Question

Wool Ltd acquired all the assets and liabilities of Rod Ltd on 1 July 2014. At this date, the assets and liabilities of Rod Ltd consisted of the following:

	Carrying Amount	Fair Value
Assets
Cash	300,000	300,000
Accounts receivable	200,000	200,000
Land	300,000	450,000
Vehicle	150,000	200,000
Accumulated depreciation -Vehicle	(50,000)
Liabilities
Accounts payable	250,000	250,000
Loans	200,000	200,000
Equity
Share Capital – 100 000 shares	400,000
Reserves	50,000

In exchange for these assets and liabilities, Wool Ltd agreed to

1- Issue 3 Wool Ltd shares for every Rod Ltd Share – Wool Ltd shares were considered to have a fair value of $4 per share; costs of issue were $600

2- Transfer a piece of Land to the former shareholders of Rod Ltd – the Land was carried in the records of Wool Ltd at $300,000 but was considered to have a fair value of $600,000.

3- Pay $5 per share in cash to each of the former shareholders of Rod Ltd.

Wool Ltd incurred $3000 in costs associated with the acquisition of these net assets.

Required:

1. Calculate an Acquisition Analysis in relation to this acquisition? Show all workings.

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2. Prepare Journal entries in Wool Ltd to record the acquisition. (8marks)

Answer 1

Analysis of Acquisition -

The method used to compute the consideration paid to acquire Rod Ltd. is Net Payment method

Reason for following this method - Here the question specifies the total amount being paid to the transferor company(Rod Ltd.) i.e,

1. 3 shares of wool ltd are issued for 1 share of rod ltd

2. Pay $600,000 to former shareholders of Rod Ltd

3. Pay $5 to each share holder of Rod Ltd

So, the total consideration paid for acquisition of Rod Ltd is -

Calculation of Consideration paid to acquire Wool Ltd.
Particulars	Amt
Shares issued to Rod Ltd. ($4 per share * 300,000 shares)	12,00,000
Paid to former share holder of Rod Ltd.	6,00,000
Cash paid to Share holders of Rod Ltd. ($5*100,000 shares)	5,00,000
Total Consideration paid	23,00,000

Computation of Goodwill/Capital Reserve on Acquisition of Wool Ltd.

Calculation of Goodwill/Capital reserve on acquisition of Wool Ltd.
Particulars	Amt
1. Net assets Acquired as part of Business Acquisition
Cash a/c	3,00,000
Accounts receivable a/c	2,00,000
Land a/c	4,50,000
Vehicle a/c	2,00,000
Total Assets (A)	11,50,000
Less: Liabilities
Accounts Payable a/c	2,50,000
Loans a/c	2,00,000
Total Liabilites (B)	4,50,000
Net Assets /Net worth of Wool Ltd. (A) - (B)	7,00,000
2. Purchase consideration being paid	23,00,000
Goodwill on acquisition of Wool Ltd. (2) - (1)	16,00,000

Journal entries are divided in 3 phases -

1. Journal entry for Business Purchase payable

2. a. Journal entry for transferring the Assets & Liabilites of Transferor Company to Transferee company

b. Journal entry for any adjustments in the books of Transferee company on account of Business Purchase (Ex. Revaluation of Assets etc.)

c. Journal Entry for accounting the expenses incurred by transferee company for the purpose of Business purchase

3. Journal Entry for payment of consideration to transferor company

Journal Entries in the books of Wool Ltd.(Transferee Company)

Date/Sl no.	Particulars	Amount (Dr) (in $)	Amount (Cr) (in $)
1	Business Purchase a/c	23,00,000
	To Rod Ltd. a/c		23,00,000
	(Being Consideration payable to vendor on purchase of the business vide agreement dated…)
2	Cash a/c	3,00,000
	Accounts receivable a/c	2,00,000
	Land a/c	4,50,000
	Vehicle a/c	2,00,000
	Goodwill a/c (Balancing figure - refer above computation)	16,00,000
	To Accounts Payable a/c		2,50,000
	To Loans a/c		2,00,000
	To Business Purchase a/c		23,00,000
	(Being Assets & Liabilites taken over as part of Business acquistion vide agreement dated…)
3	Rod Ltd. a/c	23,00,000
	To equity share capital a/c		12,00,000
	To Asset a/c (Land transferred to former share holder)		6,00,000
	To Cash/Bank a/c		5,00,000
	(Being purchase consideration paid in the form of issue of 3 lacs of Equity shares, transfer of land & by paying cash of $4 per share vide Business acquisition agreement dated….)
4	Asset a/c	3,00,000
	To Reserves a/c (revaluation of asset/gain on transfer)		3,00,000
	(Being land revalued to $600,000 as part of Business acquisition & later transferred to former share holder of Rod Ltd.)
5	Goodwill a/c (Business acquisition cost - $600 + $3,000)	3,600
	To Cash/Bank a/c		3,600
	(Being Business acquisition cost debited to Goodwill a/c)