Orange Ltd acquired an existing business, Lemon Ltd on 1 July 2021. The statements of financial position
Question:
Orange Ltd acquired an existing business, Lemon Ltd on 1 July 2021. The statements of financial position of the two companies immediately prior to the acquisition were as follows:
Orange Ltd | Lemon Ltd | ||
Cash | 5,200 | 3,000 | |
Accounts receivable | 31,000 | 15,500 | |
Land | 268,000 | 90,000 | |
Building (net) | 40,000 | 35,000 | |
Equipment (net) | 72,000 | 49,000 | |
Plant (net) | 22,000 | 25,000 | |
Motor vehicles | 35,000 | 39,000 | |
Delivery vehicles | 42,000 | 36,500 | |
Total assets | 515,200 | 293,000 | |
Accounts payable | 31,000 | 35,500 | |
Loan - Bank of QLD | 156,000 | 80,000 | |
Loan - Unsecured | 37,000 | 35,000 | |
Loan - Bank of TAS | 72,000 | 55,000 | |
Share capital | - 120,000 shares | 120,000 | - |
- 70,000 shares | - | 70,000 | |
Reserves | 32,000 | - | |
Retained earnings | 67,200 | 17,500 | |
Total liabilities and equity | 515,200 | 293,000 |
All of the assets and liabilities of Lemon Ltd are recorded at fair value, with the exception of:
Fair value | |
Land | 210,000 |
Buildings | 65,000 |
Equipment | 40,000 |
Motor vehicles | 34,000 |
The specific terms of the acquisition are as follows:
- Orange Ltd is to acquire all of the assets, except cash, delivery vehicles and motor vehicles of Lemon Ltd and will assume all of the liabilities except accounts payable.
- Orange Ltd incurred acquisition costs of $400 in relation to the acquisition.
Orange Ltd is to give the shareholders of Lemon Ltd a portion of land, two delivery vehicles, sufficient additional cash to enable the company to pay the accounts payable and liquidation costs of $1,600. The land and two delivery vehicles had the following values at 1 July 2021:
Carrying amount | Fair Value | |
Land | $50,000 | $150,000 |
Two delivery vehicles | 30,000 | 26,000 |
Required:
a. Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill.
b. Prepare the journal entries in the records of Orange Ltd to record its acquisition of Lemon Ltd at 1 July 2021.
c. Prepare the statement of financial position of Orange Ltd immediately subsequent to the acquisition.
International Financial Reporting A Practical Guide
ISBN: 978-1292200743
6th edition
Authors: Alan Melville