Ed Company acquired the assets and assumed the liabilities of Sheeran Inc. on June 30, 2022. The consideration transferred by the acquirer were as follows: Cash amounting to P2,000,000. Issued 10,000 ordinary shares at P10 par with a market price of P15. Issued 5 year interest bearing bonds payable with a face value of P3,000,000 with a nominal rate of 10% and effective interest of 12%. (use two decimal places for the present value factor) Acquisition related costs incurred were as follows: Legal fees amounting to P120,000, 70% of which is not yet paid. Share issue costs paid amounted to P15,000. Bond Issue costs paid amounting to P120,000. The Balance Sheet of the two entities before acquisition were as follows: Ed Company Sheeran Inc. Total Assets 16,500,000 5,235,000 Total Liabilities 2,500,000 500,000 Ordinary Shares 5,000,000 1,250,000 Share premium 1,500,000 750,000 Retained Earnings 6/30/22 7,500,000 2,735,000 It was determined that the book value of the assets and liabilities of the two entities were equivalent to its fair value except for the following: Inventories of Ed Company and Sheeran Inc. are understated by P50,000 and P75,000, respectively. Specialized equipment of Sheeran Inc. has a book value of P300,000 with a fair value of P450,000. Sheeran Inc. has a pre-existing goodwill amounting to P250,000. 1. Which of the following item is incorrect: Goodwill arising from business combination is 230,000. The acquirer’s total assets after business combination is P19,769,000. The acquirer’s total liabilities after business combination is P5,954,000 Total Retained earnings after business combination is 7,380,000 2. What is the total shareholder’s equity after business combination: 14,135,000 14,015,000 14,150,000 14,030,000

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 7P

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Ed Company acquired the assets and assumed the liabilities of Sheeran Inc. on June 30, 2022.

The consideration transferred by the acquirer were as follows:

Cash amounting to P2,000,000.
Issued 10,000 ordinary shares at P10 par with a market price of P15.
Issued 5 year interest bearing bonds payable with a face value of P3,000,000 with a nominal rate of 10% and effective interest of 12%. (use two decimal places for the present value factor)

Acquisition related costs incurred were as follows:

Legal fees amounting to P120,000, 70% of which is not yet paid.
Share issue costs paid amounted to P15,000.
Bond Issue costs paid amounting to P120,000.

The Balance Sheet of the two entities before acquisition were as follows:

	Ed Company	Sheeran Inc.
Total Assets	16,500,000	5,235,000
Total Liabilities	2,500,000	500,000
Ordinary Shares	5,000,000	1,250,000
Share premium	1,500,000	750,000
Retained Earnings 6/30/22	7,500,000	2,735,000

It was determined that the book value of the assets and liabilities of the two entities were equivalent to its fair value except for the following:

Inventories of Ed Company and Sheeran Inc. are understated by P50,000 and P75,000, respectively.
Specialized equipment of Sheeran Inc. has a book value of P300,000 with a fair value of P450,000.
Sheeran Inc. has a pre-existing goodwill amounting to P250,000.

1. Which of the following item is incorrect:

1. Goodwill arising from business combination is 230,000.
2. The acquirer’s total assets after business combination is P19,769,000.
3. The acquirer’s total liabilities after business combination is P5,954,000
4. Total Retained earnings after business combination is 7,380,000

2. What is the total shareholder’s equity after business combination:

1. 14,135,000
2. 14,015,000
3. 14,150,000
4. 14,030,000

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