Question

6. On 1 January 2020, Big Ltd acquired all the issued shares (non cum. div.) of small Ltd for $750 000. At that date, the equity of small Ltd was recorded at:

                                                Share capital                       $350,000

                                                Reserves                               150,000

                                                Retained earnings              100 000

On 1 January 2020, the records of small Ltd also showed that the carrying value of the land is $40,000 with a fair value of $50,000 . Further small Ltd had a dividend payable of $5 000, the dividend to be paid in March 2020. All other assets and liabilities except land were carried at amounts equal to their fair values. Applicable tax rate of 30%.

The Pre-acquisition entry for the year ended 30/06/2021

Answer 1

All amounts are in $

We need pre acquisition entry at the end of year

Share Capital 350,000

Reserves 150,000

Retained Earnings 100,000

BCVR 150,000

Shares in Small Ltd 750,000

(Pre acquisition entry accounted)

Note :

Dividend payable is not taken into consideration as this is year end pre acquisition entry. If the pre acquisition at the time of acquisition is asked, then we will also take dividend payable into consideration.

BCVR = Business Combination Valuation Reserve, difference between consideration and carrying value of net assets on acquisition date.