Question

Give the journal entry to recognize the employee stock option expense in year 1.

1. Briefly explain why the change in the estimated number of stock options in year 20X2 is not accounted for as an adjustment to the amount recognised in the 20X1.                                                                                                                                                                                                                                

QUESTION 3 BUSINESS COMBINATIONS                                                         

1. M Ltd acquired all the assets and liabilities of G Ltd on 20 December 20X1, which is the date of acquisition. The book values of G Ltd’s assets and liabilities at 20 December 20X1 are given in column (2) below. In exchange for the acquisition, M Ltd offered its own ordinary shares having a fair value of $200,000 on 20 December 20X1. The balance sheet date is 31 December 20X1. Because of the time constraint, M Ltd could estimate only the provisional fair values reported in column (3) below before the 20X1 financial statements could be prepared. Only after the 20X1 financial statements were prepared in 20X2 was M Ltd able to estimate the final fair values reported in column (4) below.

(1)	(2)	(3)	(4)
	Book value	Provisional fair value	Final fair value
Assets
Cash	$10,000	$10,000	$10,000
Accounts Receivable	$20,000	$18,000	$18,000
Inventories	$25,000	$22,000	$22,000
Property, plant and equipment	$40,000	$50,000	$60,000
Investments in shares of listed companies	$60,000	$75,000	$75,000
Total assets	$155,000	$175,000	$185,000
Liabilities
Accounts payable	$10,000	$10,000	$10,000
Long-term debentures payable	$20,000	$18,000	$19,000
Total liabilities	$30,000	$28,000	$29,000
Equity
Share capital	100000
Retained earnings	$25,000
Total equity	$125,000
Total liabilities and equity	$155,000

G Ltd had a research and development project in progress, which was fair valued at $20,000 by M Ltd.

Required

1. Calculate the goodwill/bargain purchase gain arising from the acquisition on 20 December 20X1.                                                                                       

2. What is goodwill in NZ IFRS 3 designed to represent? Briefly explain whether goodwill always represents only what it is designed to represent. You need to refer to specific paragraphs of NZ IFRS 3.                                                    

3. Give the journal entries on 20 December 20X1.                                           

4. Give the journal entries, if any, after the final fair values were determined.

Answer 1

a)

M Ltd.
Calculation of Good on the basis of provisional Fair Value
Particulars	Amount(in $)	Amount(in $)
Cash	10000
Account Receivable	18000
Inventories	22000
Property, Plant and Equipment	50000
Investment in shares of listed	75000
R & D	20000
Total Assets Acquired (A)	195000
Total Liabilities Acquired
Account Payable	10000
Long-term debentures payable	18000
Business Purchase	200000
Total Liabilities Acquired (B)	228000
Goodwill (B-A)	33000

b) As per Para 32 of NZ IFRS 3

The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with this NZ IFRS, which generally requires acquisition-date fair value (see paragraph 37);
(ii) the amount of any non-controlling interest in the acquiree measured in accordance with this NZ IFRS; and

(iii) in a business combination achieved in stages (see paragraphs 41 and 42), the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this NZ IFRS.

d) Journal entries

	M Ltd.
Date	Particulars	Dr. Amount(In $)	Cr. Amount(In $)
20, Dec 20X1	Business Purchase A/c --------------Dr.	200000
	To G Ltd. A/c		200000
	(Being business acquired)
20, Dec 20X1	Cash A/c --------------------Dr	10000
	Account Receivable A/c ----------------Dr.	18000
	Inventories A/c-----------------------Dr.	22000
	Property, Plant and Equipment A/c-----------------Dr.	50000
	Investment in shares of listed A/c ---------------------Dr.	75000
	R & D A/c---------------------------------Dr.	20000
	Goodwill A/c--------------------------Dr.	33000
	To Account PayableA/c		10000
	To Long-term debentures payable A/c		18000
	To Business Purchase A/c		200000
	(Being Assets , Liabilities and Goodwill recorded)
	G Ltd. A/c---------------------Dr.	200000
	To Shares Capital A/c		200000
	(Being Shares Issued)
	Total	628000	628000

	M Ltd.
Date	Particulars	Dr. Amount(In $)	Cr. Amount(In $)
20, Dec 20X2	Property, Plant and Equipment A/c-----------------Dr.	10000
	To Long-term debentures payable A/c		1000
	To Goodwill		9000
	(Being Assets and liabilities recorded at FMV and excess G/W is written off)
	Total	10000	10000