Question
Domino Ltd negotiated with Checkers Ltd to acquire the business of Checkers Ltd, after which Checkers Ltd would go into liquidation. The acquisition date was
Domino Ltd negotiated with Checkers Ltd to acquire the business of Checkers Ltd, after which Checkers Ltd would go into liquidation. The acquisition date was 1 March 2021. At that date, Checkers Ltd reported the following:
Assets | Carrying amounts 1 March 2021 $ | Fair Values 1 March 2021 $ |
Cash | 19 000 | 19 000 |
Accounts receivable (net) | 70 000 | 70 000 |
Inventories | 80 000 | 65 000 |
Land | 153 000 | 200 000 |
Plant | 260 000 | 180 000 |
Accumulated depreciation - plant | (60 000) |
|
Total assets | 522 000 |
|
Liabilities |
|
|
Accounts payable | 47 500 | 47 500 |
Provision for employee benefits | 20 500 | 22 500 |
Current tax liability | 17 000 | 17 000 |
Bank Loan | 70 000 | 70 000 |
Debentures (5%) | 50 000 | 50 000 |
Total liabilities | 205 000 |
|
Net assets | $317 000 |
|
Equity |
|
|
Share capital ($2 ordinary shares) | 240 000 |
|
Retained earnings | 77 000 |
|
Total equity | $317 000 |
|
Domino Ltd agreed to acquire all assets (except for cash) and assume all liabilities (except for the current tax liability and debentures) of Checkers Ltd.
In exchange, Domino Ltd would transfer the following to Checkers Ltd:
- A block of land valued at $160,000 on acquisition date (carrying amount on this date in Domino Ltd accounts $155,000).
- Issue three (3) Domino Ltd shares for every five (5) Checkers Ltd shares. Domino Ltd shares are valued at $2.80 on acquisition date.
- Sufficient additional cash to that already held by Checkers Ltd, so that Checkers Ltd can pay off remaining liabilities (debentures to be redeemed at 5%) and liquidation costs of $2,900.
Required:
a) Prepare an acquisition analysis for Domino Ltds acquisition of Checkers Ltd business on 1 March 2021. (10 marks)
b) Prepare the necessary journal entries in the accounts of Domino Ltd for the acquisition of Checkers Ltd on 1 March 2021. (5 marks)
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