On 1 Jan 2022, A Ltd acquired all the outstanding shares of B Ltd when the...

 

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On 1 Jan 2022, A Ltd acquired all the outstanding shares of B Ltd when the equity of B Ltd consisted of share capital of $10,000 (10,000 shares) and retained earnings of $4,000. The acquisition was made on a cumulative dividend basis when B Ltd's dividend payable was $1,000. Details of the acquisition are as follows. 1. 2. 3. A Ltd paid $7,408 cash by two instalments: $2,000 on 1 Jan 2022 and the remaining on 1 Jan 2024. B Ltd's shareholders were to receive 1 share from A Ltd for every 4 shares they held, or alternatively, $2.86 per share in cash, payable in one year's time. Holders of 2,000 shares preferred to receive cash. A Ltd's shares were trading at $3 per share on the acquisition date. Due to doubts as to whether the share price of A Ltd could remain at or above the $3 level for 6 months, A Ltd agreed to compensate B Ltd the value of any decrease in the share price below $3. A Ltd estimated a 20% chance that its share price would fall to $2.75 before 1 July 2022. A Ltd supplied B Ltd a self-developed patent worth $4,000. A Ltd paid $20,000 share issuance costs and $10,000 consulting and brokerage fees in relation to acquisition. 4. 5. 6. B Ltd paid $2,500 in relation to the business combination. 7. The interest rate was 4%. The income tax rate was 30%. Both firms use calendar year as their accounting year. At the acquisition date, B Ltd's net assets were recorded at fair values except for the following items: Carrying amount Fair value Status after acquisition $ 4,000 Sold in 2023 for $12,000 8,500 6,000 Land Plant (original cost $10,000) Inventory Patent Contingent liability Sales Cost of sales Gross profit Gain on sale of land Litigation expense Depreciation/amortization expense Additional information: A Ltd's share price dropped to $2.95 per share on 30 June 2022. Goodwill has not impaired since acquisition. Financial statements of the two firms at 31 Dec 2023 are as follows. Income tax expense Profit for the year Retained earnings (1/1/2023) Dividend Retained earnings (31/12/2023) Share capital Contingent liability Deferred tax liability Dividend payble Other liabilities Total equity and liabilities Land Plant 14,000 10,500 4,500 2,500 5,000 Accumulated depreciation Patent Deferred tax asset 2-year useful life (straight-line depreciation) Sold 80% in 2022 and 20% in 2023 Impaired $500 in 2023 Settled for $6,000 in 2023 (Use "Litigation expense" a/c) A Ltd $50,000 28,000 22,000 4,000 2,000 16,000 21,000 37,000 2,000 35,000 100,000 2,000 1,000 3,000 5,000 146,000 80,000 22,500 (10,500) 4,000 1,500 B Ltd $12,000 6,500 5,500 8,000 6,000 2,000 1,000 4,500 7,500 12,000 12,000 10,000 800 2,200 25,000 11,000 (2,500) 1,000 Inventory Cash Investment in B Ltd Total Assets 10,000 16,900 21,600 $146,000 2. Calculate the amount of goodwill involved on the acquisition date. 3. Prepare worksheet entries at 1 Jan 2022. 4. Prepare worksheet entries at 31 Dec 2022. 5. Prepare worksheet entries at 31 Dec 2023. 6. Prepare consolidation worksheet at 31 Dec 2023. 6,500 9,000 $25,000 Required 1. Calculate A Ltd's cost of investment in B Ltd on the acquisition date. (Note: Round the discount factor to 6 decimal places and final answer to the nearest dollar amount.) On 1 Jan 2022, A Ltd acquired all the outstanding shares of B Ltd when the equity of B Ltd consisted of share capital of $10,000 (10,000 shares) and retained earnings of $4,000. The acquisition was made on a cumulative dividend basis when B Ltd's dividend payable was $1,000. Details of the acquisition are as follows. 1. 2. 3. A Ltd paid $7,408 cash by two instalments: $2,000 on 1 Jan 2022 and the remaining on 1 Jan 2024. B Ltd's shareholders were to receive 1 share from A Ltd for every 4 shares they held, or alternatively, $2.86 per share in cash, payable in one year's time. Holders of 2,000 shares preferred to receive cash. A Ltd's shares were trading at $3 per share on the acquisition date. Due to doubts as to whether the share price of A Ltd could remain at or above the $3 level for 6 months, A Ltd agreed to compensate B Ltd the value of any decrease in the share price below $3. A Ltd estimated a 20% chance that its share price would fall to $2.75 before 1 July 2022. A Ltd supplied B Ltd a self-developed patent worth $4,000. A Ltd paid $20,000 share issuance costs and $10,000 consulting and brokerage fees in relation to acquisition. 4. 5. 6. B Ltd paid $2,500 in relation to the business combination. 7. The interest rate was 4%. The income tax rate was 30%. Both firms use calendar year as their accounting year. At the acquisition date, B Ltd's net assets were recorded at fair values except for the following items: Carrying amount Fair value Status after acquisition $ 4,000 Sold in 2023 for $12,000 8,500 6,000 Land Plant (original cost $10,000) Inventory Patent Contingent liability Sales Cost of sales Gross profit Gain on sale of land Litigation expense Depreciation/amortization expense Additional information: A Ltd's share price dropped to $2.95 per share on 30 June 2022. Goodwill has not impaired since acquisition. Financial statements of the two firms at 31 Dec 2023 are as follows. Income tax expense Profit for the year Retained earnings (1/1/2023) Dividend Retained earnings (31/12/2023) Share capital Contingent liability Deferred tax liability Dividend payble Other liabilities Total equity and liabilities Land Plant 14,000 10,500 4,500 2,500 5,000 Accumulated depreciation Patent Deferred tax asset 2-year useful life (straight-line depreciation) Sold 80% in 2022 and 20% in 2023 Impaired $500 in 2023 Settled for $6,000 in 2023 (Use "Litigation expense" a/c) A Ltd $50,000 28,000 22,000 4,000 2,000 16,000 21,000 37,000 2,000 35,000 100,000 2,000 1,000 3,000 5,000 146,000 80,000 22,500 (10,500) 4,000 1,500 B Ltd $12,000 6,500 5,500 8,000 6,000 2,000 1,000 4,500 7,500 12,000 12,000 10,000 800 2,200 25,000 11,000 (2,500) 1,000 Inventory Cash Investment in B Ltd Total Assets 10,000 16,900 21,600 $146,000 2. Calculate the amount of goodwill involved on the acquisition date. 3. Prepare worksheet entries at 1 Jan 2022. 4. Prepare worksheet entries at 31 Dec 2022. 5. Prepare worksheet entries at 31 Dec 2023. 6. Prepare consolidation worksheet at 31 Dec 2023. 6,500 9,000 $25,000 Required 1. Calculate A Ltd's cost of investment in B Ltd on the acquisition date. (Note: Round the discount factor to 6 decimal places and final answer to the nearest dollar amount.)

Answer rating: 100% (QA)

1 Calculation of A Ltds cost of investment in B Ltd on the acquisition date Cost of shares issued to B Ltds shareholders Number of shares issued 10000 shares 4 2500 shares Cash payment per share 286 C... View the full answer