Pine Ltd. is a multinational company with operations involving the resale of technological products. Many of their

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Question:

Pine Ltd. is a multinational company with operations involving the resale of technological products. Many of their products are acquired in locations where labor costs are cheaper. Island Ltd. is a local business with a range of local suppliers. The location and the loyalty of their suppliers attracted the attention of the directors of Pine Ltd. In January 2022, Island Ltd. disclosed that its lack of cash flow had impacted its operations. Pine Ltd. decided that Island Ltd. would be a good acquisition. During a meeting, the CEO of Pine Ltd. stated ‘they [Island Ltd.] have management issues, which we don’t. It is an easy fix for us’. In the same meeting, the CEO made a statement that the acquisition was to help Pine Ltd.’s results ‘look better. The accounting department of Pine Ltd. discussed two major possibilities with respect to the consideration to be transferred. Option one involved Pine Ltd. paying $160,000 to Island Ltd, which would resolve all cash flow matters. The second option would be to transfer $250,000 cash to Island Ltd. On 1 July 2022, Pine Ltd. acquired all the share capital of Island Ltd. At that date, Island Ltd.’s equity consisted of the following:

Share Capital 100,000
General Reserve 20,000
Retained Earnings 30,000

On the date of acquisition, all the assets and liabilities of Island Ltd. were at fair value, except that land
was recorded at a cost of $100,000 but had a fair value of $120,000.

Consider both options 1 and 2:

1: Purchasing Island Ltd for a cash transfer of $160,000
2: Purchasing Island Ltd for a cash transfer of $250,000.

Required
Critically evaluate both scenarios considering the impact of each on the consolidated financial statements. In your evaluation, consider whether goodwill or a gain on purchase is generated, the impact on consolidated financial statements, and the ethical impact on users (financial and non-financial) inherent in each scenario. As a critical thinker, you are encouraged to provide your opinion on which option would be better and whether the purchase is appropriate.