Question

GREEN COMPANY issues 500,000 shares of its own P1 par common stock for the net assets of YELLOW CORPORATION in a merger consummated on July 1, 2019. On this date, GREEN stock is quoted at P10 per share. Balance sheet data for the two companies at July 1, 2019, just before combination, are as follows:

                                      

	GREEN	YELLOW
Current Assets	P18,000,000	P1,500,000
Plant Assets	22,000,000	6,500,000
Total Assets	P40,000,000	P8,000,000
Liabilities	P12,000,000	P2,000,000
Common stock, P10 par	20,000,000	3,000,000
Additional paid-in capital	3,000,000	1,000,000
Retained earnings	5,000,000	2,000,000
Total equities	P40,000,000	P8,000,000

GREEN COMPANY also paid finder’s fees of P50,000 and legal fees of P10,000; as well as indirect expenses of 40,000.

The retained earnings on the combined balance sheet after the combination will be:

a. P4,960,000                  c. P4,900,000

b. P5,900,000                  d. P7,000,000

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PURPLE COMPANY. is to acquire BROWN CORPORATION by absorbing all the assets and assuming all the liabilities of the latter company, in exchange for shares of stocks of the former. Below are the balance sheets of the two companies with the corresponding appraised value increment for Brown. Parties agree to use the appraised values against which the fair market value of the shares will be matched.                                                  

      

	PURPLE	BROWN
Assets per books	P4,000,000	P2,500,000
Asset increase per appraisal		300,000
Liabilities	1,500,000	800,000
Capital stock	(no par) 2,000,000	(P100 par) 1,000,000
APIC	700,000	300,000
Retained earnings (deficit)	(200,000)	400,000
Total Equities	P4,000,000	P2,500,000

The stocks of PURPLE COMPANY is currently selling at P100 per share. The number of shares to be issued to BROWN by PURPLE is

1. 20,000                         c. 13,000
2. 17,000                         d. 10,000

Answer 1

Part 1 :

Direct Combination costs like finders fees, legal expenses are to be expensed in the period of combination. (Taken to Income statement)

So the Retained earnings balance will be unchanged

Answer is Option d - P7,000,000 (5,000,000+2,000,000)

Part 2 :

Fair value of brown business

= Assets fair value + Undervalued amount - Liabilities

= 2,500,000 + 300,000 - 800,000

= 2,000,000

Purple company stock is trading at P100 per share

So total shares to be issued is 20,000 shares (2,000,000/100)

So answer is Option a - 20,000