Chapter 13 – Business Combinations Page 1 of 5

PROBLEM 13-1 PROBLEM 13-2

Big Corporation purchases the net assets of Small Corporation for P500,000 On January 1, 2017, Tagalog Corporation issued 6,000 shares of its P10 par
cash. Prior to the combination, Small Corporation has the following value common stock to acquire the assets and liabilities of Visaya
Statement of Financial Position. Corporation. Tagalog Corporation shares were selling at P90 on that date.
Carrying value and fair value data for Visaya Corporation at the time of
Assets acquisition were as follows:
Current Assets:
Accounts Receivable P 120,000 Carrying Value Fair Value
Inventories 100,000 P 220,000 Cash and Receivables P 50,000 P 50,000
Property, Plant and Equipment 280,000 Inventory 120,000 200,000
Total Assets P 500,000 Buildings and Equipment 400,000 300,000
Less: Accumulated Depreciation (150,000) ________
Liabilities and Equity Total Assets P 420,000 P 550,000
Current Liabilities P 50,000
Shareholders’ Equity: Accounts Payable P 50,000 P 50,000
Common Stock, P10 par P 200,000 Common Stock (P20 per share) 200,000
Retained Earnings 250,000 450,000 Retained Earnings 170,000
Total Liabilities and Equity P 500,000 Total Liabilities and Equities P 420,000

Fair market values agree with book values except for inventories and Tagalog Corporation paid P25,000 for SEC registration and issuance of its new
property, plant and equipment, which have fair market values of P140,000 shares and paid professional fees of P15,000.
and P300,000 respectively. To consummate the transaction, Big Corporation
incurs P5,000 acquisition-related costs. Required: Record the journal entries for the acquisition in the books of
Tagalog Corporation.
Required:
1. Record the acquisition on Big Corporation’s books. Provide support for
your entry as needed.
2. Record the sale on the books of Small Corporation and the subsequent
total liquidation of the corporation.
Chapter 13 – Business Combinations Page 2 of 5

PROBLEM 13-3 PROBLEM 13-4

On January 1, 2017, Pal Products Corporation issues 12,000 shares of its P10 The following Statement of Financial Position were prepared for Red and Blue
par value stock to acquire the net assets of Tan Company. Underlying book v Corporations on January 1, 2017, just before they entered into a business
value and fair value information for the statement of financial position items combination:
RED CORPORATION
of Tan Company at the time of acquisition are as follows:
Book Value Fair Value
Book Value Fair Value Cash and Receivables P 300,000 P 300,000
Cash P 60,000 P 60,000 Inventory 400,000 600,000
Accounts Receivable 100,000 100,00 Buildings and Equipment 800,000 870,000
Inventory (lifo basis) 60,000 115,000 Less: Accumulated Depreciation (200,000) _________
Total Assets P 1,300,000 P 1,770,000
Land 50,000 70,000
Building and Equipment 400,000 350,000 Accounts Payable P 100,000 P 100,000
Less: Accumulated Depreciation (150,000) ________ Bonds Payable 400,000 440,000
Total Assets P 520,000 P 695,000 Common Stock (P10 par value) 300,000
Additional Paid-in Capital 100,000
Retained Earnings 400,000
Accounts Payable P 10,000 P 10,000
Total Liabilities and Equities P 1,300,000
Bonds Payable 200,000 180,000 BLUE CORPORATION
Common Stock (P5 par value) 150,000 Book Value Fair Value
Additional Paid-in Capital 70,000 Cash and Receivables P 50,000 P 50,000
Retained Earnings 90,000 Inventory 100,000 245,000
Buildings and Equipment 300,000 250,000
Total Liabilities and Equities P 520,000
Less: Accumulated Depreciation (150,000) ________
Total Assets P 300,000 P 545,000
Tan Company shares were selling at P18 and Pal Products Corporation shares
were selling at P50 just before the merger announcement. Additional cash Accounts Payable P 40,000 P 40,000
payments made by Pal Products Corporation in completing the acquisition Bonds Payable 60,000 85,000
Common Stock (P10 par value) 100,000
were:
Additional Paid-in Capital 20,000
Broker’s fee paid to firm that located Tan Company P 10,000 Retained Earnings 80,000
Audit fee for stock issued by Pal Products Corporation 12,000 Total Liabilities and Equities P 1,300,000
Cost of SEC registration of Pal Products Corporation shares 6,000 Required: Assume that Red Corporation acquires the net assets of Blue Corporation
Required: Prepare all journal entries to be recorded on Pal Products by issuing 15,000 shares of stock. Prepare a Statement of Financial Position for the
Corporation’s books. combined company immediately after the acquisition if the market price of Red
Corporation shares is (1) P40 and (2) P20 at the time the acquisition occurs.
Chapter 13 – Business Combinations Page 3 of 5

PROBLEM 13-5 Book Value Fair Value

Peter Industries, Inc., entered into a business combination agreement with Liabilities:
Honey Chemical Corporation (HCC). Under the terms of the agreement, Current Payables P 137,200 P 137,200
Peter Industries issued 180,000 shares of its P1 par common stock in Mortgages Payable 500,000 520,000
exchange for all the assets and liabilities of HCC. The Peter Industries shares Equipment Trust Notes 100,000 95,000
then were distributed to the shareholders of HCC, and HCC was liquidated. Debentures Payable 1,000,000 950,000
Less: Discount on Debentures (40,000) __________
Immediately prior to the combination, HCC’s statement of financial position Total Liabilities 1,697,200 P 1,702,200
appeared as follows, with fair values also indicated:
Stockholders’ Equity:
Book Value Fair Value Common stock (P5 par) 600,000
Assets: Additional Paid-in Capital from
Cash P 28,000 P 28,000 Common Stock 500,000
Accounts Receivable 258,000 251,500 Additional Paid-in Capital from
Less: Allowance for Bad Debts (6,500) Retirement of Preferred Stock 22,000
Inventory 381,000 395,000 Retained Earnings 220,100
Long-Term Investments 150,000 175,000 Less: Treasury Stock (1,500 shares) (12,000)
Land 55,000 100,000 Total Stockholders’ Equity 1,330,100
Rolling Stock 130,000 63,000 Total Liabilities and Equity P 3,027,300
Plant and Equipment 2,425,000 2,500,000
Less: Accumulated Depreciation (614,000) Immediately prior to the combination Peter Industries common stock was
Patents 125,000 500,000 selling for P14 per share. Peter Industries incurred professional fees of
Special Licenses 95,800 100,000 P135,000 in arranging the business combination and P42,000 of stock issue
Total Assets P 3,027,300 P 4,112,500 costs.

Required:
1. Prepare all journal entries that Peter Industries should have entered on
its books to record the acquisition.
2. Present all journal entries that should have been entered on the books of
HCC to record the combination and the distribution of the stock received.
Chapter 13 – Business Combinations Page 4 of 5

PROBLEM 13-6 based on their face value on January 1, 2017. The market price of the
Gene Company acquired the assets of Honey Company on January 1, 2015, shares of January 1, 2017 was P8.
and made the following entry to record the acquisition: PROBLEM 13-7
Papa Corporation is contemplating the acquisition of the net assets of Baby
Current assets 200,000 Company on December 31, 2015. It is considering making an offer, which
Equipment 300,000 would include a cash payout of P400,000 along with giving 15,000 shares of
Land 100,000 its P4 par value common stock that is currently selling for P40 per share.
Building 600,000 Papa Corporation also agrees that it will pay an additional P100,000 on
Goodwill 200,000 January 1, 2018, if the average net income of Baby’s business unit exceeds
Liabilities 160,000 P160,000 for 2016 and 2017. The likelihood of reaching that target is
Common stock, P1 par 200,000 estimated to be 75%. The Statement of Financial Position of Baby Company
Additional paid in 1,040,000 along with estimated fair values of the net assets to be acquired is as follows.
capital Baby Company
Statement of Financial Position
Required: Prepare the required entry on January 1, 2017, for each of the December 31, 2017
following independent contingency agreements:
1. An additional cash payments would be made on January 1, 2017, equal to Book Value Fair Value
twice the amount by which average earnings of the Honey Company Current assets P 274,000 P 256,000
Non-current assets 1,020,000 660,000
exceed P50,000 per year, prior to January 1, 2017. Net income was Total assets P 1,294,000 P 916,000
P100,000 in 2015 and P120,000 in 2016. Assume that the liabilities
recorded on January 1, 2015, include an estimated contingent liability Current labilities P 162,000 P 162,000
recorded at an estimated amount of P80,000. Non-current labilities 464,000 440,000
2. Added shares would be issued on January 1, 2017, equal in value to twice Total liabilities 626,000 P 602,000
the amount by which average annual earnings of the Honey Company Common stock 100,000
exceed P50,000 per year, prior to January 1, 2017. Net income was Additional paid-in capital 400,000
P100,000 in 2015 and P120,000 in 2016. The market price of the shares Retained earnings 168,000
on January 1, 2017 was P10. Total equity 668,000
3. Added shares would be issued on January 1, 2017, to compensate for any Total liabilities and equity P 1,294,000
fall in the value of Gene Company’s common stock below P12 per share. Required:
The settlement would be to cure the deficiency by issuing added shares 1. Prepare the entry on the books of Papa Corporation to record the
acquisition of Baby Company.
Chapter 13 – Business Combinations Page 5 of 5

2. Assume the net income of Baby Company is P240,000 for 2018. As a

result, the likelihood of paying the contingent consideration is believed to
be 90%. What adjusting entry is required as of December 31, 2018, if
any?
PROBLEM 13-8
Ace Company required the net assets of Heart Company on January 1, 2017,
for P500,000 cash. The fair value of Ace’s net assets was P400,000.

Required:
1. What amount of goodwill was recorded by Ace Company when it
acquired Heart Company?
2. Using the information above, answer the following independent
questions:
a. On December 31, 2018, there were indication that goodwill might
have been impaired. At that time, the carrying vale of Ace Company’s
net assets, including goodwill, was P500,000 and the recoverable
amount of the unit is P520,000. Is goodwill impaired? If so, what
adjustment is needed?
b. On December 31, 2020, there were indications that goodwill might
have been impaired. At that time, the carrying value of Ace
Company’s net assets, excluding goodwill, was P430,000. The
recoverable amount of the unit was estimated to be P400,000. Is
goodwill impaired? If so, what adjustment is needed?