Accounting and Financial reporting: Business Combinations

25.9 Accounting for a business combination by the acquirer LO6 Doctor Ltd was having difficulty in raising finance for expansion while Who Ltd was interested in achieving economies by marketing a wider range of products. They entered discussions on how they could mutually achieve added benefits to both companies. They prepared the following financial positions of the companies at 30 June 2020. Doctor Ltd Who Ltd Share capital 40000 shares 90000 shares Retained earnings s 40000 12000 52000 $ 90000 30000 120000 Liabilities: Debentures (secured by floating charge) Accounts payable 20000 42 000 62 000 2000 12000 114 000 132000 Total equity and liabilities Assets: Cash Accounts receivable Inventories (at cost) Land and buildings (at cost) Plant and machinery (at cost) Accumulated depreciation on plant and machinery s 12000 18000 43000 23000 52 000 34 000) 114000 $ 24000 20000 7 000 19000 41 000 (19000) $132000 Total assets It was agreed that it would be mutually advantageous for Doctor Ltd to specialise in manufac- turing, and for marketing, purchasing and promotion to be handled by Who Ltd. Accordingly Who Ltd sold part of its assets to Doctor Ltd on 1 July 2020, the identifiable assets acquired having the following fair values. Inventories Land and buildings Plant and machinery $22000 (cost $15 000) 34 000 (carrying amount $10000) $27000 (cost $38 000, accumulated depreciation $18000) The acquisition was satisfied by the issue of 40000 A' ordinary shares (fully paid) in Doctor Ltd Required 1. Assuming the assets acquired constitute a business, show the journal entries to record the above transactions in the records of Doctor Ltd: (a) if the fair value of the A' ordinary shares of Doctor Ltd was $2 per share (b) if the fair value of the 'A' ordinary shares of Doctor Ltd was $2.20 per share. 2. Show the statement of financial position of Doctor Ltd after the transactions, assuming the fair value of Doctor's Ltd's 'A' ordinary shares was $2.20 per share