Regina Communications Ltd develops and manufactures equipment for technology and
Regina Communications Ltd. develops and manufactures equipment for technology and communications enterprises. Since its incorporation in Year 5, it has grown steadily through internal expansion. In the middle of Year 14, Arthur Lajord, the sole owner of Regina, met a couple of engineering students who were working on new technology to increase the efficiency of data transferred over cable lines. Arthur has provided moral support and some financial support to these students over the past few months. The company has developed some materials and processes sufficiently that a prospective buyer could buy the company, complete the development, and begin producing outputs for sale to prospective customers, or integrate the seller's materials and processes with its own inputs and processes.
At a lunch with the students last Friday, the students told Arthur that they had been able to register a patent to protect their technology. Furthermore, they were interested in selling their business, Davin Technologies Inc., which owns the patent and some other assets used in the development of this tech nology. After a week of negotiation, Arthur and the students agreed to the following:
• Rather than buying the shares of Davin, Regina would buy the assets and assume the liabilities of Davin effective January 1, Year 15.
• The purchase price would be payable as follows:
– $200,000 on January 1, Year 15
– $100,000 a year for three years commencing January 1, Year 16
• The students would commit to work for Regina as consultants over the next three years and would be paid $40 per hour for their services.
The condensed statement of financial position for Davin at January 1, Year 15, was as follows:
Arthur was pleased and excited about the acquisition. He felt that it was a fair deal for both parties given that the business had not yet earned any revenue.
He was particularly pleased that the students agreed to be paid over three years because he otherwise would have had to arrange a bank loan with an interest rate of 8%. Arthur is now worried about the accounting for this acquisition because it is the first time that his company has purchased another business. Although Regina has always followed IFRSs, he is wondering whether now is the time to opt for a simpler approach. In particular, he is wondering whether IFRSs would allow the entire acquisition differential to be allocated to goodwill. This would keep it simple and would also avoid a charge to income over the first few years, since goodwill does not need to be amortized. If the acquisition differential is allocated to patent, then Arthur would like to write off the patent over the maximum period of 20 years.
Arthur has asked you, a CGA, to prepare a presentation on the accounting implications for the proposed acquisition. He wants to understand how to determine the acquisition cost, how to measure the individual assets and liabilities, and how this measurement would affect profit in the first year after the date of acquisition.
Prepare the presentation slides and related speaker’s notes for the presentation. Limit your presentation to five slides. Your presentation should provide recommendations related to the issues raised by Arthur. Use financial statement concepts to support your recommendations. Provide a detailed calculation to show the impact on profit for Year 15. State your assumptions.
Membership TRY NOW
  • Access to 800,000+ Textbook Solutions
  • Ask any question from 24/7 available
  • Live Video Consultation with Tutors
  • 50,000+ Answers by Tutors
Relevant Tutors available to help