PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

ACCOUNTING 309 : ACCOUNTING FOR BUSINESS COMBINATION

COURSE OBJECTIVE AND COURSE TOPIC OUTLINE

COURSE OUTLINE After completing this course, the student should be able to:
1. Distinguish the different forms of business combination.
2. Learn the mode of accounting for statutory merger and
statutory consolidation.
3. Appreciate and determine accounting for Acquisition of
Shares using purchase method
4. Learn to prepare consolidated financial statements for
the parent and subsidiary company.
5. Learn to account for intercompany profits

MIDTERM COVERAGE

ACCOUNTING FOR MERGER

A. Definition
COURSE OUTLINE B. Acquisition price including contingent consideration
C. Acquisition-related cost
D. Valuation of Identifiable assets and liabilities
E. Acquisition of net assets - Acquisition method
Recording the sale on the books of selling
company
Recording the sale on the books of acquiring
company
F. Recognizing and Measuring of goodwill

ACCOUNTING FOR ACQUISITION OF SHARES

A. Recognizing and Measuring of goodwill or gain from
 bargain purchase
B. Recording of contingent consideration
C. Change in fair value of contingent consideration
D. Recording of stock acquisition

CONSOLIDATED STATEMENT OF FINANCIAL POSITION -

DATE OF ACQUISITION
A. Acquisition of wholly owned subsidiary.
- at book value
- at less than book value
- at more than book value
B. Acquisition of Partially owned subsidiary
- at book value
- at less than book value
- at more than book value
C. Measurement of Noncontrolling interest
- at fair value
- at non-controlling interest's proportionate share
of the acquiree's identifiable net assets
D. Calculation and allocation of excess
E. Preparation of consolidated working paper
F. Step Acquisition
G. Push down accounting
H. Reverse acquisition

CONSOLIDATED STATEMENT OF FINANCIAL POSITION -

SUBSEQUENT TO DATE OF ACQUISITION
A. Accounting policies
B. Accounting for investment in subsidiary
- Cost method
- Fair value method
- Equity method
 C. Computation of Consolidated Comprehensive Income
- Parent approach
- Entity approach
D. Consolidation of wholly owned subsidiary
E. Consolidation of partially owned subsidiary
F. Accounting for loss of control

FINAL COVERAGE

INTERCOMPANY PROFIT TRANSACTION

A. Sale of Inventories
B. Sale of Property, Plant and Equipment
SYLLABUS DETAILED CONTENT

Time Table Topic Desired Learning Outcomes References

Week 1 to 2 Business Combination Syllabi Understand the DO's and DON’T'S in the
(6 hours) Google classroom rules and google classroom
regulation
Definition of terms To determine the difference between the Advanced
different types of business combination. Accounting
Illustration and accounting To learn how to journalize the acquisiton 2 - Guerrero
for merger - on the books of the buying company.
books of buying company To learn how to journalize the acquisiton AFAR by
books of selling company on the books of the selling company. Dayag
Preparation of financial To be able to prepare the statement of
statement financial position
Illustration and accounting To learn how to journalize the acquisiton
for consolidation on the books of the buying company.
To learn how to journalize the acquisiton
on the books of the selling company.

Week 3 to 4 Discuss IFRS 10 To learn when the a parent is required or Advanced

(6 hours) not required to prepare a consolidated Accounting
Computation of goodwill - financial statements. 2 - Guerrero
using full goodwill method
using proportionate method AFAR by
Illustration and accounting for Dayag
acquisition of shares. To be able to determin goodwill or income
Acquisition of wholly owned from acquisition which is to be incorporated
subsidiary : in the consolidated statement of financial
- at book value position on the date of acquisition.
- at less than book value
 - at more than book value
Measurement of Non-Controlling To be able to present the consolidated
Interest: statement of financial position on the date
at fair value of acquisition.
at NCI's proportionate share
of the acquiree's identifiable
net assets
Preparation of consolidated working
paper on the date of acquisition.
Push down accounting

Week 5 to 7 Determination of consolidated net To be able to determin consolidated net Advanced

(9 hours) income income even without the worksheet. Accounting
- Parent approach 2 - Guerrero
- Entity approach
Accounting for Investment in To determine the balance of Investment AFAR by
Subsidiary: under the 3 methods of accounting for Dayag
A. Cost Method investment
B. Fair Value Method
C. Equity Method
Determination and allocation of To distribute the excess to identifiagle
excess assets.
Preparation of worksheet - First
year and second year To be able to prepare the consolidated
- For wholly owned subsidiary financial statements at the end of the year.
- For partially owned subsidiary
Accounting for Loss of Control To know what happens to the Investment in
Subsidiary account after sale of shares.

Week 8 to 9 Difference between Downstream To determine when to include the Advanced

(6 hours) sales and Upstream sales of intercompany profit on inventories Accounting
merchandise 2 - Guerrero
Computation of consolidated net
income AFAR by
- Parent approach Dayag
- Entity approach
Presentation of additional working
paper elimination entries.

Week 10 to 11 Profit on Downstream sales and To determine when to include the profit Advanced
(6 hours) Upstream sales of property, plant on intercompany sales of property, plant Accounting
and equipment for and equiment. 2 - Guerrero
- Nondepreciable asset
- Depreciable asset T determine what happens when the asset AFAR by
Computation of consolidated net is sold in subsequent period. Dayag
income
- Parent approach
- Entity approach
Presentation of additional working
paper elimination entries.
Subsequent disposition of asset

Week 12 MIDTERM EXAMINATION

(3 hours)
Week 13 to 14 Corporate Liquidation To determine how much of the free assets Advanced
(6 hours) will be distributed to the creditors Accounting
2 - Guerrero

AFAR by
Dayag
Week 15 to 17 Foreign currency transaction To learn how to convert foreign currency Advanced
(6 hours) transactions to peso. Accounting
To account for importing and exporting 2 - Guerrero
goods.
Derivatives - Forward contract Learn how to offset effects of changes in AFAR by
fair value of the hedging instrument and the Dayag
hedge item every accounting period.
Translation of financial statements To convert the foreign currency financial
statements to its peso equivalent .
To determine translation adjustment - OCI

Week 18 FINAL EXAMINATION

Prepared by: Recommending Approval: APPROVED:

MA. VICTORIA R. ESPIRITU DR. ALFREDO JOSON DR. JOSE F. PERALTA

Professor B.S.A. Discipline Head President and Dean of Undergraduate studi
Teaching-Learning
Activities Assessment

Web lecture Self-Paced

Exercises
Problem solving
-asynchronous Quiz

Interactive discussion

Web lecture Self-Paced

Exercises
Problem solving
-asynchronous Quiz

Interactive discussion
Web lecture Self-Paced
Exercises
Problem solving
-asynchronous Quiz

Interactive discussion

Web lecture Self-Paced

 Exercises
Problem solving
-asynchronous Quiz

Interactive discussion

Web lecture Self-Paced

Exercises
Problem solving
-asynchronous Quiz

Interactive discussion

Web lecture Self-Paced

Exercises
Problem solving
-asynchronous Quiz

Interactive discussion
 Web lecture Self-Paced
Exercises
Problem solving
-asynchronous Quiz

Interactive discussion

PROVED:

. JOSE F. PERALTA
sident and Dean of Undergraduate studies
Department: Bachelor of Science in Accountancy SEE THE OTHER SHEET -COVER
Accounting 309: Business Combination FOR THIS.

Table of Content Page

Blended Syllabi
`
Module 1 Merger - Acquisition of Net Assets

Module 2 Acquisition of Shares & Preparation of

Consolidated Financial Statement - Date
of Acquisition

Module 3 Consolidated Financial Statement -

Subsequent to date of acquisition

Module 4 Intercompany profit on Inventories

Module 5 Intercompany profit on Property, Plant and

equitpment

Module 6 Midterm examination

Module 7 Corporate Liquidation

Module 8 Foreign currency transactions and Translation

Module 9 Final examination

 PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
826 R. Papa St. Sampaloc, Manila City

BSA DEPARTMENT

MODULE FOR ACCOUNTING 309

MODULE 1
SUBJECT DESCRIPTION: ACCOUNTING FOR BUSINESS COMBINATION
PREREQUISITE: None
CONTACT TIME: 3 Weeks

TOPIC: Business Combination Syllabi

Google Classroom rules and regulation
Illustration and accounting for merger:
books of buying company
books of selling company
Preparation of financial statements
Illustration and accounting for consolidation
OBJECTIVE:
Understand the DO's and DON’T'S in the google classroom.
To determine the difference between the different types of business combination.
To learn how to journalize the acquisiton on the books of the buying company.
To learn how to journalize the acquisiton
To be able to prepare the statement of financial position.
To learn how to journalize the acquisiton

TO DO LIST:
Enroll students in the google classroom of the instructor.
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.

LECTURE:
Done through web.

-1-

MODULE 2
CONTACT TIME: 2 Weeks
TOPICS:
Discuss IFRS 10

Computation of goodwill -using full goodwill method

using proportionate method
Illustration and accounting for acquisition of shares
Acquisition of wholly owned subsidiary - at book value
- at less than book value
- at more than book value
Acquisition of partially owned subsidiary - at book value
- at less than book value
- at more than book value
Measurement of Non-Controlling interest at fair value
at NCI's proportionate share
of the acquiree's identifiable
net assets
Preparation of consolidated working paper on the date of acquisition
Push down accounting

OBJECTIVES:
To learn when the a parent is required or not required to prepare a consolidated
financial statements.
To be able to determin goodwill or income from acquisition which is to be
incorporated
in the consolidated statement of financial position on the date of acquisition
To be able to present the consolidated statement of financial position on the
date of acquisition.
TO DO LIST:
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.
Interactive discussion

LECTURE:
Done through web.

-2-

MODULE 3
CONTACT TIME: 4 Weeks

TOPICS:
Determination of consolidated net income income: - Parent approach
- Entity approach
Accounting for Investment in Subsidiary
A. Cost Method
B. Fair Value Method
C. Equity Method
Determination and allocation of excess
Preparation of worksheet - First year and second year
- For wholly owned subsidiary
- For partially owned subsidiary
Accounting for Loss of Control
Computation of consolidated net income - Parent approach
 - Entity approach
Presentation of additional working
paper elimination entries.

OBJECTIVES:
To be able to determin consolidated net income even without the worksheet.
To determine the balance of Investment under the 3 methods of accounting for
investment
To distribute the excess to identifiagle assets.
To be able to prepare the consolidated financial statements at the end of the year.
To know what happens to the Investment in Subsidiary account after sale of
shares.

TO DO LIST:
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.

LECTURE:
Done through web.

MODULE 4
CONTACT TIME: 2 WeekS
TOPICS:
Difference between Downstream sales and Upstream sales of merchandise.

-3-

OBJECTIVES
To determine when to include the intercompany profit on inventories

TO DO LIST:
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.

LECTURE:
Done through web.

MODULE 5
CONTACT TIME: 2 Weeks

TOPICS:
Upstream sales of property, plant and equipment for:
- Nondepreciable asset
 - Depreciable asset
Computation of consolidated net income - Parent approach
- Entity approach
Presentation of additional working paper elimination entries
Subsequent disposition of asset

OBJECTIVES:
To determine when to include the profit on intercompany sales of property, plant
and equipment.
To determine what happens when the asset is sold in subsequent period.

TO DO LIST:
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.

LECTURE:
Done through web.

-4-
MODULE 6
CONTACT TIME: 1 Week
 MIDTERM EXAMINATION

MODULE 7
CONTACT TIME: 2 Weeks

TOPICS
Corporate liquidation

OBJECTIVES:
To determine how much of the free assets will be distributed to the creditors.

TO DO LIST:
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.

LECTURE:
Done through web.
MODULE 8
CONTACT TIME: 2 Weeks

TOPICS
Foreign currency transactions and Translation
Derivatives - Forward contract
Translation of financial statements

-5-
OBJECTIVES:
To learn how to convert foreign currency transaction to peso.
To account for importing and exporting goods.
Learn how to offset effects of changes in fair value of the hedging instrument and
the hedge item every accounting period.
To convert the foreign currency financial statements to its peso equivalent.
To determine translation adjustment - OCI

TO DO LIST:
Access documents and lectures of the instructor on google classroom in a self-
paced manner.
Take exercises/quiz after this module.
Interactive discussion
LECTURE:
Done through web.

MODULE 9
CONTACT TIME: 1 Week

FINAL EXAMINATION
-6-
PSBA - MANILA
ACCOUNTING 309 V. R. ESPIRITU

MODULE 1 - MERGER (ACQUISITION OF NET ASSETS)

Learning Outcomes:
To determine the difference between the different types of business
combination.
To learn how to journalize the acquisiton on the books of the buying company.
To learn how to journalize the acquisiton on the books of the selling company.
To be able to prepare the statement of financial position

DEFINITION OF TERMS:
1. Business combination - a transaction or event in which an acquirer obtains control
of one or more businesses.
2. Control of an entity is where one party has the power over another to govern its
financial and operating policies so as to obtain the benefits from its activities.
3. Merger - is a business combination wherein the assets and liabilities of one entity
are transferred to another entity dissolving the acquired entity.
4. Consolidation - is a business combination wherein the assets and liabilities of
two or more entities are transferred to a newly formed entity and both the
combined entities are dissolved.
5. Acquisition of equity shares - is a business combination involving purchase of
shares in another company to gain control resulting to a parent-subsidiary
relationship.
6. Acquisition date - is the date on which the acquirer obtains control of the acquiree.
7. Contingent consideration - is an obligation of the acquirer to transfer additional
assets or equity interest to the former owners as part of the exchange for control
of the acquire if specified future events occur or c
"considerations are met".
8. Goodwill - is the amount paid to gain access to the future economic benefits
anticipated to be generated from the assets not specifically identified and
separately identified and separately recognized.

FORMS OF BUSINESS COMBINATION

A. Acquisition of net assets
A. Merger
B. Consolidation
B. Acquisition of equity shares

IFRS 3: Method of business combination - Purchase method

Under the purchase method, all assets and liabilities of the acquired company
are recorded at FAIR VALUE. Purchase method is also known as the acquisition
method.
Steps in acquisition method:
1. Identify the acquirer
2. Determine the acquisition date
3. Determine the consideration given (price paid) by the acquirer.
4. Recognize and measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree.

Acquisition related costs -represents the cost the acquirer incurs to effect a business
combination. This includes:

page 1

1.Broker's fees
2.Accounting, legal and other professional fees,
3.Finder's fee
4.General and administrative costs (including cost of maintaining an internal
acquisition department,
Treatment - They are expensed

Stock Issuance Costs - cost incurred when the acquirer issues shares of stock for the
net assets acquired. This included:
1. SEC registration fees
2. Documentary stamp tax and newspaper publication fees
Treatment - They are treated as reduction in share premium(additional paid in capital)

PFRS 3 requires goodwill resulting from a business combination to be recognized as

an asset of the acquiring company. It should be tested for impairment on an annual
basis.
For Merger and Consolidation:
Consideration transferred xx
Less: Fair value of net assets transferred xx
Goodwill xx

Consideration transferred xx
Less: Fair value of net assets transferred xx
Gain from acquisition (xx)

ILLUSTRATIVE PROBLEM 1
AUTOBOT Company acquired the net assets of TRANSFORM Company on
January 2, 2021 by issuing 12,000 of its shares to shareholders of Transform. In
connection with this combination, the following cost were incurred:
Accounting fee 80,000
Finder's fee 40,000
Legal fee 160,000
Printing cost of stock certificates to
issued to shareholders of Transform 6,000
SEC registration 120,000

Trial balances of the companies on that date, together with other pertinent
information follows:
Transform
Autobot Book value FMV
Cash 800,000 200,000 200,000
Accounts receivable 400,000 300,000 300,000
Inventory 300,000 260,000 280,000
Land 584,000 160,000 240,000
Equipment (net) 600,000 400,000 360,000
Investment in Stocks 200,000 250,000 280,000
2,884,000 1,570,000 1,660,000

Accounts payable 350,000 230,000 230,000

Ordinary Share Capital,P50 800,000
Ordinary Share Capital,P10 400,000
Share capital 400,000
Retained earnings 1,334,000 940,000
2,884,000 1,570,000

page 2

The ordinary share capital of Autobot Company trades regularly on a stock exchange,
and it traded at P125 per share on the date of acquisition.
Required: Record the acquisition of Transform
A. On the books of Transform
B. On the books of Autobot

ILLUSTRATIVE PROBLEM 2
ELLEN Company issued 20,000 shares of its ordinary share capital with a par value
of P100 but with quoted price of P120 per share to acquire IRIS Company. The latter
had tangible net assets with book value of P800,000 and fair value of P900,000. In
addition, ELLEN issued share capital valued at P150,000 to an investment banker
as fee for arranging the combination.
Required: Goodwill as a result of business combination

ADVANCED ACCOUNTING VOLUME 2 of Guerrero and Peralta

Student's Exercises:
Problem 13 - 1
Problem 13 - 3
Problem 13 - 4

Problem 13 - 5
Problem 13 - 6
Problem 13 - 8
Problem 13 - 10
Problem 13 - 11
Problem 13 - 12
Problem 13 - 14

Multiple choice
13-1 13-14
13-2 13-15
13-3 13-16
13-4 13-17
13-5 13-18
13-6 13-19
13-7 13-20
13-8 13-21
13-9 13-22
13-10 13-23
13-11 13-24
13-12 13-25
13-13 13-26
13-27

Illustration on Contingent Consideration

Problem 13-12

page 3

PROBLEM 1
ALEXANDER Company paid finder's fees of P160,000, accountant's fees of P40,000,
legal fees of P60,000, salaries of Alexander's employees assigned to the implementation
of the merger of P64,000, cost of closing duplicate facilities of P48,000, cost of shareholders'
meeting to vote on the merger of P56,000, cost of printing stock certificates of P28,000,
audit and accounts's fee related to the stock issuance of P12,000, SEC registration fee
of P20,000 and the stock listing application fees of P16,000.
The company used the acquisition method (PFRS 3)
Required: 1. Acquisition related expense

2. Reduction in share premium

PROBLEM 2
Ralph Company is acquiring Angel Company. Angel had the following intangible assets:
A. Patent on a product that is deemed to have no useful life, P40,000
B. Customer list with an observable fair value of P200,000
C. A 5 year operating list with favorable terms with a discounted present value of P32,000
D. Identifiable R & D of P400,000
Required: Intangible assets to be recorded by Ralph

PROBLEM 3
On June 1, 2020, Choosy Company paid P3.2M cash for the assets and liabilities of Racer
Company. The carrying values for Racer's assets and liabilities on June 1, 2020 follow:
Cash 600,000
Accounts receivable 720,000
Capitalized software costs 1,280,000
Goodwill 400,000
Liabilities (520,000)
Net assets 2,480,000

On June 1, 2020, Racer's accounts receivable had a fair value of P560,000. Additionally,
Racer's in-process and development cost was estimated to have a fair value of P800,000.
All other items were stated at their fair values.
Required: Goodwill on June 1, 2020

Illustration on Contingent Consideration

A contingent consideration is an agreement to issue additional consideration (asset or
stock) at a later date if sepcified events occur. It is recorded as a liability.
Subsequent measurement for contingent consideration:
If the change results from events after the acquisition date, such as when it becomes
clear that the acquire has met an earnings target and additional consideration is to be
transferred.
If classified as an equity, this amount should not be remeasured and instead
final settlement of the consideration should be recognized as part of equity.

If classified as liability, it should be measured at fair value with any gain or

loss being recognized in profit or loss or OCI.
During measurement period and contingent liability increase:
Goodwill…………………………..xx
Contingent liability…………………xx

page 4

After measurement period and contingent liability increase:

Loss……………………………….xx
Contingent liability…………………xx

During measurement period and contingent liability decrease:

Contingent liability…………………xx
Goodwill………………………………xx

After measurement period and contingent liability decrease:

Contingent liability…………………xx
Loss……………………………………xx

Problem 13-12
MODULE 2
ACQUISITION OF SHARES
 PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
826 R. Papa St. Sampaloc, Manila

Department: Bachelor of Science in Accountancy

Accounting 309: BUSINESS COMBINATION

Table of Content
Blended Syllabi Page

Module 1 Merger - Acquisition of Net Assets 1

Module 2 Acquisition of Shares & Preparation of 2

Consolidated Financial Statement - Date
of Acquisition

Module 3 Consolidated Financial Statement -

Subsequent to date of acquisition 3

Module 4 Midterm examination 3

Module 5 Intercompany profit on Inventories 4

Module 6 Intercompany profit on Property, Plant and

equitpment 5

Module 7 Corporate Liquidation 5

 Module 8 Foreign currency transactions and 5
Translation

Module 9 Final examination 6

FOR THE FRONT PAGE

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

826 R. Papa St. Sampaloc, Manila City

BSA DEPARTMENT
BUSINESS COMBINATION
MA. VICTORIA R. ESPIRITU
2020