Question

Carina Ltd has acquired all the shares of Finn Ltd on 1 July 2019 for $ 225 000. The accountant for Carina Ltd, having studied the requirements of AASB 3 Business Combinations, realises that all the identifiable assets and liabilities of Finn Ltd must be recognised in the consolidated financial statements at fair value. Although he is happy about the valuation of these items, he is unsure of a number of other matters including pre-acquisition entries and business combination valuation reserves associated with accounting for these assets and liabilities. He has approached you and asked for your advice.

The financial statements of Finn Ltd showed the equity of Finn Ltd at acquisition date to be:

                                Share capital — 20 000 $5.10 shares                         $102 000

                                General reserve                                                                   40 000

                                Retained earnings                                                               60 000

All the assets and liabilities of Finn Ltd were recorded at amounts equal to their fair values at that date.

During the year ending 30 June 2020, Finn Ltd undertook the following actions:

•    On 10 September 2019, paid a dividend of $20 000 from the profits earned prior to 1 July 2019.

•    On 28 June 2020, declared a dividend of $20 000 to be paid on 15 August 2020.

• On 1 January 2020, transferred $15 000 from the general reserve existing at 1 July 2019 to retained earnings.

Required

Write a report for the accountant at Carina Ltd advising on the following issues:

1.      Should the adjustments to fair value be made in the consolidation worksheet or in the accounts of Finn Ltd?                                                                                                                                             

2.     What is the purpose of the pre-acquisition entries in the preparation of consolidated financial statements? Explain.                                                                                                                            

3.      How to prepare the pre-acquisition entries at 1 July 2019.                                                     

4.      How to prepare the pre-acquisition entries at 30 June 2020.                                                    

Answer 1

To

Company C

Accountant

Subject: Resolve the various issues related to business combination

Introduction: Company C purchases all the shares of the Company F, thus Company F is a subsidiary company. Company C has to follow AASB 3-Business Combinations for its accounting purpose.

Subject: The points that an accountant has to remember are as follows:

1. The adjustment that are taken place due to change in the cost with that of fair value are to be recorded in the consolidated balance sheet of the Company C. As per AASB 3, it is compulsory to value the assets and liabilities at fair value of the date of acquisition.

2. The pre-acquisition entries are required to record the assets taken over and liabilities paid by the Company C in the process of acquisition. It is helpful to estimate the amount of goodwill acquired or a gain from bargain purchase through a business combination.

3. On 1^st July 2019, acquisition takes places, therefore the acquisition of assets and payment of liabilities is to be record at fair value. In this case, cost of acquisition is $225,000 and cost of control is $202,500. Therefore goodwill of $ 23,000 arises.

The cost of control consists of the amount of share capital of $102,000, general reserve of $40,000 and retained earnings of $60,000.

4. On 30^th June 2020, entries were made to consider the effect caused due to recording of assets and liabilities at fair value. Depreciation has to be changed on assets, impairment loss/gain is to be calculate on goodwill and payment of dividend.

Conclusion: It is concluded that now Company C has to follow the AASB 3 and the accountant has to prepare the financial statements as per this AASB.