PHINMA Education

Student Activity Sheet

Lesson Title: Business Combination (Part 1) Materials:
Learning Targets: Columnar notebook; calculator; textbook

At the end of the learning session, 100% of the class can References:

1. Compute goodwill under restructuring provisions. Millan, Zeus Vernon B.; Accounting for Business
Combinations; 2019 Edition
2. Apply exception to recognition and measurement
Dayag, Antonion J.; Advanced Financial
principles on business combination. Accounting and Reporting, 2016 Edition

Guided Practice 1 Activity 4-1

(60 minutes)
Goodwill Computation with Contingent Consideration based on Future Performance - Earnings
Problem: On December 31, 2014, Paul Company enteres into a business combination by acquiring the
assets and assumed the liabilities of Ernest Corporation in which Ernest Corporation will be dissolved. Paul’s
consideration transferred consists of the following:
a. 25,000 unissued shares of its P10 par common stock, with a market value of P25 per share.
b. P150,000 in long-term 8% notes payable, and
c. A contingent payment of P100,000 cash on January 1, 2017, if the average income of during the
2-year period of 2016 - 2016 exceeds P250,000 per year. Paul estimated that there is a 30 percent chance or
probability that the P100,000 payment will be required.

In addition, Paul pays the following at the time of the merger:

 Finders; fee - P10,000
 Accounting fees - P20,000
 Cost of SEC registration, including accounting and legal fees - P15,000 
Cost of printing and issuing stock certificates - P12,000.
 Indirect costs of combining, including allocated overhead and executive salaries - P23,000.
Balance sheet and fair value information for the two companies on December 31, 2014, immediately before
the merger, are as follows:
Paul Ernest
Book Value Fair Value Book Value Fair Value
Cash P 230,000 P 230,000 P 20,000 P 20,000
Receivables - net 80,000 80,000 40,000 40,000
Inventories 240,000 300,000 100,000 60,000
Land 90,000 200,000 60,000 200,000
Buildings - net (10-year life) 400,000 600,000 200,000 300,000
Equipment - net (15-year life) 360,000 490,000 180,000 250,000
In-process research and dev. 50,000
0 0 0
Total Assets P 1,400,000 P 1,900,000 P 600,000 P 920,000
Accounts payable P 180,00 P 180,000 P 60,000 P 60,000
0
Other liabilities 200,000 180,000 120,000 140,000
Common stock, P10 par 600,000 200,000
Additional paid-in capital 200,000 160,000
Retained earnings 220,000 60,000
ACC 113 - Accounting forBusiness Combination 1
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Student Activity Sheet
Total Liabilities and Equities P 1,400,000 P 600,000

Required:
A. Goodwill Computation with Contingent Consideration
1. Compute goodwill.
2. Prepare journal entries to record the acquisition on the books of Paul Corportion.
3. Prepare the balance sheet of Paul Corporation after the acquisition.

B. Provisional Amount on Asset Acquired. Assume that the value of the buildings was provisionally
determined on December 31, 2014. On August 1, 2014, Paul Corporation recxeived the final value from the
independent appraisal, the fair value at acquisition date being P320,000.
4. Prepare journal entries on August 1, 2014 to reflect the adjustment.
Date: ______________

Activity 4-1
SCORE:/RATING
Student Name: ________________________________________ Yr./Sec.:________
Computation of Goodwill:
Consideration transferred:
Orindary shares (25,000 x P25) P 625,000
Notes payable 150,000
Contingent consideration (cash contingency): (P1,000 x 30%) 30,000
Total P 805,000
Less: Fair value of identifiable assets acquired and liabilities assumed:
Cash P 20,000
Receivables - net 40,000
Inventories 60,000
Land 200,000
Buildings - net 300,000
Equipment - net 250,000
In-process research and development 50,000
Accounts payable ( 60,000)
Other liabilities ( 140,000) 720,000
Positive Excess - Goodwill P 85,000

Journal Entries:
Particulars Debit Credit
Cash P 20,000
Receivable - net 40,000
Inventories 60,000
Land 200,000
Buildings - net 300,000
Equipment - net 250,000
In-process research and development 50,000
Goodwill 85,000
ACC 113 - Accounting forBusiness Combination 2
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Student Activity Sheet
Accounts payable 60,000
Other liabilities 140,000
Notes payable 150,000
Estimated liability for Contingent Consideration 30,000
Common stock (P10 par x 25,000 shares) 250,000
Paid-in capital in excess of par [(P25 - P10) x 25,000 sh) 375,000
To record acquisition of Ernest Corporation

Acquisition related expenses 65,000

Cash 65,000
To record acquisition related costs - direct costs

Paid-in Capital in excess of par 27,000

Cash 27,000
To record acquisition-related costs - cost to issue & register stocks

Acquisition related expenses 25,000

Cash 25,000
To record acquisition-related costs - indirect costs

The balance sheet of Paul Corporation, immediately after the acquisition is presented below:
Paul Corporation
Balance Sheet
December 31, 2014
Assets
Cash P 135,000
Receivables - net 120,000
I nventories 300,000
Land 290,000
Buildings - net 700,000
Equipment - net 610,000
In-process research and development 50,000
Goodwill 85,000
Total Assets P 2 ,290,000
Liabilities and Stockholders’ Equity
Liabilities

ACC 113 - Accounting forBusiness Combination 3

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Student Activity Sheet
Accounts payable P 240,000
Other liabilities 340,000
Notes payable 150,000
Estimated liability for contingent consideration 30,000
Total liabilities P 760,000
Stockholders’ Equity
Common stock, P10 par P 850,000
Paid-in capital in excess of par 548,000
Retained earnings 132,000
Total Stockholders’ Equity P 1,530,000
Total Liabilities and Stockholders’ Equity P 2,290,000
* P200,000 + P375,000 - P27,000
P220,000 - P65,000 - P23,000

Provisional Amount on Asset Acquired.

Date Particulars Debit Credit
Aug. 1, 2014 Buidings P 20,000
Goodwill P20,000
Adjustement to goodwill due to measurement date

ACC 113 - Accounting forBusiness Combination 4

SAS Day 4