ACT4354 Assignment (2021 22) (Submission deadline March 2, 2022) At the beginning of year 1, P Ltd acquired S Ltd by issuing its own shares to shareholders of S Ltd who had an option of receiving either two shares from P Ltd for every one share held in S Ltd or $3 per share in cash, receivable half at the acquisition date and half in one years time S Ltd had 2,500 shares before business combination and 25 of its shareholders eleceted to receive cash and the remainder to receive shares P Ltds shares traded at $2 per share on the acquisition date Due to doubts as to whether its share price could remain at or above the $2 level for three months, P Ltd agreed to compensate shareholders of S Ltd the value of any decrease in the share price below $2 P Ltd believed that there was a probability of one third that its share price would fall to $1 80 in three months Other information is as follows S Ltd reported $10,000 of share capital and additional paid in capital and $7,000 of retained earnings as at the beginning of year 1 P Ltd acquired S Ltd on a cumulative dividend basis S Ltd recorded a dividend payable of $1,600 on the acquisition date In addition to shares issued, P Ltd paid $15,430 cash to S Ltd by two instalments $10,430 at the beginning of year 1 and the remaining two years later P Ltd supplied to S Ltd a self developed patent worth $1,304 on the date of acquisition On the date of acquisition, S Ltd had an unrecorded liability arising from a lawsuit with the expected loss of $10,000 However, the lawyer estimated that there was a 20 chance of losing the case On the date of acquisition, S Ltd had an unrecorded patent of $1,000 (fair value) P Ltd paid $15,000 for share issuance and $10,000 for consulting and brokerage services in relation to acquisition The bank interest rate was 5 and the income tax rate was 30 At the acquisition date, S Ltds assets and liabilities were recorded as fair value except for the following Carrying amount Fair value Land $ 4,000 7,000 Plant (original cost $6,000) 4,000 6,000 Inventory 6,000 5,000 S Ltd sold the land during year 2 for $6,800 The undervalued plant had a further 4 year life 90 of the overvalued inventory were sold in year 1 and the remaining amount was sold in year 2 P Ltds share price remained above $2 per share within the guarantee period S Ltd has not settled the contingent liability by end of year 2 no amortization was charged on the unrecorded patent and no impairment loss on goodwill since acquisition Financial statements of the two firms for and at end of year 2 are as follows P Ltd S Ltd Sales revenue $30,000 $8,000 Cost of sales (18,000) (5,500) Gross profit 12,000 2,500 Gain on sale of land 2,800 Depreciation expense (1,000) (500) Other expenses (3,000) (2,000) Income tax expense (800) (200)

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ACT4354 Assignment (2021-22) (Submission deadline: March 2, 2022) At the beginning of year 1, P Ltd acquired S Ltd by issuing its own shares to

ACT4354 Assignment (2021-22) (Submission deadline: March 2, 2022)

At the beginning of year 1, P Ltd acquired S Ltd by issuing its own shares to shareholders of S Ltd who had an option of receiving either two shares from P Ltd for every one share held in S Ltd or $3 per share in cash, receivable half at the acquisition date and half in one years time. S Ltd had 2,500 shares before business combination and 25% of its shareholders eleceted to receive cash and the remainder to receive shares. P Ltds shares traded at $2 per share on the acquisition date. Due to doubts as to whether its share price could remain at or above the $2 level for three months, P Ltd agreed to compensate shareholders of S Ltd the value of any decrease in the share price below $2. P Ltd believed that there was a probability of one-third that its share price would fall to $1.80 in three months. Other information is as follows.

S Ltd reported $10,000 of share capital and additional paid-in capital and $7,000 of retained earnings as at the beginning of year 1.
P Ltd acquired S Ltd on a cumulative dividend basis. S Ltd recorded a dividend payable of $1,600 on the acquisition date.
In addition to shares issued, P Ltd paid $15,430 cash to S Ltd by two instalments: $10,430 at the beginning of year 1 and the remaining two years later.
P Ltd supplied to S Ltd a self-developed patent worth $1,304 on the date of acquisition.
On the date of acquisition, S Ltd had an unrecorded liability arising from a lawsuit with the expected loss of $10,000. However, the lawyer estimated that there was a 20% chance of losing the case.
On the date of acquisition, S Ltd had an unrecorded patent of $1,000 (fair value).
P Ltd paid $15,000 for share issuance and $10,000 for consulting and brokerage services in relation to acquisition.
The bank interest rate was 5% and the income tax rate was 30%.

At the acquisition date, S Ltds assets and liabilities were recorded as fair value except for the following:

	Carrying amount	Fair value
Land	$ 4,000	7,000
Plant (original cost $6,000)	4,000	6,000
Inventory	6,000	5,000

S Ltd sold the land during year 2 for $6,800. The undervalued plant had a further 4-year life. 90% of the overvalued inventory were sold in year 1 and the remaining amount was sold in year 2.

P Ltds share price remained above $2 per share within the guarantee period; S Ltd has not settled the contingent liability by end of year 2; no amortization was charged on the unrecorded patent; and no impairment loss on goodwill since acquisition. Financial statements of the two firms for and at end of year 2 are as follows.

	P Ltd	S Ltd
Sales revenue	$30,000	$8,000
Cost of sales	(18,000)	(5,500)
Gross profit	12,000	2,500
Gain on sale of land	-	2,800
Depreciation expense	(1,000)	(500)
Other expenses	(3,000)	(2,000)
Income tax expense	(800)	(200)