Question

Greenmount Ltd, an ASX listed consumer goods corporation aims to acquire a fashion business to generate new growth opportunities. Following a formal search process, external advisors have identified the following two businesses as best matching entitiesfor a potential take-over: Tallows Ltd and Bilgola Ltd. Only one will be selected. To move forward with the selection process, the external advisor has estimated that both firms have the same entity value of $2m based on a Discounted Cash Flow (DCF) model, i.e. acquisition price of $2 million (excluding advisor fees), which will be paid as cash consideration. The external advisor will charge $5,000 finder’s fee and $3,000 legal fees paid in cash to prepare all required due diligence.

You have been given access to the following information about the assets, liabilities, and shareholders’ equity for both potential target firms:

Tallows Ltd:

	Historical costs	Carrying amount	Remaining useful life
Cash and cash equivalents	$12,000	$12,000	$           -
Accounts receivable	$21,000	$21,000	$           -
Inventory	$250,000	$220,000	$           -
Property Plant and Equipment (net)	$2,000,000	1,200,000	5 years
Total Assets		$1,453,000	$           -
Accounts Payable		$145,000	$           -
Bank Loans		$200,000	$           -
Shareholder’s Equity		$1,108,000	$           -
Liabilities & shareholders’ equity		$1,453,000	$           -

Additional information for Tallows Ltd: Taking into account current market information and historical data of the firm, you determine the following fair values: Accounts receivables: $18,000, Inventory: $180,000, Property Plant and Equipment: $1,000,000.

Bilgola Ltd:
	Historical Costs ($)	Carrying Amount ($)	Remaining useful life
Cash and cash equivalents	6,000	6,000
Accounts receivable	230,000	230,000
Inventory	600,000	600,000
Property Plant and Equivalent (net)	3,500,000	1,000,000	10 years
Total Assets		1,836,000
Accounts Payable		200,000
Bond Payable		360,000
Shareholders' Equity		1,276,000
Liabilities and shareholders' equity		1,836,000

Additional information for Bilgola Ltd:

Considering current market prices and further historical information from the company, you determine the following fair values: Accounts receivable $200,000, Inventory $500,000, Property Plant and Equipment $2,000,000.

Nicholas Less, the CFO of Greenmount Ltd has been under pressure to increase the companies’earnings as soon as possible. He has to provide a recommendation on which firm to acquire at the next board of directors meeting in two weeks. In preparation for the meeting, Nicholas has asked you to prepare a fact sheet that evaluates the acquisition of the two potential target firms, Tallows Ltd and Bilgola Ltd from an accounting perspective.

2 To evaluate the potential acquisitions from an accounting perspective, calculate the net asset values of both target firms in accordance with Australian Accounting Standards, and calculate how these values differ from the acquisition price. Prepare and explain the potential journal entries that Greenmount Ltd would need to process for the acquisition costs and business combination under both scenarios. Refer to specific paragraphs in Australian Accounting Standards.

Answer 1

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