Question
Alice Ltd acquired all the assets, except cash , and assumed all the liabilities of Medicure Ltd on 1 July 2020. Alice Ltd agreed to
Alice Ltd acquired all the assets,except cash, and assumed all the liabilities of Medicure Ltd on 1 July 2020.
Alice Ltd agreed to provide the following consideration on 1 July 2020:
(1)Cash payment of $100,000, half of which is paid on the acquisition date, the remaining half of which is to be paid one year after the acquisition on 1 July 2021.
(2) Issue 20,000 shares in Alice Ltd to the owners of Medicure Ltd. Alice Ltd's shares were trading at $19.87 per share on 1 July 2020. The cost of the share issue was $7,948.
(3) In the event that Alice Ltd's share price falls below $15.00 per share by 1 August 2020, Alice Ltd would provide additional cash payment of $4.87 per share for the 20,000 issued shares. There is a 30% chance for the share price of Alice Ltd to fall below $15.00 by 1 August 2020.
(4) Alice also provides an existing patent to Medicure Ltd. The patent is not recognised in Alice Ltd's balance sheet but is estimated to have a fair value of $27,800 on the acquisition date.
Alice Ltd incurred $31,740 accounting and legal fees in relation to its acquisition of Medicure Ltd. Alice Ltd's marginal cost of capital is 12% per annum. The corporate tax rate is 30%.
On 1 July 2020, the financial position of Medicure Ltd was as follows:
Carrying amountFair value
Assets
Cash$15,000
Accounts receivable195,000105,000
Land135,000210,000
Equipment (net of depreciation)60,00045,000
Buildings (net of depreciation)135,000240,000
Vehicles (net of depreciation)120,000127,500
Other Investments90,00060,000
Other Non-Current Assets300,000270,000
Total assets$1,050,000
Equity
Share capital - 10,000 shares375,000
Retained earnings180,000
Total equity555,000
Liabilities
Accounts payable75,00075,000
Loans60,00060,000
Debentures360,000360,000
Total liabilities495,000
Total equity and liabilities$1,050,000
Through the due diligence process, it is discovered that Medicure Ltd has provided warranties to customers which, if claimed, would cost Medicure Ltd $100,000. Based on historical data, it was estimated that there was a 50% chance that the warranties would be claimed. In addition, Medicure Ltd had an internally developed trademark which is not recorded in its balance sheet but has a fair value of $16,500.
Required:
Part (A): Complete the acquisition analysis in relation to this business combination and calculate the goodwill or gain on bargain purchase (7 marks).
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