Calculate P Ltd's cost of investment in S Ltd on the acquisition date (Round the discount...
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Calculate P Ltd's cost of investment in S Ltd on the acquisition date (Round the discount factor to 7 decimal places and final answer to the nearest dollar amount). Calculate the amount of goodwill involved at the acquisition date. Prepare consolidation worksheet entries at the acquisition date. Prepare consolidation worksheet entries at the end of year 2. Prepare the consolidation worksheet for and at the end of year 2. Land Plant Accumulated depreciation Deferred tax asset Inventory Cash Investment in S Ltd Goodwill Total Assets $ 8,000 12,000 (4,000) 500 5,000 9,065 17,435 $ 48,000 $ 5,000 14,000 (4,000) 3,000 4,000 1,000 $ 23,000 P Ltd's share price remained above $2 per share within the guarantee period. There was no impairment loss on goodwill since acquisition. Financial statements of the two firms for and at end of year 2 are as follows. Sales revenue Cost of sales Gross profit Gain on sale of land Depreciation (amortization) expense Other expenses Income tax expense Profit for the year Retained earnings (year 2 opening) Dividend Retained earnings (year 2 ending) Share capital ($1 par value for both firms) Contingent liability Deferred tax liability Other liabilities Total equity and liabilities P Ltd $30,000 (18,000) 12,000 (1,000) (2,000) (1,800) 7,200 12,800 20,000 20,000 25,000 1,000 500 1,500 $ 48,000 S Ltd $8,000 (5,500) 2,500 6,500 (500) (1,000) (1,200) 6,300 6,000 12,300 (500) 11,800 10,000 1,200 $ 23,000 At the beginning of year 1, P Ltd acquired all the assets and liabilities of S Ltd on a cumulative dividend basis when S Ltd recorded a dividend payable of $2,000. Details of the consideration transferred are as follows. 1. P Ltd paid $15,000 cash to S Ltd by two instalments: $10,000 at the beginning of year 1 and the remaining two years later. Suppose the bank interest rate was 5%. 2. P Ltd issued 4,000 shares to S Ltd when its share price was $2 per share on the acquisition date. The cost of issuing these shares amounted to $5,000. 3. Due to doubts as to whether its share price could remain at or above the $2 level for three months, P Ltd agreed to compensate shareholders of S Ltd for the value of any decrease in the share price below $2. P Ltd believed that there was a 40% probability that its share price would fall to $1.60. P Ltd provided a self-generated intengible to S Ltd worth $900 on the date of acquisition. 4. 5. 6. P Ltd paid $10,000 for consulting and brokerage services in relation to acquisition. On the date of acquisition, S Ltd had two unrecorded items: 1) an unrecorded patent of $1,200 (fair value) with an impairment loss of $400 in year 2 and 2) an unrecorded liability with a fair value of $5,000 and S Ltd has not yet settled this liability by end of year 2. 7. The income tax rate was 30%. At the acquisition date, S Ltd reported $10,000 of share capital and $4,000 of retained earnings and its assets and liabilities were recorded as fair value except for the following: Land Plant (original cost $6,000) Inventory Goodwill Carrying amount $4,000 4,200 6,000 1,000 Fair value $10,000 6,800 5,000 Status Sold during year 2 for $10,500 Had a further 4-year life Sold 90% in year 1 and the remaining in year 2 P Ltd did not recognize goodwill recorded by S Ltd Calculate P Ltd's cost of investment in S Ltd on the acquisition date (Round the discount factor to 7 decimal places and final answer to the nearest dollar amount). Calculate the amount of goodwill involved at the acquisition date. Prepare consolidation worksheet entries at the acquisition date. Prepare consolidation worksheet entries at the end of year 2. Prepare the consolidation worksheet for and at the end of year 2. Land Plant Accumulated depreciation Deferred tax asset Inventory Cash Investment in S Ltd Goodwill Total Assets $ 8,000 12,000 (4,000) 500 5,000 9,065 17,435 $ 48,000 $ 5,000 14,000 (4,000) 3,000 4,000 1,000 $ 23,000 P Ltd's share price remained above $2 per share within the guarantee period. There was no impairment loss on goodwill since acquisition. Financial statements of the two firms for and at end of year 2 are as follows. Sales revenue Cost of sales Gross profit Gain on sale of land Depreciation (amortization) expense Other expenses Income tax expense Profit for the year Retained earnings (year 2 opening) Dividend Retained earnings (year 2 ending) Share capital ($1 par value for both firms) Contingent liability Deferred tax liability Other liabilities Total equity and liabilities P Ltd $30,000 (18,000) 12,000 (1,000) (2,000) (1,800) 7,200 12,800 20,000 20,000 25,000 1,000 500 1,500 $ 48,000 S Ltd $8,000 (5,500) 2,500 6,500 (500) (1,000) (1,200) 6,300 6,000 12,300 (500) 11,800 10,000 1,200 $ 23,000 At the beginning of year 1, P Ltd acquired all the assets and liabilities of S Ltd on a cumulative dividend basis when S Ltd recorded a dividend payable of $2,000. Details of the consideration transferred are as follows. 1. P Ltd paid $15,000 cash to S Ltd by two instalments: $10,000 at the beginning of year 1 and the remaining two years later. Suppose the bank interest rate was 5%. 2. P Ltd issued 4,000 shares to S Ltd when its share price was $2 per share on the acquisition date. The cost of issuing these shares amounted to $5,000. 3. Due to doubts as to whether its share price could remain at or above the $2 level for three months, P Ltd agreed to compensate shareholders of S Ltd for the value of any decrease in the share price below $2. P Ltd believed that there was a 40% probability that its share price would fall to $1.60. P Ltd provided a self-generated intengible to S Ltd worth $900 on the date of acquisition. 4. 5. 6. P Ltd paid $10,000 for consulting and brokerage services in relation to acquisition. On the date of acquisition, S Ltd had two unrecorded items: 1) an unrecorded patent of $1,200 (fair value) with an impairment loss of $400 in year 2 and 2) an unrecorded liability with a fair value of $5,000 and S Ltd has not yet settled this liability by end of year 2. 7. The income tax rate was 30%. At the acquisition date, S Ltd reported $10,000 of share capital and $4,000 of retained earnings and its assets and liabilities were recorded as fair value except for the following: Land Plant (original cost $6,000) Inventory Goodwill Carrying amount $4,000 4,200 6,000 1,000 Fair value $10,000 6,800 5,000 Status Sold during year 2 for $10,500 Had a further 4-year life Sold 90% in year 1 and the remaining in year 2 P Ltd did not recognize goodwill recorded by S Ltd
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Solution PLads cost of investment in SLad on the acquisition date PLads cost of investment in SLad on the acquisition date can be calculated as follow... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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