Quiz Question of Business Combination

ACCT2006 CORPORATE ACCOUNTING

BUSINESS COMBINATIONS

QUIZ QUESTIONS and SOLUTIONS

1. On 1 December 2013, Grapefruit Ltd took over the operation of Lime Ltd. At that date the assets and liabilities of Lime Ltd were:

Carrying Amount Fair Value

Cash 20 000 20 000

Receivables 40 000 38 000

Inventory 27 000 42 000

Property, Plant and Equipment 135 000 157 000

Accounts Payable (37 000) (39 000)

Employee Entitlements (41 000) (46 000)

Grapefruit Ltd acquired all of the assets except cash plus an unrecorded trademark owned by Lime Ltd which Grapefruit Ltd estimated to be worth $30 000 at acquisition date. In exchange for these assets Grapefruit gave the shareholders of Lime Ltd 52 000 Grapefruit Ltd shares each worth $2.80, and sufficient additional cash to pay all outstanding liabilities including liquidation costs of $9 000. Acquisition related costs amounted to $15 000.

Required

Calculate the fair value of the net identifiable assets acquired by Grapefruit Ltd, show all workings. (2 marks)

2. How and when is goodwill measured? (2 Marks)

3. How are directly attributable acquisition related costs accounted for? Why?

(1 Mark)

4. On 1 April 2013, Lemon Ltd acquired all of the issued shares of Orange Ltd. At this date, the share capital of Orange Ltd consisted of 70 000 ordinary shares issued at $2.60 each. Under the terms of the acquisition Lemon Ltd is to give each shareholder of Orange Ltd for each five (5) Orange Ltd shares held two (2) Lemon Ltd shares and $1.50 cash . The fair value of a Lemon Ltd share is $3.35. It will cost Lemon Ltd $ 750 to issue the new shares.

Required

Prepare the journal entries to record the acquisition. (2 Marks)

5. List two indicators which can assist in assessing which entity is the acquirer in a business combination. (2 Marks)

6. Define control. (1 Mark)

7. On 1 July 2013 Cumquat Ltd acquired the operating division of...