Question 5

Solice Ltd is looking to expand its share of the accessories market and has negotiated to acquire the operations of Eclipse Ltd on 1 July 2021.

At 1 July 2021, all assets and liabilities of Eclipse Ltd are recorded at fair value as follows:

	$
Cash	18,000
Accounts receivable (net)	42,000
Inventory	80,000
Land and buildings (net)	265,000
Plant and equipment (net)	110,000
Accounts payable	60,000
Bank loan	95,000

Eclipse Ltd has also developed a brand Lunar Glasses and to date has incurred $36,000 building up the brand name. In line with AASB138 Intangible Assets, Eclipse Ltd has recorded these costs as expenses. On 1 July 2021, the brand name is valued at $45,000. It is also determined that the brand name has an indefinite useful life.

Eclipse Ltd has decided that it will go into liquidation after it pays off all of its creditors. Eclipse Ltd has additional outstanding amounts owing to creditors of $40,000 and liquidation costs of $4,000.

Details of the acquisition:

• Solice Ltd is to acquire all assets (except cash) and assume the bank loan of Eclipse Ltd.
• In exchange, Solice Ltd will transfer to Eclipse Ltd the following:
  • Shares in Solice Ltd. Solice Ltd will issue five (5) of its shares for every three (3) shares held in Eclipse Ltd. On 1 July 2021 there are 90,000 Eclipse Ltd shares held by shareholders. Solice Ltd shares are valued at $2 each on 1 July 2021.
  • Equipment with a fair value of $65,000 (recorded in Solice Ltd accounts at cost $65,000, accumulated depreciation $15,000).
  • Sufficient additional cash to enable Eclipse Ltd to pay all its outstanding creditors and liquidation costs.

Required:

a) Prepare an acquisition analysis for the business combination. (13 marks)

b) Discuss how Solice Ltd should initially, and subsequently, account for the brand name Lunar Glasses. Your answer must be based on the rules contained in AASB 3 Business Combinations, AASB138 Intangible Assets and AASB136 Impairment of Assets. (7 marks)