Business Combination_exercise

1.       On December 31, 2015, Honest Corporation enters into a business combination by acquiring the assets and assuming the liabilities of Kind corporation.  In effect Kind corporation will be dissolved. Honest transferred the following to Kind Corporation:

a.       20,000 unissued shares of its P10 par common stock, with a market value of P25 per share;

b.      P180,000 in long-term 8% notes payable, and

c.       A contingent payment of P 120,000 cash on January 1, 2018, if the average income during the 2-year period of 2016-2017 exceeds P 300,000 per year. Honest estimate that there is a 60%  chance or probability that the P 120,000 payment will be required.

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

·         Finder’s fee, P 15,000

·         Accounting fees, P20,000

·         Legal fees to arrange the business combination P32,000

·         Cost of SEC registration, including accounting and legal fees P20,000

·         Cost of printing and issuing stock certificates P12,400

·         Indirect costs of combining, including allocated overhead and executive salaries P 30,600

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

                                                  Honest                                 Kind

                                              Book Value               Fair Value               Book Value            Fair Value

Cash.............................       P   576,000               P   576,000              P   24,000             P       24,000

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

Inventories......................         280,000                    360,000                  220,000                    172,000

Land................................         110,000                    240,000                    82,000                    240,000

Buildings-net (10-year life)..   450,000                     720,000                 340,000                    320,000

Total Assets........................P 1,606,000              P 2,082,000             P 724,000                P  804,000

Accounts payable..............P    216,000                  P216,000               P 72,000                   P 72,000

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

Common Stock, P 10 par......   720,000                                                 240,000

Additional paid-in capital...     240,000                                                 196,000

Retained earnings...............    190,000                                                    72,000     

Total liab. and Equities      P  1,606,00                                                P 724,00

Required:

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

b.      Prepare the entries required in the books of the acquirer in relation to the acquisition of Kind Corporation.