On 1 January 2019 Big Ltd acquired all the assets and liabilities of Small Ltd instead of Small Ltd’s issued shares.

Details of the consideration paid:

• Cash of $400,000, half to be paid on 1 January 2019, with the balance due on

1 January 2020. The incremental borrowing rate for Big Ltd is 10%

• 100,000 shares in Big Ltd were issued. The share price on 1 January 2019 was $1.50 per share. This price was a six-month high. The cost of issuing the shares was $1,000.

• Owing to the doubts about whether the share price would remain at $1.50, Big Ltd agreed to pay cash equal to the value of any decrease in the share price below $1.50. This guarantee was valid for 3 months (to 31 March 2019). Big Ltd believed that there was a 75% chance that the share price would remain at or above $1.50 until 31 March 2019 and a 25% chance that it would fall to $1.40.

• Supply of a patent to Small Ltd. The fair value of the patent is $60,000. As the patent was internally generated by Big Ltd, it has not been recognized in Big Ltd’s books.

• Legal fees and associated costs with the acquisition totaled $5,000. Further, Small Ltd’s assets and liabilities acquired by Big Ltd are as follows:

Carrying Amount Fair Value

Plant and equipment $360 000 $367 000

Land 260 000 257 000

Inventory 24 000 30 000

Accounts receivable 18 000 16 000

Accounts payable (35 000) (35 000)

Bank overdraft (55 000) (55 000)

Besides, Small Ltd had an unrecorded contingent liability of $10 000 at that time. It was an existing obligation that failed the probable occurrence test.

Required:

As Big Ltd’s company accountant, you are asked to:

(1) Provide a calculation to find out Big Ltd’s total cost of acquisition and the associated goodwill or a gain on bargain purchase;

(2) Prepare all the necessary journal entries to record Big Ltd’s purchase of Small Ltd’s assets and liabilities.

Answer rating: 100% (QA)

Consideration Transferred Journal Entries PV of Cash payment 10 Instal... View the full answer