Question

On 1 January 20X0, Linda Ltd acquired 100 % of the share capital of Yoko Ltd for $900,000 cash. At that date, the equity section of Yoko Ltd’s balance sheet was as follows: $ Share capital 900,000 Retained profits 400,000 Asset revaluation reserve 300, 000 Assuming all assets and liabilities were recorded at their fair values what will be the effect of the acquisition on the financial statements? Select one: Goodwill will be increased by $700,000 in Linda Ltd. separate statements. Goodwill will be increased by $400,000 in Yoko Ltd. separate statements. Bargain purchase will be increased by $700,000 in the Linda Group consolidated statements. Bargain purchase will be increased by $700,000 in Linda Ltd. separate statements.

Answer 1

Given facts

Linda Ltd acquired 100% of share capital of Yoko Ltd for $900,000 cash. At that date the balance sheet contains Share capital at $900,000, Reserves at $400,000 and Revaluation reserves at $300,000. Also given that the assets and liabilities are taken and recorded at their fair values.

Due to this

Bargain purchase will be increased by $700,000 in linda Ltd seperate statement.

This is because bargain purchase will be recognised when a business or combination of assets are acquired at less than their fair market value. The resultant difference is recognised at Bargain purchase or Negative goodwill in the books of Acquirer. So the difference between $900,000 and $1,600,000 is recognised as bargain purchase.

Total fair value of net assets = Capital + Reserve+ revaluation reserve = 900,000 + 400,000 + 300,000 = $1,600,000