On 1 July 2020, B Ltd acquired all the assets and liabilities of P Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100,000 shares that at date of issue had a fair value of $4.50 per share. Costs of issuing these shares amounted to $2,000. Legal costs associated with the acquisition of Pitt Ltd amounted to $3,200. The asset and liabilities of P Ltd at 1 July 2020 were as follows (Extract): Assets Carrying Amount Fair Value Cash $ 3 000 - Account Receivable 12 000 $ 12 000 Inventories 63 000 69 000 Plant and equipment 330 000 225 000 Accumulated Depreciation – plant and Equipment (100 000) - Land 200 000 280 000 Liabilities Accounts payable 22 000 22 000 Debentures 68 000 68 000 Required: a) Prepare the acquisition analysis at 1 July 2020 for the acquisition of P Ltd by B Ltd. Assume that at 30 June 2020, P Ltd had reported a contingent liability relating to a guarantee given by that company to another entity. P Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $14 000.
On 1 July 2020, B Ltd acquired all the assets and liabilities of P Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100,000 shares that at date of issue had a fair value of $4.50 per share. Costs of issuing these shares amounted to $2,000. Legal costs associated with the acquisition of Pitt Ltd amounted to $3,200. The asset and liabilities of P Ltd at 1 July 2020 were as follows (Extract): Assets Carrying Amount Fair Value Cash $ 3 000 - Account Receivable 12 000 $ 12 000 Inventories 63 000 69 000 Plant and equipment 330 000 225 000 Accumulated Depreciation – plant and Equipment (100 000) - Land 200 000 280 000 Liabilities Accounts payable 22 000 22 000 Debentures 68 000 68 000 Required: a) Prepare the acquisition analysis at 1 July 2020 for the acquisition of P Ltd by B Ltd. Assume that at 30 June 2020, P Ltd had reported a contingent liability relating to a guarantee given by that company to another entity. P Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $14 000.
On 1 July 2020, B Ltd acquired all the assets and liabilities of P Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100,000 shares that at date of issue had a fair value of $4.50 per share. Costs of issuing these shares amounted to $2,000. Legal costs associated with the acquisition of Pitt Ltd amounted to $3,200. The asset and liabilities of P Ltd at 1 July 2020 were as follows (Extract): Assets Carrying Amount Fair Value Cash $ 3 000 - Account Receivable 12 000 $ 12 000 Inventories 63 000 69 000 Plant and equipment 330 000 225 000 Accumulated Depreciation – plant and Equipment (100 000) - Land 200 000 280 000 Liabilities Accounts payable 22 000 22 000 Debentures 68 000 68 000 Required: a) Prepare the acquisition analysis at 1 July 2020 for the acquisition of P Ltd by B Ltd. Assume that at 30 June 2020, P Ltd had reported a contingent liability relating to a guarantee given by that company to another entity. P Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $14 000.
Business Combination - Accounting for an acquirer)
On 1 July 2020, B Ltd acquired all the assets and liabilities of P Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100,000 shares that at date of issue had a fair value of $4.50 per share. Costs of issuing these shares amounted to $2,000. Legal costs associated with the acquisition of Pitt Ltd amounted to $3,200.
The asset and liabilities of P Ltd at 1 July 2020 were as follows (Extract):
Assets
Carrying Amount
Fair Value
Cash
$ 3 000
-
Account Receivable
12 000
$ 12 000
Inventories
63 000
69 000
Plant and equipment
330 000
225 000
Accumulated Depreciation – plant and Equipment
(100 000)
-
Land
200 000
280 000
Liabilities
Accounts payable
22 000
22 000
Debentures
68 000
68 000
Required:
a) Prepare the acquisition analysis at 1 July 2020 for the acquisition of P Ltd by B Ltd. Assume that at 30 June 2020, P Ltd had reported a contingent liability relating to a guarantee given by that company to another entity. P Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $14 000.
Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.
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