Statutory Merger: Valuation of Assets and Liabilities,

Consideration Transferred, Goodwill and Bargain Purchase

Tony Inc. acquires all of Jaramillo Co.’s assets and liabilities on January 1, 20x5. Tony incurs the
following costs for the acquisition:

Consideration transferred:
Cash paid to former stockholders of Jaramillo: there
were 200,000 shares of Jaramillo outstanding, and
Tony agreed to pay P90 in cash for each share of
outstanding Jaramillo stock ………………………………… 18,000,000 Cash payment
50,000shares of new Tony common stock, par value
P2/share, market value P80/share, issued to the former Fair value of
stockholders of Jaramillo…………………………………….. P 4,000,000 stock issued

Acquisition-related costs:
Registration fees connected with issuing the new shares,
paid in cash…………………………………………………….. 300,000 Cash payment
Costs of issuing and printing shares/stock certificates……. 200,000 Cash payment
Consulting/professional fees paid to brokers………………. 1,000,000 Cash payment
Legal fees, audit fees, and finder’s fees for acquisition…. 100,000 Cash payment

The balance sheets of both companies immediately prior to the acquisition are as follows:
Tony, Inc. Jaramillo Co.
Assets Book Value Book Value Fair Value
Cash…………………………...................... P 25,000,000 P 90,000 P 90,000
Receivables…………………………………. 2,000,000 200,000 190,000
Inventories…………………………………… 20,000,000 8,110,000 7,000,000
Plant & equipment, net…………………... 99,500,000 50,000,000 40,000,000
Trademarks………………………………….. 5,000,000 1,000,000 4,000,000
Goodwill……………………………………... ____________ ____600,000
Total Assets……………………………………. P151,500,000 P 60,000,000
Liabilities &Equity Book Value Book Value Fair Value
Current liabilities……………………………. P 500,000 P 400,000 P 400,000
Long-term liabilities………………………… 70,000,000 45,000,000 47,000,000
Ordinary share/Common stock, par…… 2,000,000 1,000,000
Share premium/APIC……………………… 55,000,000 10,000,000
Accumulated P&L/Retained earnings… 25,000,000 6,600,000
Treasury shares……………………………… (1,000,000) ( 3,000,000)
3
Total Liabilities &Equity………………………. P151,500,000 P 60,000,000

In addition to the assets and liabilities already reported, Jaramillo has the following previously
unrecorded intangible assets at fair value that meet the requirements for capitalization:
Brand names…………………………………………………………….. P 5,000,000
Secret formulas…………………………………………………………. 7,000,000
Tony, Inc. will pay an additional cash consideration of P1,000,000 on January 1, 20x7 in the event
that average income for the two (2) year period of 20x5 and 20x6 will be equal or greater than
P5,000,000 per year. At acquisition, there is a high probability of reaching the target average
income and the fair value of the additional consideration was determined to be at an expected
value of the contingency at P400,000 based on a 40% probability of achieving the target average
income.
Required:
1. Goodwill. Prepare the journal entry or entries to record the acquisition on Tonys’ books (the
acquirer/acquiring company).

2. Bargain Purchase Gain/Gain on Acquisition. Assume the same information as above, but
Jaramillo has an additional previously unreported intangible that meets the requirements
for capitalization: a noncompetition agreement with a fair value of P10,000,000. All fair
value calculations have been double checked for accuracy and found to be correct.
Prepare the journal entry or entries to record the acquisition on Tonys’ books.

3. Prepare Tony’s balance sheet for (1) and (2) above immediately following the merger.

4. Determine the following amounts immediately following the merger for requirement (1) and
(2):
(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;

Solution:

1.(in millions)
Books of Acquirer/Acquiring
Acquisition of assets and liabilities:
Cash 90
Receivables 190
Inventories 7,000
Plant & equipment 40,000
Trademarks 4,000
Brand names 5,000
Secret formulas 7,000
Goodwill 6,520
Current liabilities 400
Long-term liabilities 47,000
Cash 18,000
Estimated liability for Contingent Consideration 400
Common stock, P2 par x 50,000 shares 100
Share premium/APIC (P80 – P2) x 50,000 shares 3,900
 Consideration transferred:
Cash P18,000,000
Prob. PV of Contingent Consideration - given
or, P1,000,000 x 40% probability 400,000
Common stock (P80 x 50,000 shares) __4,000,000
Consideration transferred P22,400,000
Less: MV of Assets and Liabilities Acquired:
Cash P 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment, net 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Current liabilities ( 400,000)
Long-term liabilities ( 47,000,000) 15,880,000
Positive excess: Goodwill P 6,520,000

Acquisition expenses (P1,000,000 + P100,000)

Acquisition-related expenses/Retained earnings/Accum. P&L 1,100
Cash 1,100

Costs to Issue and Register Stocks (P300,000 + P200,000)

Share premium/APIC 500
Cash 500

2.(in millions)
Books of Acquirer/Acquiring
Acquisition of assets and liabilities:
Cash 90
Receivables 190
Inventories 7,000
Plant & equipment 40,000
Trademarks 4,000
Brand names 5,000
Secret formulas 7,000
Noncompetition agreements 10,000
Current liabilities 400
Long-term liabilities 47,000
Cash 18,000
Estimated liability for Contingent Consideration 400
Common stock, P2 par x 50,000 shares 100
Share premium/APIC (P80 – P2) x 50,000 shares 3,900
Retained earnings (Gain on acquisition) 3,480
 Consideration transferred:
Cash P 18,000,000
Prob. PV of Contingent Consideration - given
or, P1,000,000 x 40% probability 400,000
Common stock (P80 x 50,000 shares) ___4,000,000
Consideration transferred P 22,400,000
Less: MV of Assets and Liabilities Acquired:
Cash P 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment, net 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Noncompetition agreements 10,000,000
Current liabilities ( 400,000)
Long-term liabilities ( 47,000,000) _25,880,000
Negative excess: Gain on acquisition P( 3,480,000)

Acquisition expenses (P1,000,000 + P100,000)

Acquisition-related expenses/Retained earnings/Accum P&L 1,100
Cash 1,100

Costs to Issue and Register Stocks (P300,000 + P200,000)

Share premium/APIC 500
Cash 500

3.
Post-Combination Balance Sheet: (requirement 1)
Assets Liabilities and Stockholders’ Equity
Cash P 5,490,000 Current liabilities P 900,000
Receivables 2,190,000 Estimated liability for Cont. Cons 400,000
Inventories 27,000,000 Long-term liabilities 117,000,000
Plant and equipment 139,500,000
Trademarks 9,000,000 Common stock 2,100,000
Brand names 5,000,000 Paid-in capital – par 58,400,000
Secret formulas 7,000,000 Retained earnings* 23,900,000
Goodwill __6,520,000 Treasury stock ( 1,000,000)
Total P201,700,000 Total P 201,700,000

*25,000,000 – 1,100,000, acquisition-relate/merger expenses = 23,900,000.

Post-Combination Balance Sheet: (requirement 2)
Assets Liabilities and Stockholders’ Equity
Cash P 5,490,000 Current liabilities P 900,000
Receivables 2,190,000 Estimated liability for Cont. Cons 400,000
Inventories 27,000,000 Long-term liabilities 117,000,000
Plant and equipment 139,500,000
Trademarks 9,000,000 Common stock 2,100,000
Brand names 5,000,000 Paid-in capital – par 58,400,000
Secret formulas 7,000,000 Retained earnings* 27,380,000
Noncompetition agreement _10,000,000 Treasury stock __( 1,000,000)
Total P 205,180,000 Total P 205,180,000
*25,000,000 – 1,100,000 + 3,480,000 = 27,380,000

4.
Post-Combination Balance Sheet: (requirement 1)
a. P201,700,000 c. P58,400,000 e. P83,400,000
b. P118,300,000 d. P23,900,000
Post-Combination Balance Sheet: (requirement 2)
a. P205,180,000 c. P58,400,000 e. P86,880,000
b. P118,300,000 d. P27,380,000