B.C.S.

Villaluz
Accounting Lessons with BCSV
ELCC - Estimated Liability on Contingent Consideration
Net Asset Acquisition

Problem 1: (One acquiree)

The following Statement of Financial Position were prepared for PLDC Inc. and GLOBAL Telecom on January 1, 2020 just before they
entered into business combination:
PLDC Inc. GLOBAL Telecom
Book Value Fair Value Book Value Fair Value
Cash 200,000 200,000 30,000 30,000
Accounts receivable 140,000 25,000
Allowance for doubtful accounts (40,000) 80,000 (5,000) 18,000
Inventory 400,000 350,000 100,000 120,000
Buildings and Equipment 800,000 300,000
Accumulated Depreciation (200,000) 700,000 (150,000) 160,000
Accounts payable 100,000 100,000 40,000 35,000
Bonds payable 400,000 440,000 60,000 75,000
Common stock
P10 par value 300,000
P5 par value 100,000
Share premium 100,000 20,000
Retained earnings 400,000 80,000

PLDC Inc. acquired the net assets of GLOBAL Telecom by issuing 12,000 shares of its common stocks and paying cash amounting to
P75,000. In addition, the following costs were incurred and paid for by PLDC Inc.:
• Legal fees, P22,000
• Costs of SEC registration, P15,000
• Cost of issuing stock certificates, P20,000
• General administrative costs, P12,500

CASE 1: The stock market price of the PLDC Inc. and GLOBAL Telecom are P13.50 and P7.20, respectively at the time of acquisition.
Determine the following:
1. Goodwill or Gain on bargain purchase. 19,000 GW
2. Combined Common Stock after acquisition.420,000
3. Combined Share Premium after acquisition. 107,000
4. Combined Retained Earnings after acquisition.365,500
5. Combined Total Liabilities after acquisition. 610,000
6. Combined Total Assets after acquisition.
1,502,500
CASE 2: The stock market price of the PLDC Inc. and GLOBAL Telecom are P10.80 and P6.60, respectively at the time of acquisition.
Determine the following:
1. Goodwill or Gain on bargain purchase.(13,400) GBP
2. Combined Common Stock after acquisition. 420,000
3. Combined Share Premium after acquisition.
74,600
4. Combined Retained Earnings after acquisition.
5.
378,900
Combined Total Liabilities after acquisition. 610,000
6. Combined Total Assets after acquisition.
1,483,500
Problem 2: (More than one acquiree)
On January 1, 2020, Hedwig Company decided to enter into a business combination with Patricia Company and Dennis Company. The
following information was gathered from the books of the entities:
Hedwig Patricia Dennis
Company Company Company
Current assets 8,250,000.00 2,340,000.00 1,560,000.00
Non-current assets 18,750,000.00 15,300,000.00 10,200,000.00
TOTAL ASSETS 27,000,000.00 17,640,000.00 11,760,000.00

Liabilities 1,950,000.00 7,260,000.00 2,840,000.00

Ordinary shares, P100 par 16,491,000.00 1,260,000.00 1,240,000.00
Share premium 1,059,000.00 4,440,000.00 1,960,000.00
Retained earnings 7,500,000.00 4,680,000.00 5,720,000.00
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 27,000,000.00 17,640,000.00 11,760,000.00

Hedwig Company will issue 76,000 of its ordinary shares in exchange for the acquisition of Patricia Company and 67,200 of its ordinary
shares in exchange for the acquisition of Dennis Company. The fair value of Hedwig Company’s shares is P150. In addition, the following
adjustments should be made to the current assets of Patricia Company and Dennis Company which has a fair value of P2,700,000 and
P1,380,000, respectively. The non-current assets has a fair value of P12,900,000 and P11,850,000 for Patricia Company and Dennis
Company, respectively.

Compute for the following on the date of acquisition:

1. Result of the combination with Patricia Company. 3,060,000 GW
2. Result of the combination with Dennis Company. 310,000 GBP
3. Combined retained earnings. 7,810,000
4. Combined total assets. 58,890,000

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 B.C.S.Villaluz
Problem 3: (Accounting for Provisional Fair Values)
On January 1, 2020, X Company and Y Company decided to enter into a business combination. The balance sheets of X Company and Y
Company just before they enter into business combination are shown below:
X Company Y Company
Book Value Fair Value Book Value Fair Value
Cash and Receivable 560,000 560,000 100,000 100,000
Inventory 200,000 230,000 100,000 120,000
Land 325,000 445,000 200,000 230,000*
Accounts Payable 460,000 460,000 50,000 50,000
Notes payable 100,000 50,000 50,000 30,000
Common Stocks
P10 par 200,000
P5 par 100,000
Share Premium 105,000 50,000
Retained Earnings 220,000 150,000
*provisional

X Company acquired the net assets of Y Company by paying cash of P350,000. The direct and indirect cost paid by X Company to effect
the combination amounted to P45,000 and P15,000, respectively.

1. How much is the result of the business combination on January 1, 2020? 20,000 GBP
2. How much is the combined retained earnings on January 1, 2020? 180,000
3. How much is the combined inventory on January 1, 2020? 320,000
4. How much is the combined land on January 1, 2020? 555,000
5. How much is the combined notes payable on January 1, 2020? 130,000

CASE 1: On June 30, 2020, the fair value of Y Company’s land increased to P250,000 due to facts existing at the date of acquisition.
1. How much is the result of the combination to be reported in 2020? 40,000 GBP
2. How much is the combined land to be reported in 2020? 575,000

CASE 2: On March 1, 2020, the fair value of Y Company’s land decreased to P200,000 due to facts existing at the date of acquisition but
increased to P250,000 on June 30, 2020 due to facts existing subsequent to the date of acquisition.
1. How much is the result of the combination to be reported in 2020? 10,000 GW
2. How much shall be reported as the gain due to change in fair value in 2020? 50,000
3. How much is the combined land to be reported in 2020? 575,000

Problem 4: (Accounting for Contingent Consideration)

Hades Company acquired the assets (except cash) and assumed the liabilities of Ochoa Company on January 1, 2020, paying P720,000
cash. Ochoa Company’s December 31, 2019 balance sheet, reflecting both book values and fair values, showed:

Book Value Fair Value

Accounts receivable, net 72,000 65,000
Inventory 86,000 99,000
Land 110,000 162,000
Buildings, net 369,000 450,000
Equipment, net 237,000 288,000
Accounts payable 83,000 83,000
Notes payable 180,000 180,000
Common stock, P2 par value 153,000
Share premium 229,000
Retained earnings 229,000

As part of negotiations, Hades Company agreed to pay the former stockholders of Ochoa Company P300,000 cash on January 1, 2021 if
the post-combination earnings of the combined company reached certain level during 2020. Hades estimates that there is a 40% chance
that the P300,000 will be paid. Because of improved information about facts and circumstances that existed at date of acquisition, Hades
increased its estimate to 75% on August 1, 2020.

REQUIRED:
1. How much is the initial consideration transferred on January 1, 2020? 840,000
2. What is the initial result of the business combination on January 1, 2020? 39,000 GW
3. What is the revised result of the business combination on January 1, 2020 due to change in estimate on August
1, 2020? 144,000
4. Assuming the earnings target is met, how much is the gain or loss on settlement? 75,000
5. Assuming the earnings target is not met, how much is the gain or loss on settlement? 225,000

END OF HANDOUT

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