Value
ASSETS
Cash =915,000
P =915,000
P =1,005,000
P =1,005,000
P
Inventory 192,000 220,800 175,000 183,750
Land 420,000 840,000 350,000 525,000
Equipment 620,000 682,000 580,000 430,000
Accumulated depreciation (380,000) (418,000) (170,000) (126,035)
Total Assets P
=1,767,000 P
=2,239,800 P
=1,940,000 P
=2,017,715

LIABILITIES AND EQUITY

Liabilities
Accounts payable P40,000
= P40,000
= P66,000
= P66,000
=
Provisions 27,000 27,000 34,000 34,000
Long-term payable 800,000 713,485 950,000 1,007,655
Total Liabilities 867,000 780,485 1,050,000 1,107,655

Stockholders’ Equity
Common stock 500,000 350,000
Additional paid-in capital 50,000 300,000
Retained earnings 350,000 240,000
Total Equity 900,000 890,000
Total Liabilities and
Stockholders’ Equity P
=1,767,000 P
=1,940,000

2. Go Incorporated and Binggo Corporation are talent management agencies. Together, they manage 80% of
local actors, actresses, singers and models in the Metro. On January 1, 2018, they decided to bring their
operations together to form Gobinggo Constellation of Stars. The memorandum of agreement between the
two companies contains the following:
i. Gobinggo will issue 25,000 shares of its P=50 par value common stock distributed as follows: 15,000
shares to Go and 10,000 shares to Binggo.
ii. The 15-person board of directors (BOD) of the new corporation will be composed of 9 from Go’s old
BOD and 6 from that of Binggo.

Further, Gobinggo paid P

=100,000 for various expenses related to issuance of common shares.

Requirements:
1. Prepare all necessary journal entries to account for the above transactions.
2. Compute for the goodwill or gain from bargain purchase, total assets, total liabilities and total
stockholders’ equity as of date of business combination of the surviving entity.

3. Go Incorporated is one of the largest film production companies in Manila. Its rival production company
established its own talent management agency that disallows its talents from working with Go. Binggo is
the biggest talent management agency in the Philippines. In a strategic move, Go purchased 100% of
Binggo’s common stock through a negotiated sale agreement with Binggo’s shareholders for P =1,500,000
on January 1, 2018. Binggo will continue its operations as a talent management agency.
 Additional information:
i. Binggo is known to manage only the best talents in show business. The company is also known for
the strict discipline they impose on their talents. Producers and directors agree that Binggo stars are
a joy to work with. This brand (including its registered trademark), while internally generated, was
valued by Go’s financial consultant, MMG, at P =300,000.
ii. Go paid MMG = P40,000 to help in the appropriate valuation of Binggo’s net assets.
iii. Go does not have sufficient cash to buy the stocks of Binggo. In order to finance its acquisition, Go
borrowed P =1,000,000 (net of any transaction costs) from Piggy Bank.

Requirements:
1. Prepare the necessary journal entries on the date of business combination.
2. Prepare the working paper eliminating entries and consolidated balance sheet as of the date of
business combination.

4. In continuation of Problem 3, prepare the working paper eliminating entries and consolidated financial
statements as of and for the period ended December 31, 2018 based on the following assumptions (See
attached financial statements below):
a. 2018 beginning inventory were all sold.
b. The subsidiary’s pre-acquisition equipment has a remaining life of 5 years.
c. The subsidiary’s brand name is expected to have an economic life of 5 years.
d. The coupon interest rate on the long-term payable is 9%. The market yield on similar 5-year bonds is
7.5% on the date of business combination.

Statement of Profit or Loss

For the Year Ended December 31, 2018
Go Binggo
Revenues (P
=1,450,000) (P
=900,000)
Expenses:
Cost of goods sold 703,000 630,000
Operating expenses 20,000 16,800
Depreciation expense 48,000 82,000
Other expenses 40,000 —
Interest expense 162,000 85,500
Total expenses 973,000 814,300
Income before income tax (477,000) (85,700)
Income tax expense 180,950 29,995
Net income (P
=296,050) (P
=55,705)

Condensed Statement of Changes in Equity

For the Year Ended December 31, 2018
Go Binggo
Retained earnings, beginning (P
=310,000) (P
=240,000)
Net income (296,050) (55,705)
Dividends declared — —
Retained earnings, end (P
=606,050) (P
=295,705)
 Statement of Financial Position
As of December 31, 2018
Go Binggo
ASSETS
Cash P572,500
= =1,105,500
P
Inventory 340,550 192,500
Land 420,000 350,000
Equipment 620,000 580,000
Accumulated depreciation (428,000) (252,000)
Investment in Binggo 1,500,000 —
Brand name — —
Goodwill — —
Total Assets P
=3,025,050 P
=1,976,000

LIABILITIES AND EQUITY

Liabilities
Accounts payable P39,300
= P60,120
=
Provisions 29,700 20,175
Long-term payable A 800,000 950,000
Long-term payable B 1,000,000 —
Total Liabilities 1,869,000 1,030,295

Stockholders’ Equity
Common stock 500,000 350,000
Additional paid-in capital 50,000 300,000
Retained earnings 606,050 295,705
Total Equity 1,156,050 945,705
Total Liabilities and Stockholders’ Equity P
=3,025,050 P
=1,976,000

5. Effective December 31, 2013, Aida Corporation proposes to acquire, in a one-for-one exchange of common
stock, all the assets and liabilities of Lorna Corporation and Fe Corporation, after which the latter two
corporations will distribute the Aida stock to their shareholders in complete liquidation and dissolution.
Aida proposes to increase its outstanding stock for purposes of these acquisitions. Balance sheets of each
of the corporations immediately prior to merger on December 31, 2013, are given here. The assets are
deemed to be worth their book values:

Aida Lorna Fe
Current assets 2,000,000 500,000 25,000
Fixed assets (net) 10,000,000 4,000,000 200,000
Total 12,000,000 4,500,000 225,000

Current liabilities 1,000,000 300,000 20,000

Long-term debt 3,000,000 1,000,000 105,000
Common stock (P10 par) 3,000,000 1,000,000 50,000
Retained earnings 5,000,000 2,200,000 50,000
Total 12,000,000 4,500,000 225,000

Other data relative to the acquisition:

Shares outstanding 300,000 100,000 5,000
Fair market value per share 40 40 30
 Number shares of Aida stock to be
exchanged for Lorna assets 100,000
Number of shares of Aida stock to be
exchanged for Fe assets 5,000

The fair market value of the common shares of Aida reflects the impact of the increased number of shares
to be issued.

Required:
1. Prepare all the necessary journal entries to record the acquisition of Lorna and Fe.
2. Determine the following:
a. How much goodwill will be recognized as a result of the business combination?
b. How much is the total assets of Aida after the business combination?
c. How much is the total equity of Aida after the business combination?

6. On December 31, 2016, Popoy acquired 100% of the outstanding voting stock of Sasha for P 1.3 Million
cash. The excess of fair market value over book value of assets amounted to P 246,000. The distribution of
the excess is detailed below:

Remarks
Inventories 26,000 FIFO
Land 60,000
Building 80,000 Economic life of 20 years from date of business combination
Machinery 50,000 Economic life of 5 years from date of business combination
Patent 30,000 Economic life of 6 years from date of business combination

Sasha Company reported Net Income of 90,000 and 105,000 for 2017 and 2018, respectively, subsequent
to the date of business combination. Moreover, all of Sasha’s existing inventories on 2016 were sold the
following year.

The balance sheets of Popoy and Sasha at the date of acquisition are as follows:
Balance Sheet Popoy Sasha
Assets
Cash 1,375,000 100,000
Inventories 800,000 500,000
Other current assets 542,250 215,000
Plant assets 3,500,000 1,100,000
6,217,250 1,915,000
Liabilities & SHE
Liabilities (2,550,000) (946,000)
Common stock, P1 par (1,057,000)
Common stock, P10 par (400,000)
APIC (1,560,250) (235,000)
Retained Earnings (1,050,000) (334,000)
(6,217,250) (1,915,000)

Required:
1. What is the journal entry/ies in Popoy’s books at the date of acquisition?
 2. Prepare WPEEs for the consolidated FS on December 31, 2016.
3. Prepare the consolidated FS of Popoy and Sasha on December 31, 2016.

7. In continuation of the problem above, prepare the WPEEs and consolidated FS of Popoy and Sasha on 2017
and 2018 using financial statements below:

2017 2018
Popoy Sasha Popoy Sasha
Income Statement
Net sales (5,611,000) (1,089,000) (5,464,750) (1,104,000)
Cost of goods sold 3,925,000 700,000 3,925,000 700,000
Operating expenses 556,000 129,000 556,000 129,000
Other expenses 710,000 170,000 710,000 170,000
Net income (420,000) (90,000) (273,750) (105,000)

Statement of Changes in
Equity
RE, beg (1,050,000) (334,000) (1,351,450) (384,000)
Net income (420,000) (90,000) (273,750) (105,000)
Dividends declared 158,550 158,550
RE, end (1,311,450) (424,000) (1,466,650) (489,000)

Balance Sheet
Assets
Inventories 861,000 439,000 861,000 439,000
Other current assets 599,000 411,000 751,700 476,000
Investment in Sasha Company
CS 1,300,000 1,300,000
Plant assets 3,600,000 1,150,000 3,600,000 1,150,000
Patent
Goodwill
Total assets 6,360,000 2,000,000 6,512,700 2,065,000

Liabilities & SE
Liabilities (2,431,300) (941,000) (2,428,800) (941,000)
Common stock, P 1 par (1,057,000) (1,057,000)
Common stock, P 10 par (400,000) (400,000)
APIC (1,560,250) (235,000) (1,560,250) (235,000)
Retained Earnings (1,311,450) (424,000) (1,466,650) (489,000)
Total liabilities &
SE (6,360,000) (2,000,000) (6,512,700) (2,065,000)