Question

On 31 October, Lector Limited agreed to acquire Hannibal Limited for $400,000 which is to be settled by:

(a) 250,000 fully paid ordinary shares in Lector Limited at $1.00 per share, and (b) $150,000 in cash.

The Statement of Financial Position (Balance Sheet) of Hannibal Limited contained the following assets and liabilities to be acquired by Lector Limited for the fair values listed for each.

		Book Value	Fair Value
Assets	$	$	$
Accounts Receivable	195,000
Less Allowance for Doubtful debts	(25,000)	170,000	165,000
Inventory		200,000	190,000
Plant and Equipment	250,000
Less Accumulated Depreciation	(75,000)	175,000	150,000
Total Assets		545,000	505,000
Less Liabilities
Accounts Payable		150,000	150,000
Net Assets Acquired		395,000	355,000
Purchase Consideration (250,000 Shares × $1) + 150,000 cash			400,000
Goodwill			45,000

Required:

Prepare General Journal Entries for the transaction.

Note: Any adjustment to the fair value of accounts receivable must be made through the allowance for doubtful debts (the gross Accounts Receivable balance should remain at book value).

Answer 1

General Journal Entries in the books of Lector Ltd.

Particulars	Amount (Dr.)	Amount (Cr.)
Purchase consideration A/c..............Dr To Haniball Ltd. A/c	400000	400000
Accounts Receivable A/c ...................Dr. Inventory A/c ......................................Dr. Pant & Equipment A/c ........................Dr. Goodwill A/c .......................................Dr. To Accounts Payable A/c To Purchase Consideration A/c	165000 190000 150000 45000	150000 400000
Haniball Ltd. A/c ..................................Dr. To Cash A/c To Securities Capital A/c	400000	150000 250000
TOTAL	1350000	1350000