Akawnting Exercise/Lesson: Business Combinations

Akawnting for Business Combinations

1.       On December 31, 2015, Patrick Corporation purchased 18,000 shares of stock to Santiago Company by paying P 250,000 cash and issuing its 10,000 shares, P 20 par ordinary shares.  The current market value of shares of stock of Patrick and Santiago were P 25 and P 20 per share respectively.  At that time the book value of the shares of stock of Santiago was P 15 per share.  In addition, a contingent payment of P 200,000 cash on January 1, 2018 was to be made, if the average income during the 2-year period of 2016-2017 exceeds P 300,000 per year. Patrick estimated that there was a 50% chance or probability that the P 200,000 payment would be required.

In addition, Patrick paid the following at the time of the business combination:  

·         Finder’s fee, P 25,000

·         Accounting fees, P20,000

·         Legal fees to arrange the business combination P25,000

·         Cost of SEC registration, including cost of printing and issuing stock certificates, accounting and legal fees P19,600

·         Indirect costs of combining, including allocated overhead and executive salaries P 10,400

Balance sheet and fair value information for the companies on December 31, 2015, immediately before the acquisition, was as follows:

                                                                               Patrick                                                               Santiago

                                                           Book Value               Fair Value                           Book Value            Fair Value

Cash.............................                       P   876,000               P   876,000                        P  124,000               P   124,000

Receivables –net.............                      190,000                    186,000                               58,000                       48,000

Inventories......................                       280,000                     360,000                            220,000                     272,000

Land................................                        410,000                     540,000                              82,000                     220,000

Buildings-net (10-year life)....           450,000                     720,000                             342,000                    320,000

Total Assets...........................          P  2,206,000              P 2,682,000                       P  826,000               P   984,000

Accounts payable.................         P     216,000                  P 216,000                            P 74,500              P     74,500

Other liabilities....................                 240,000                      216,000                             144,000                   168,000

Ordinary shares............. ......                  720,000                                                                 337,500

Share Premium.....................                  440,000                                                                 196,000

Retained earnings...............                  590,000                                                                   74,000      

Total liabilities and Equities..      P 2,206,000                                                             P 826,000

Required:

a.       Determine the amount  of goodwill /gain from bargain purchase

b.      How much should be the consolidated balance of Total assets?

c.       Compute the consolidated equity  section of Parent and Subsidiary

d.      Prepare the elimination entries required in the books of the acquirer in relation to the preparation of the consolidated balance sheet at date of acquisition.