Question

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.

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.

Answer 1

Ans-1	Acqusition analysis in relation to determine gain on bargain puchase or good will
	Value of Assets acquire
	Current Assets
		Account Receivable	11000.00
		Inventory	20000.00
	Non-Current Assets
		Land	100000.00
		Buildings	56000.00
		Machinery	20000.00
		Truck	30000.00
		Total    (A)	237000.00
	Value of Liabilities acquire
		Other Payable	41000
		Provision	27000
		Loans	63000
		Total      (B)	131000.00
		Excess (A-B)	106000.00
	Consideration given by Boots Ltd
		Land	86000.00
		Vehicle	21400.00
		Cash-
		for Account Payable	18900.00
		For Liquidation Exp.	4300.00
		Total Paid	130600.00
		Excess Paid by boot Ltd	24600.00
	Ans	this excess paid for Goodwill of the company, hence Boot Ltd book Goodwill $ 24600 Ans 2 Journal Entry in the books of boot Ltd S.no Particulars Amount (Dr.) Amount (Cr.) 1 Account Receivable   Dr. $11,000.00 Inventory                       Dr. $20,000.00 Land                                  Dr $1,00,000.00 Buildings                        Dr $56,000.00 Machinery                    Dr $20,000.00 Truck                              Dr. $30,000.00 Goodwill                      Dr.          $20,300.00        To, Other Payable $41,000.00        To, Provision $27,000.00        To, Loans $63,000.00         To, Purchase consideration $1,26,300.00 (Being assets and liabilty aquired) 2 Good will A/c Dr $4,300.00 To, Cash $4,300.00 ( being liquidation exp. Paid by boot ltd) 3 Purchase consideration a/c      Dr. $1,26,300.00      To Land $86,000.00      ToVehicle $21,400.00      To Cash $18,900.00 (being purchase consideration paid) Note:    Land are value on Fair value Vehicle are taken on the basis of carring cost or book value whichever is lower Calculation of Purchase consideration Land 86000 Vehicle 21400 Cash 18900 126300