On 1 January 2019 Big Ltd acquired all the assets and liabilities of Small Ltd instead of Small Ltd's issued shares. Details of the consideration paid: Cash of $380,000, half to be paid on 1 January 2019, with the balance due on 1 January 2020. The incremental borrowing rate for Big Ltd is 10% 100,000 shares in Big Ltd were issued. The share price on 1 January 2019 was $1.50 per share. This price was a six-month high. Cost of issuing the shares was $1,500. Owing to the doubts whether the share price would remain at $1.50, Big Ltd agreed to pay cash equal to value of any decrease in the share price below $1.50. This guarantee was valid for 3 months (to 31 March 2019). Big Ltd believed that there was a 75% chance that the share price would remain at or above $1.50 until 31 March 2019 and a 25% chance that it would fall to $1.40. Supply of a patent to Small Ltd. The fair value of the patent is $60,000. As the patent was internally generated by Big Ltd, it has not been recognised in Big Ltd's books. Legal fees and associated costs with the acquisition totalled $4,000. Further, Small Ltd's assets and liabilities acquired by Big Ltd are as follows: Carrying Amount Plant and equipment Land Inventory Accounts receivable Accounts payable Bank overdraft $360 000 260 000 24 000 18 000 (35 000) (55 000) Fair Value $367 000 257 000 30 000 16 000 (35 000) (55 000) Besides, Small Ltd had an unrecorded contingent liability of $10 000 at that time. It was an existing obligation that failed the probable occurrence test. Required: As Big Ltd's company accountant, you are asked to: (1) Provide a calculation to find out Big Ltd's total cost of acquisition and the associated goodwill or a gain on bargain purchase; (2) Prepare all the necessary journal entries to record Big Ltd's purchase of Small Ltd's assets and liabilities.
On 1 January 2019 Big Ltd acquired all the assets and liabilities of Small Ltd instead of Small Ltd's issued shares. Details of the consideration paid: Cash of $380,000, half to be paid on 1 January 2019, with the balance due on 1 January 2020. The incremental borrowing rate for Big Ltd is 10% 100,000 shares in Big Ltd were issued. The share price on 1 January 2019 was $1.50 per share. This price was a six-month high. Cost of issuing the shares was $1,500. Owing to the doubts whether the share price would remain at $1.50, Big Ltd agreed to pay cash equal to value of any decrease in the share price below $1.50. This guarantee was valid for 3 months (to 31 March 2019). Big Ltd believed that there was a 75% chance that the share price would remain at or above $1.50 until 31 March 2019 and a 25% chance that it would fall to $1.40. Supply of a patent to Small Ltd. The fair value of the patent is $60,000. As the patent was internally generated by Big Ltd, it has not been recognised in Big Ltd's books. Legal fees and associated costs with the acquisition totalled $4,000. Further, Small Ltd's assets and liabilities acquired by Big Ltd are as follows: Carrying Amount Plant and equipment Land Inventory Accounts receivable Accounts payable Bank overdraft $360 000 260 000 24 000 18 000 (35 000) (55 000) Fair Value $367 000 257 000 30 000 16 000 (35 000) (55 000) Besides, Small Ltd had an unrecorded contingent liability of $10 000 at that time. It was an existing obligation that failed the probable occurrence test. Required: As Big Ltd's company accountant, you are asked to: (1) Provide a calculation to find out Big Ltd's total cost of acquisition and the associated goodwill or a gain on bargain purchase; (2) Prepare all the necessary journal entries to record Big Ltd's purchase of Small Ltd's assets and liabilities.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On 1 January 2019 Big Ltd acquired all the assets and liabilities of Small Ltd instead of
Small Ltd's issued shares.
Details of the consideration paid:
Cash of $380,000, half to be paid on 1 January 2019, with the balance due on
1 January 2020. The incremental borrowing rate for Big Ltd is 10%
.
100,000 shares in Big Ltd were issued. The share price on 1 January 2019 was $1.50
per share. This price was a six-month high. Cost of issuing the shares was $1,500.
Owing to the doubts whether the share price would remain at $1.50, Big Ltd agreed to
pay cash equal to value of any decrease in the share price below $1.50. This guarantee
was valid for 3 months (to 31 March 2019). Big Ltd believed that there was a 75%
chance that the share price would remain at or above $1.50 until 31 March 2019 and a
25% chance that it would fall to $1.40.
Supply of a patent to Small Ltd. The fair value of the patent is $60,000. As the patent
was internally generated by Big Ltd, it has not been recognised in Big Ltd's books.
Legal fees and associated costs with the acquisition totalled $4,000.
Further, Small Ltd's assets and liabilities acquired by Big Ltd are as follows:
Carrying Amount
Plant and equipment
Land
Inventory
Accounts receivable
Accounts payable
Bank overdraft
$360 000
260 000
24 000
18 000
(35 000)
(55 000)
Fair Value
$367 000
257 000
30 000
16 000
(35 000)
(55 000)
Besides, Small Ltd had an unrecorded contingent liability of $10 000 at that time. It was an
existing obligation that failed the probable occurrence test.
Required:
As Big Ltd's company accountant, you are asked to:
(1) Provide a calculation to find out Big Ltd's total cost of acquisition and the associated
goodwill or a gain on bargain purchase;
(2) Prepare all the necessary journal entries to record Big Ltd's purchase of Small Ltd's
assets and liabilities.
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