Advanced Financial Accounting

2B:

Question 2 (20 points) Duncan Ltd and Montgomery Ltd are two companies that are operating in the agri- food industry in Tasmania. Duncan Ltd operates several businesses (e.g. cheese production, fresh organic chicken production), whilst Montgomery Ltd predominantly operates a beef cattle feedlot. After considerable negotiations it was agreed on 1 July 2020 that Duncan Ltd would purchase the entire business of Montgomery Ltd. The balance sheet of Montgomery Ltd immediately prior to the sale of the business was: Fair value Cash at bank Accounts receivable Land Buildings (net) Farm equipment (net) Irrigation equipment (net) Vehicles (net) Carrying amount $ 20,000 140,000 620,000 530,000 360,000 220,000 160 000 2,050,000 $ 20,000 125,000 840,000 550,000 364,000 225,000 172,000 80,000 480,000 Accounts payable Loan Share capital Retained earnings 80,000 480,000 670,000 820,000 2,050,000 The terms of the agreement state: i. Duncan Ltd is to provide cash of $480 000 on 1 July 2020 plus an additional $150 000 cash on 1 July 2022. Duncan Ltd's incremental borrowing rate is 10% and the present value of $1.00 at 10% for 2 years is 0.8264. ii. Duncan Ltd is to provide a piece of its prime coastal land to Montgomery Ltd. The piece of land in question has a carrying amount of $80 000 and a fair value of $220 000. iii. Duncan Ltd is to issue 100 000 shares to Montgomery Ltd, these having a fair value of $14.00. The directors of Montgomery Ltd have insisted that a term of the sale agreement states that they be compensated in cash for any fall in the fair value of these shares at the end of the first year after the sale. The financial advisors of Duncan Ltd have advised that there is an 80% probability of a fall in its shares to $13.50. iv. Montgomery Ltd is currently being sued by a neighbouring land owner for damage done to his crops when cattle escaped from one of Montgomery Ltd's feedlots. Duncan Ltd's lawyers estimate that there is an 80% probability that damages of $50 000 will have to be paid. V.The purchase of the business proceeded as per the agreement with Duncan Ltd incurring incidental legal fees of $25 000 and share issue costs of $18 000. Required A - Using the template provided, prepare an acquisition analysis for the purchase of the business of Montgomery Ltd by Duncan Ltd. [ 10 marks] B - Using the template provided, prepare general journal entries on 1 July 2020 (without narrations) in the books of Duncan Ltd to record the business acquisition under AASB 3 Business Combinations. Please note, only entries on 1 July 2020 are required. Subsequent journal entries affecting the business combination in the future (i.e. 1 July 2021 and 1 July 2022) are NOT required. [ 10 marks] [Total 20 marks] Paragraph V B 1 U 2A: Net fair value of identifiable assets, liabilites and contingent liabilities acquired: $