10.13Sweetlip Ltd and Warehou Ltd are two family-owned flax-producing companies in New Zealand. Sweetlip Ltd is owned by the Wood family and the Bradbury family owns Warehou Ltd. The Wood family has only one son and he is engaged to be married to the daughter of the Bradbury family. Because the son is currently managing Warehou Ltd, it is proposed that, after the wedding, he should manage both companies. As a result, it is agreed by the two families that Sweetlip Ltd should take over the net assets of Warehou Ltd.

The statement of financial position of Warehou Ltd immediately before the takeover is as follows:

Cash

Carrying amount: 20,000

FV: 20,000

Accounts Rec

CA: 140,000

FV: 125,000

Land

CA: 620k

FV: 840k

Building (net)

CA: 530,000

FV: 550,000

Farm Equip (net)

CA:360k

FV: 364k

Irrigation equip (net)

CA: 220,000

FV: 225,000

Vehicles (net)

CA: 160K

FV: 172K

Total Asset at CV: 2,050,000

ACCOUNTS PAYABLE

CV: 80k

FV: 80k

Loan - Bank:

CV: 480k

FV 480k

Share Capital

670,000

Retained Earnings

820,000

TOTAL L + E = 2,050,000

The takeover agreement specified the following details:

Sweetlip Ltd is to acquire all the assets of Warehou Ltd except for cash, and one of the vehicles (having a carrying amount of $45000 and a fair value of $48000), and assume all the liabilities except for the loan from the Trevally Bank. Warehou Ltd is then to go into liquidation. The vehicle is to be transferred to Mr and Mrs Bradbury.

Sweetlip Ltd is to supply sufficient cash to enable the debt to the Trevally Bank to be paid off and to cover the liquidation costs of $5500. It will also give $150000 to be distributed to Mr and Mrs Bradbury to help pay the costs of the wedding.

Sweetlip Ltd is also to give a piece of its own prime land to Warehou Ltd to be distributed to Mr and Mrs Bradbury, this eventually being available to be given to any offspring of the forthcoming marriage. The piece of land in question has a carrying amount of $80000 and a fair value of $220000.

Sweetlip Ltd is to issue 100000 shares, these having a fair value of $14 per share, to be distributed via Warehou Ltd to the soon to-be-married-daughter of Mr and Mrs Bradbury, who is currently a shareholder in Warehou Ltd.

The takeover proceeded as per the agreement, with Sweetlip Ltd incurring incidental acquisition costs of $25000 and $18000 share issue costs.

Required

Prepare the acquisition analysis and the journal entries to record the acquisition of Warehou Ltd in the records of Sweetlip Ltd.

SOLUTION FOUND ******* Consideration transferred

Shares:100 000 x $14 per share $1 400 000

Cash:$480 000 +$5 500 +$150 000 - $20 000615 500

Land:220 000

$2 235 500

MY QUERY ****** Then the consideration transferred in the solution includes a minus 20,0000. May I know what this is and why?