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

purchase consideration =fair value of net assets +any cost attributable to business combination

fair value of asset =100000+56000+20000+20000+11000+30000

=237000

liabilites taken =41000+63000+27000

104000

net asset =133000 purchase cosideration

106000+2000

=108000

amount given to vendor =86000 +21400+18900+4300

=130600

balance amount is value of googwill

journal entries

business purchase 130600

flashy ltd 130600

(acquired flashy ltd on agreed amount)

land 100000

building 56000

machinery accoun 20000

inventory    20000

trucks 30000

account receivable 11000

loan 63000

other payable 41000

provision 27000

(net asset taken over)

cash 22900

land 86000

motor vehicle 21400

goodwill 22600

purchase consideraton 130600

(purchase consideration paid and excess amount debited to goowill)