Question

Question 3 (Recognition and fair value adjustments of acquired assets & liabilities)

On January1, 2015, Invigilators Enterprises acquired 100 percent of the shares of Lemma Company.

The separate condensed statements of financial position immediately after the acquisition appeared as shown below:

Invigilator enterprises Lemma company

Intangible assets ------------ 2,000

PPE 490,000 80,000

Investment in Lemma 600,000 ------------

Inventories 230,000 360,000

Trades and receivables 400,000 240,000

Total assets 1,720,000 682,000

Share capital 1,000,000 200,000

Retained earnings 140,000 100,000

Provisions 20,000 30,000

Current liabilities 560,000 353,000

total equity and liabilities 1,720,000 682,000

Lemma owns a patent for the production of a new product. Lemma did not recognize the patent in its separate financial statements. The estimated fair value of the patent at acquisition date amounts to $80,000 Additional information (at the acquisition date:

The fair value of Lemma’s main corporate offices is $130,000 (net book value of $50,000)

The fair value of Lemma’s main inventories amounts to $320,000

On January 1, 2015, Invigilator Enterprises still has to pay an invoice ($100,000) for services rendered by Lemma Company in December 2014

Task:

1. Compute the goodwill at the acquisition date

2 Prepare the consolidation adjustments at the acquisition date

3. Prepare the consolidated statement of financial position of the invigilator Group   as at January 2015.

Answer 1

1. Calculation of Goodwill of Lemma Company
Particulars	Amount	Amount
Assets
Intangible Assets	$               2,000
Patent not recorded Earlier	$             80,000
Property Plant Equipment (PPE)	$             30,000
($80,000 less $50,000 considered separately)
Main Corporporate Office	$         1,30,000
(Net Book Value $50,000 valued at $1,30,000)
Inventory (at revalued )	$         3,20,000
Trade Receivables	$         2,40,000
Total Assets (A)		$         8,02,000
Liabilities
Provisions	$             30,000
Current Liabilities	$         3,52,000
Total Liabilities (B)		$         3,82,000
Net Assets (A-B) = C		$         4,20,000
Investment Amount (D)		$         6,00,000
Goodwill (D-C)		$         1,80,000
Note
The Balance Sheet of Invigilator Showing $6,00,000 as investement
However the total net assets acquired after considering all is only $4,20,000
Therefore, Excess $1,80,000 paid for Goodwill of Lamma Company
1. (i) Consolidation Adjustment Entry
First to eliminate the Investment from Assets Acquired
Accounts Details	Debit Amount	Credit Amount
Intangible Assets	$             82,000
Property Plant Equipment (PPE)	$         1,60,000
Inventory	$         3,20,000
Trade Receivables	$         2,40,000
Goodwill	$         1,80,000
To, Provisions		$            30,000
To, Current Liabilities		$         3,52,000
To, Investment Account		$         6,00,000
(to record the investment in Lemma Account)
(ii) To Eliminate the Pay Receivables
Accounts Details	Debit Amount	Credit Amount
Current Liabilities	$         1,00,000
To, Trade Receivables		$         1,00,000
(To eliminate inter group transaction)
(‘C) Consolidated Financial Statement of Invigilator Enterprises
As at 01st January 2015
Assets
Current Assets	Amount	Amount
Inventory
Invigilator Enterprises	$         2,30,000
Lemma Company	$         3,20,000	$         5,50,000
Trade Receivables
Invigilator Enterprises	$         4,00,000
Lemma Company	$         2,40,000
Less: Intragroup Adjustment	$        -1,00,000	$         5,40,000
Total Current Assets		$      10,90,000
Property, Plant and Equipment net
Invigilator Enterprises	$         4,90,000
Lemma Company	$         1,60,000	$         6,50,000
Intangible Assets Net
Invigilator Enterprises	$                      -
Lemma Company	$             82,000
Goodwill	$         1,80,000	$         2,62,000
Total Assets		$      20,02,000
Liabilities and Shareholder Equity
Current Liabilities
Invigilator Enterprises	$         5,60,000
Lemma Company	$         3,52,000
Intragroup Adjustment	$        -1,00,000	$         8,12,000
Provisions
Invigilator Enterprises	$             20,000
Lemma Company	$             30,000	$            50,000
Total Liabilities		$         8,62,000
Shareholder Equity
Share Capital		$      10,00,000
Retained Earnings		$         1,40,000
Total Equity		$      11,40,000
Total Liabilities and Shareholder Equity		$      20,02,000
In Summary
Consolidated Financial Statement of Invigilator Enterprises
As at 01st January 2015
Assets
Current Assets	Amount	Amount
Inventory		$         5,50,000
Trade Receivables		$         5,40,000
Property, Plant and Equipment net		$         6,50,000
Intengible Assets Net		$            82,000
Goodwill		$         1,80,000
Total Assets		$      20,02,000
Liabilities and Shareholder Equity
Current Liabilities		$         8,12,000
Provisions		$            50,000
Total Liabilities		$         8,62,000
Shareholder Equity
Share Capital		$      10,00,000
Retained Earnings		$         1,40,000
Total Equity		$      11,40,000
Total Liabilities and Shareholder Equity		$      20,02,000