1. On January 1, 2020, Smile Co, a company that adopts IFRS, acquired 100% of Mars Co. Smile Co issued 100,000 shares of its BD10 ordinary shares, with a market price of BD15 on the date the acquisition was announced, and BD25 on the date the acquisition was completed, for all of Mars Co ordinary shares. The fair value of Mars Co's assets and liabilities equalled their respective carrying amounts except for land, which had a fair value that exceeded its book value by BD200,00. The fair value of Mars Co's identifiable intangibles is BD100,000, which will be amortized over a useful life of eight years. For the year ended December 31, 2020, Mars Co reported net income of BD350,000 and paid cash dividends of BD150,000. The shareholders' equity section of each company's statement of financial position as at December 31, 2020 was:

Smile Co Ordinary shares 5,000,000 Share premium 1,000,000 Retained earnings 3,000,000 = BD9,000,000

Mars Co Ordinary shares 1,000,000 Share premium 400,000 Retained earnings 500,000 = BD1,900,000

2. On January 1, 2020 Green Co, a company that adopts IFRS, acquired a 40% interest in Yellow Co for BD300,000. At the date of acquisition, Yellow Co’s net assets had a carrying value of BD550,000 and a fair value of BD600,000. The difference between the carrying value and the fair value is attributable to equipment being depreciated over ten years. Green Co has been evidently represented on Yellow Co’s board of directors and have actively participated in the company’s policy-making process. During 2020, Yellow Co had a net income of BD90,000 and paid a BD40,000 dividend.

3. On December 31, 2019, Palm Co, a company that adopts IFRS, owned 54% of Rose Co, at which time Palm Co reported its investment at fair value through profit or loss owing to political instability in the country where Rose Co was located. On January 5, 2020, the management of Palm Co was satisfied that the political situation was stabilized and that the assets of Rose Co were no longer at risk of being transformed into public assets under the public ownership of a national government. Hence, Palm Co decided to prepare consolidated financial statements for the two companies for the year ended December 31, 2020.

4. Maze Co, a company that adopts IFRS, had outstanding 200,000 ordinary shares and 20,000 shares of preference shares convertible into five ordinary shares each. Net income for the year is BD200,000. Dividends declared during 2020 were BD40,000 on the preference shares and BD60,000 on the ordinary shares. Maze Co was hesitant to account for a number contingently issuable ordinary shares and contracts that may be settled in ordinary shares or cash

Required: 

Advise the companies on the above accounting issues, illustrating your advice, where appropriate, with relevant references, journal entries, financial extracts and numerical details. Note: Round to the nearest BD, if needed.

Answer rating: 100% (QA)

The 100000 Smile Co shares issued to Mars Co shareholders should be recorded at their fair value of ... View the full answer