Question

Flashy Ltd is involved in the manufacture of Ugg boots. The director wishes to sell the...

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.

Homework Answers

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)


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