Accounting

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)

Ans:

AASB 3, paragraph 32 provides the following formula for the measurement of goodwill:

• Consideration transferred = X

• Fair value of the net identifiable assets

• of the acquiree purchased by the acquirer = Y

• Goodwill = X > Y

• Therefore, goodwill is valued as a residual:

• the amount paid for the business (the cost)

• less the value of the net identifiable assets obtained

• = the goodwill (the unidentifiable net assets)

• If X=Y then goodwill may be acquired but has no cost.

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...