Question

On 1 July 2020, Tall Ltd acquired all of the assets and liabilities of Blacks Ltd. In exchange for these assets and liabilities, Tall Ltd issued 100 000 shares that at date of issue had a fair value of $6.30 per share. Costs of issuing these shares amounted to $1000. Legal costs associated with the acquisition of Blacks Ltd amounted to $4200.

The asset and liabilities of Blacks Ltd at 1 July 2020 were as follows:

                                                                                                Carrying amount                               Fair value

Assets

             Cash                                                                                             $1 000                                      $1 000

             Accounts receivable                                                               10 000                                      10 000

             Inventory                                                                                   64 000                                      68 000

             Equipment                                                                              320 000                                   232 000

             Accumulated depreciation – equipment                     (96 000)                                              —

             Patents                                                                                     240 000                                   280 000

Liabilities

             Accounts payable                                                                 (16 000)                                  (16 000)

             Debentures                                                                            (64 000)                                  (64 000)

The accountant for Tall Ltd, Mr Spencer, knows that AASB 3 has to be applied in accounting for business combinations. However, he is confused as to how to account for the goodwill, what recognition criteria is applied to assets and liabilities acquired in the business combination, and how the varying dates such as the date of exchange and acquisition date will affect the accounting for the business combination.

Provide Mr Spencer with advice on the issues that are confusing him.

Required

1. Explain how to account for goodwill.                                                                                              

2. Discuss the importance of identifying the acquisition date                                                                      

3. What recognition criteria is applied to assets and liabilities acquired in the business combination. Explain.                                                                                                         

4. Prepare the acquisition analysis at 1 July 2020 for the acquisition of Blacks Ltd by Tall Ltd.                                                                                                                                                                          

5. Prepare the journal entries in the records of Tall Ltd at 1 July 2020.                              

Answer 1

1. Accounting for goodwill:

Calculation of purchase consideration:

100000 shares at fair value $6.30 per share = $6,30,000

Net Investment:

Cash = 1000

Account receivable = 10000

Inventory = 68000

Equipment = 232000

patents = 280000

Total assets 591000

Less : Liabilities

Accounts payable = 16000

Debentures = 64000

Total Liabilities 80000

Net assets taken on business combination = 591000-80000 =511000

Therefore,

Goodwill = Purchase consideration - Net assets

= 630000-511000 = $119000

2. The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree. The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.

3. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. For each business combination, the acquirer shall measure at the acquisition date components of noncontrolling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:

(a) fair value; or

(b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.

4. On 1 July 2020, Tall ltd acquired all of assets and liabilties of Black ltd. The assets and laibilities of Black ltd should be measured at fair value for the purpose of business combination. Purchase consideration paid by Tall ltd is 100000 share at fair value is $6.3.

5. Journal Entries in the books of Tall Ltd at 1 July 2020