It has got 2 questions. it is a practice question...

Case 1: Accounting by the acquirer

The trial balance of Jackman Ltd at 1 January 2019 was as follows:

DebitCredit

Share capital

Preference - 15 000 fully paid shares 15000

Ordinary - 70 000 fully paid shares 70000

Retained earnings 43000

Equipment 84000

Accumulated depreciation - equipment 20000

Inventories 36000

Accounts receivable 33000

Investments 12000

Patents7000

Debentures 8000

Accounts payable16000

172000 172000

At this date, all the assets and liabilities of Jackman Ltd are sold to Hugh Ltd, with Jackman Ltd going

into voluntary liquidation. The terms of acquisition are:

(a) Hugh Ltd is to take over all the assets of Jackman Ltd, as well as the accounts payable of Jackman

Ltd.

(b) Costs of liquidation of $700 are to be paid by Jackman Ltd with funds supplied by Hugh Ltd.

(c) Preference shares in Jackman Ltd are to receive two fully paid shares in Hugh Ltd for every three

shares held, or alternatively, $0.80 per share in cash payable at the acquisition date.

(d) Ordinary shareholders of Jackman Ltd are to receive two fully paid ordinary shares in Hugh Ltd

for every share held or, alternatively, $2.50 in cash payable half at the acquisition date and half

in one year's time.

(e) Debenture holders of Jackman Ltd are to be paid in cash out of funds provided by Hugh Ltd. The

debentures have a fair value of $102 per $100 debenture.

(f) All shares issued by Hugh Ltd have a fair value of $1.20 per share.

(g) Costs of issuing and registering the shares issued by Hugh Ltd amount to $80 for the preference

shares and $200 for the ordinary shares.

(h) Legal and accounting costs associated with the acquisition of Jackman Ltd amount to $2000.

The two parties agree on the terms of the arrangement, and holders of 6 000 preference shares and

10 000 ordinary shares elect to receive cash.

Hugh Ltd assesses the fair values of the identifiable assets and liabilities of Jackman Ltd to be as

follows:

Equipment 72000

Inventories 40000

Accounts receivable 29000

Patents 8000

Investments 12000

Accounts payable 16000

Hugh Ltd has an incremental borrowing rate of 10%.

Required

(a) Prepare the acquisition analysis in relation to the above acquisition by Hugh Ltd.

(b) Prepare the journal entries in the records of Hugh Ltd at the date of acquisition.

(c) Prepare the journal entry for the payment of the deferred consideration in one year's time.

Case 2: Consolidation worksheet, previously held investment in subsidiary

On 1 August 2018, Eco Ltd acquired 10% of the shares in Fico Ltd for $8000. Eco Ltd used the fair

value method to measure this investment with movements in fair value being recognised in profit or

loss. At 1 July 2017, the fair value of this investment was $15 400. The original investment in Fico Ltd

was due to the fact that Fico Ltd was undertaking research into particular microbiological elements

that could influence the profitability of Eco Ltd. With the continuing success of this research, Eco Ltd

decided to acquire the remaining shares (cum div.) in Fico Ltd.

On 1 July 2017, Eco Ltd made an offer to buy the remaining shares in Fico Ltd for $151 000 cash. This offer was accepted by the shareholders of Fico Ltd. On 1 July 2017, immediately after the business

combination, the statement of financial position of Fico Ltd was as follows:

Eco ltd Fico Ltd

share capital 130,000 90,000

General reserve 56,500 12,000

Retained Earnings 93,500 36,000

total equity 280,000 138,000

Dividends payable 25,000 12,600

Other liabilities 75,000 25,000

total liabilities 100,000 37,600

TOTAL EQUITY AND LIABILITIES 380000 175,600

Cash 11,000 20,600

Receivables 25,500 20,000

Other assets 10,000 8,000

Shares in FICO LTD 153,800 -

Inventories 55,000 42,000

Plant and equipment 210,000 107,000

Accumulates depreciation (85000) (22,000)

TOTAL ASSETS 380,000 175,600

On analysing the financial statements of Fico Ltd, Eco Ltd determined that all the assets and

liabilities recorded by Fico Ltd were shown at amounts equal to their fair values except for:

CARRYING AMOUNT FAIR VALUE

plant and equipment(cost 46,000) 35,000 43,000

Inventories 42,000 46,000

The plant and equipment is expected to have a further 4-year life and is depreciated on a straightline basis. The inventory was all sold by 30 June 2018.

Fico Ltd had expensed all the outlays on research and development. Eco Ltd placed a fair value of

$12 000 on this asset. Fico Ltd also had reported a contingent liability at 30 June 2017 in relation to

claims by customers for damaged goods. Eco Ltd placed a fair value of $3000 on these claims. The

research and development is amortised evenly over a 10-year period. The claims by customers were

settled in May 2018 for $2800.

The company tax rate is 30%.

Required

(a) Prepare the consolidated financial statements of Eco Ltd at 1 July 2017, immediately after

the business combination.

(b) Prepare the consolidation worksheet entries at 30 June 2018.