Cotton Ltd had purchased all the assets and taken over all the liabilities of Towelling Ltd on 1st July 2022.

The purchase consideration included Cotton Ltd issuing to the Towelling Ltd shareholders 6 Cotton Ltd shares and giving them a cash payment of $2.70 for each one Towelling Ltd share held. The Cotton Ltd shares were deemed to have a fair value of $9.45 each. The costs of issuing the Cotton Ltd shares amounted to $810. The Towelling Ltd shareholders would also have a patent transferred to them. This patent was internally generated by Cotton Ltd with a carrying value of $540,000 and was deemed to have a fair value of $1,350,000.

At 30th June 2022 Towelling Ltd had noted in its financial statements a contingent liability due to a guarantee that the company had given for another companys loan. No value had been placed on the guarantee but the fair value at the date of acquisition was assessed at $54,000.

Prior to the acquisition of Towelling Ltd Cotton Ltd sought advice from lawyers and accountants and at the completion of the acquisition their fees amounted to $13,500.

Required

Complete the journal entries in the books of Cotton Ltd recording the acquisition of Towelling Ltd.

Fair value $270,000 1,080,000 $2,160,000 1,147,500 823,500 At the 1st July 2022 Towelling Ltd had the following financial position: Carrying amount Assets Current assets Cash $270,000 Accounts receivable 1.080.000 Total current assets $1.350.000 Non-current assets Plant and equipment $2,835,000 Accumulated depreciation (810,000) Fixtures and fittings 1,215,000 Accumulated depreciation (135,000) Motor vehicles 1,080,000 Accumulated depreciation (270,000) Land 1,485,000 Total non-current assets $5,400.000 Total assets $6.750,000 Liabilities Current liabilities Accounts payable $135,000 Total current liabilities $135.000 Non-current liabilities Long term loan $540,000 Total non-current liabilities $540.000 Total liabilities $675.000 Net assets $6.075.000 Equity Share capital - 135,000 ordinary shares $3,375,000 Retained earnings 2.700.000 Total equity $6.075.000 2,025,000 $135,000 $540,000