Business Combinations

Module 4 Business Combinations

Exercise 14.3 ACCOUNTING BY AN ACQUIRER

1. Prepare an acquisition analysis in relation to this acquisition.

2. Prepare the journal entries in Light Ltd to record the acquisition.

LIGHT LTD – SOUND LTD

Question 1. Acquisition analysis:

Fair value of identifiable assets and liabilities acquired:

Current assets $980 000

Non-current assets 4 220 000

5 200 000

Liabilities 500 000

$4 700 000

Consideration transferred:

Shares: 100 000 x 10 x $10 $10 000 000

Patent 1 000 000

Cash: 100 000 x $5.20 520 000

$11 520 000

Goodwill = $11 520 000 - $4 700 000 = $6 820 000

Question 2. Journal entries: Light Ltd

Current assets Dr 980 000

Non-current assets Dr 4 220 000

Goodwill Dr 6 820 000

Liabilities Cr 500 000

Share capital Cr 10 000 000

Gain on sale of Patent Cr 1 000 000

Payable to Sound Ltd Cr 520 000

(Acquisition of Sound Ltd)

Gain on Sale of Patent Dr 350 000

Patent Cr 350 000

(De-recognition of patent as part of consideration

transferred in a business combination)

Payable to Sound Ltd Dr 520 000

Cash Cr 520 000

(Payment to acquiree)

Acquisition-related expenses Dr 10 000

Cash Cr 10 000

(Payment of directly attributable costs)

Share capital Dr 500

Cash Cr 500

(Costs of issuing shares)

Exercise 14.20 ACCOUNTING FOR ACQUISITIONS OF A BUSINESS AND SHARES IN ANOTHER ENTITY

Required

1. Prepare the acquisition analysis and journal entries to record the acquisitions in the records of Tailor Ltd.

3. Explain in detail why, if Flathead Ltd has recorded a goodwill asset of $5000, Tailor Ltd calculates the goodwill acquired via an acquisition analysis. Why does Tailor Ltd not determine a fair value for the goodwill asset and record that...