Flannel Ltd and Fleece Ltd are two family-owned cotton producing companies in Australia. It is

proposed that Flannel Ltd take over the net assets of Fleece Ltd to realise synergies in both companys

operations.

The statement of financial position of Fleece Ltd immediately before the takeover is as follows:

Carrying Amount Fair Value

Cash $30,000 $30,000

Accounts Receivable 160,000 127,000

Land 720,000 843,000

Building (net) 540,000 555,000

Farm equipment (net) 350,000 365,000

Vehicles (net) 210,000 235,000

165,000 177,000

2,175,000

Accounts payable $85,000 $85,000

Loan - ZNA Bank 580,000 580,000

Share capital 670,000

Retained earnings 840,000

2,175,000

The takeover agreement specified the following details:

(a) Flannel Ltd is to acquire all of the assets of Fleece Ltd except for cash, and one of the vehicles

(which has a carrying amount of $45,000 and a fair value of $59,000), and assume all the liabilities

except for the loan from the ZNA Bank. The vehicle is to be transferred to the directors of Fleece Ltd.

(b) Flannel Ltd is to supply sufficient cash to enable the debt to the ZNA Bank to be paid off and to

cover the liquidation costs of $7,200. It will also give $125,000 to be distributed to the directors of

Fleece Ltd.

(c) Flannel Ltd is also to give a piece of its own prime land to the directors of Fleece Ltd which has a

carrying amount of $80,000 and a fair value of $230,000.

Charles Sturt University Subject Outline

ACC322 201630 SM I-13 February 2016-Version 1 Page 13 of 35

(d) Flannel Ltd is to issue 100,000 shares, these having a fair value of $13 per share, to be distributed

to the directors of Fleece Ltd.

(e) Once the above steps are complete, Fleece Ltd will go into Liquidation.

The takeover proceeded as per the agreement, with Flannel Ltd incurring incidental acquisition costs

of $32,000 and $22,000 share issue costs.

Required:

1. Prepare the acquisition analysis in relation to the acquisition. (5 marks)

2. Prepare the journal entries inFlannel Ltd to record the business combination. (10 marks)