Question

he following is a summary of the statement of financial position of Stratification Company showing data regarding the carrying values and fair values as of December 31, 2011:

Statement of Financial Position Item		Book Value		Fair Value
Cash		P 70,000		P 70,000
Trade and other Receivables		125,000		125,000
Merchandise Inventory		80,000		140,000
Land		62,500		90,500
Buildings and Machinery		500,000		443,250
Accumulated Depreciation		(187,500)
Total Assets		P650,000		P868,750
Trade and other Payables		P 12,500		P 12,500
Bonds Payable		200,000		180,000
Ordinary Share Capital (P5 par value)		187,500
Share Premium		87,500
Accumulated Profits		162,500
Total Liabilities and Equities		P650,000

On January 1, 2012, Permutation Corporation entered into a business combination agreement by issuing 15,000 shares of its P10 par value ordinary share capital in exchange for the net assets of Stratification Company. As of this date, the shares of Stratification were selling at P18 per share while that of the Permutation were selling at P50 per share.

Permutation Corporation in carrying out the business combination agreement incurred the following additional cash payments:

                  Consultancy fee paid to broker that located Stratification           P 12,500

                  Legal fee for stock issued by Permutation                                         3,750

                  Share issue cost of new shares of Permutation                                   6,250

                  General and administrative expenses                                               11,250

                  Cost of SEC registration of Permutation shares                                 1,250

Required:

Prepare all indicated entries to record the acquisition on the books of Permutation Corporation.

Answer 1

Cost of acquisition = 15000*50 = 750,000

Add: additional cash payments 35,000

(12,500 + 3,750 + 6,250 + 11,250 + 1,250)

Total cost = 785,000

Net worth = Fair value of Total Assets - Liabilities

= 868,750 - 12,500 - 180,000

= 676,250

Goodwill = Cost of Acquisition - Net worth

= 785,000 - 676,250 = 108,750

Journal Entry to record acquisition will be as follows:

Total Assets A/c Dr 8,68,750

Goodwill A/c Dr 73,750

To Current Liabilities A/c Cr 192,500

To Share Capital A/c 150,000

To Share Premium A/c 600,000

(Additional cost of acquisition adjusted against goodwill)