On 1 Jan 2018, A Ltd acquired all the outstanding shares of B Ltd when the...

 

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On 1 Jan 2018, A Ltd acquired all the outstanding shares of B Ltd when the equity of B Ltd consisted of share capital (10,000 shares) of $10,000 and retained earnings of $5,000. Details of the acquisition are as follows. A Ltd paid $10,000 cash by two instalments: $6,000 on 1 Jan 2018 and the remaining on 1 Jan 2020. The incremental borrowing rate is 6%. 1. 2. A Ltd issued 5,000 shares of its own in exchange for all shares in B Ltd when the market price was $2 per share on the issuing date. 3. Due to doubts as to whether the share price of A Ltd could remain at or above the $2 level for 3 months, A Ltd agreed to compensate B Ltd the value of any decrease in the share price below $2. At the time of acquisition, A Ltd estimated a 30% chance that its share price would fall to $1.80 by 31 Mar 2018. A Ltd supplied to B Ltd a self-developed patent worth $500. On the date of acquisition, B Ltd had an unrecorded liability arising from a lawsuit with the expected loss of $10,000. However, the lawyer estimated that there was a 40% chance of losing the case. 5. 4. 4. On the date of acquisition, B Ltd had an unrecorded patent of $3,000 (fair value). A Ltd paid $10,000 share issuance costs and $8,000 consulting and brokerage fees in relation to acquisition. 6. At the acquisition date, B Ltd's assets and liabilities were recorded as fair value except for the following: Carrying amount $ 4,000 Fair value Land 6,800 Plant (original cost $6,000) 5,500 8,500 Inventory 5,000 6,000 Goodwill 1,000 The land was sold in May 2019 for $7,500. The plant had a further 5-year life. Eighty percent of the undervalued inventory were sold in 2018 and the remaining amount was sold in 2019. Tax rate is 30%. Additional information: A Ltd's share price remained above $2 per share on 31 Mar 2018; B Ltd has not settled the contingent liability by 31 Dec 2019; and no amortization was charged on the unrecorded patent and no impairment loss on goodwill since acquisition. Financial statements of the two firms at 31 Dec 2019 are as Required 1. Calculate A Ltd's cost of investment in B Ltd on the acquisition date. (4 marks) 2. Calculate the amount of goodwill involved on the acquisition date. (6 marks) 3. Prepare consolidation worksheet entries at 1 Jan 2018. (22 marks) On 1 Jan 2018, A Ltd acquired all the outstanding shares of B Ltd when the equity of B Ltd consisted of share capital (10,000 shares) of $10,000 and retained earnings of $5,000. Details of the acquisition are as follows. A Ltd paid $10,000 cash by two instalments: $6,000 on 1 Jan 2018 and the remaining on 1 Jan 2020. The incremental borrowing rate is 6%. 1. 2. A Ltd issued 5,000 shares of its own in exchange for all shares in B Ltd when the market price was $2 per share on the issuing date. 3. Due to doubts as to whether the share price of A Ltd could remain at or above the $2 level for 3 months, A Ltd agreed to compensate B Ltd the value of any decrease in the share price below $2. At the time of acquisition, A Ltd estimated a 30% chance that its share price would fall to $1.80 by 31 Mar 2018. A Ltd supplied to B Ltd a self-developed patent worth $500. On the date of acquisition, B Ltd had an unrecorded liability arising from a lawsuit with the expected loss of $10,000. However, the lawyer estimated that there was a 40% chance of losing the case. 5. 4. 4. On the date of acquisition, B Ltd had an unrecorded patent of $3,000 (fair value). A Ltd paid $10,000 share issuance costs and $8,000 consulting and brokerage fees in relation to acquisition. 6. At the acquisition date, B Ltd's assets and liabilities were recorded as fair value except for the following: Carrying amount $ 4,000 Fair value Land 6,800 Plant (original cost $6,000) 5,500 8,500 Inventory 5,000 6,000 Goodwill 1,000 The land was sold in May 2019 for $7,500. The plant had a further 5-year life. Eighty percent of the undervalued inventory were sold in 2018 and the remaining amount was sold in 2019. Tax rate is 30%. Additional information: A Ltd's share price remained above $2 per share on 31 Mar 2018; B Ltd has not settled the contingent liability by 31 Dec 2019; and no amortization was charged on the unrecorded patent and no impairment loss on goodwill since acquisition. Financial statements of the two firms at 31 Dec 2019 are as Required 1. Calculate A Ltd's cost of investment in B Ltd on the acquisition date. (4 marks) 2. Calculate the amount of goodwill involved on the acquisition date. (6 marks) 3. Prepare consolidation worksheet entries at 1 Jan 2018. (22 marks)