Top Ltd is a renowned merchandising brand which has been in business for many years. Top Ltd's
Question:
Top Ltd is a renowned merchandising brand which has been in business for many years. Top Ltd's directors intend to expand the business to include manufacturing activities. On 1 January 2023, Top Ltd acquired all of the assets and liabilities from Vogue Ltd in Wagga Wagga, except for cash and income tax payable.
The statement of financial position of Vogue Ltd as at 1 January 2023 contained the following:
Assets: | $ |
Land | 800,000 |
Motor vehicles (at cost) | 500,000 |
Less: accumulated depreciation | (200,000) |
Plant (at cost) | 380,000 |
Less: accumulated depreciation | (120,000) |
Accounts receivable | 80,000 |
Inventory | 175,000 |
Cash | 32,000 |
| 1,647,000 |
Liabilities and Equity: |
|
Accounts payable | 70,000 |
Income tax payable | 18,000 |
Loans payable | 230,000 |
Share capital | 1,000,000 |
Retained earnings | 329,000 |
| 1,647,000 |
The assets of Vogue Ltd were all recorded at fair values except for the following:
Land had a fair value of $200,000 more than its carrying amount
Plant was considered to be worth $300,000, and
Total fair value of all motor vehicles was $20,000 more than their carrying amount
In exchange for the net assets, Top Ltd agreed to:
Pay Vogue Ltd $200,000 on 1 January 2023, and $200,000 on 31 December 2023.
Transfer a patent, which had a carrying amount of $150,000 in Top Ltd's financial statements, but is considered to have a fair value of $205,000 on 1 January 2023.
Issue 75,000 new shares in Top Ltd to Vogue Ltd. At the date of acquisition, Top Ltd's shares were trading on the Australian Securities Exchange at $18.75 per share.
The incremental borrowing rate for Top Ltd is 10%. Top Ltd incurred incidental costs of $10,000 in relation to the acquisition, and costs of issuing the shares in Top Ltd were $5,800.
Required:
Determine if the business combination results in goodwill or gain on bargain purchase.
International Financial Reporting A Practical Guide
ISBN: 978-1292200743
6th edition
Authors: Alan Melville