In: Accounting
Flashy Ltd is involved in the manufacture of Ugg boots. The
director wishes to sell the business
to a long-standing competitor, Boots Ltd. The financial statements
of Flashy Ltd at 1 July 2019
contained the following information:
Assets
Current assets
Cash 7,500
Accounts receivable 11,000
Inventories 16,500
Total current assets 35,000
Non-current assets
Vehicles 32,000
Accumulated depreciation (5,500)
Trucks 37,000
Accumulated depreciation (6,300)
Machinery 22,000
Accumulated depreciation (3,000)
Buildings 49,000
Accumulated depreciation (4,500)
Land 90,000
Total non-current assets 210,700
Total assets 245,700
Liabilities
Accounts payable 18,900
Other payables 41,000
Provisions 27,000
Loans 63,000
Total liabilities 149,900
Equity
Share capital: 50,000 shares 48,000
Retained earnings 47,800
Total equity 95,800
An agreement was made whereby Boots Ltd takes over Flashy Ltd.
Boots Ltd will acquire all
the assets and liabilities of Flashy Ltd, except for the cash,
motor vehicles and accounts
payable. In exchange, Boots Ltd will give the shareholders of
Flashy Ltd a block of land valued
at $86,000 and a motor vehicle valued at $21,400. The land is
carried at a cost of $40,000 while
the motor vehicle is carried at $22,000, comprising cost of $23,000
and accumulated
depreciation of $1,000. Boots Ltd will also provide sufficient
additional cash to enable Flashy
Ltd to pay off the accounts payable and the liquidation expenses of
$4,300.
Boots Ltd recognised the brand ‘Flashy’ that was not recognised in
the records of Flashy Ltd as
it was an internally developed brand. It was calculated that this
brand had a fair value of
$22,000. Boots Ltd also incurred legal and valuation costs of
$2,000 in undertaking the
business combination.
The assets and liabilities of Flashy Ltd are recorded at amounts
equal to fair value except for
the following:
Fair value
Land 100,000
Buildings 56,000
Machinery 20,000
Trucks 30,000
Inventories 20,000
Required:
1. Prepare the acquisition analysis in relation to the acquisition
to determine the gain on bargain
purchase or goodwill.
2. Prepare the journal entries in the records of Boots Ltd to
record its acquisition of Flashy Ltd on 1
July 2019.