Question
Karlin Ltd acquired all the assets and assumed all the liabilities of Jim Ltd on 1 July 2022. In exchange, Karlin Ltd agreed to issue
Karlin Ltd acquired all the assets and assumed all the liabilities of Jim Ltd on 1 July 2022. In exchange, Karlin Ltd agreed to issue 3 Jim Ltd shares for every Jim Ltd share held and pay cash of $4.2 per share to the former shareholders of Jim Ltd for each share held in Jim Ltd. Karlin Ltd and Jim Ltd shares were assessed to have a fair value of $8.5 per share and $6.5 per share, respectively.
On 1 July 2022, the financial position of Jim Ltd was as follows:
| Carrying amount | Fair value | |
Assets | |||
Cash | 120,000 | 120,000 | |
Accounts receivable | 500,000 | 500,000 | |
Plant | 1,365,000 | 1,040,000 | |
Accumulated depreciation - plant | (390,000) | ||
Equipment | 485,000 | 452,500 | |
Accumulated depreciation -Equipment | (65,000) | ||
Land | 720,000 | 865,000 | |
Vehicles | 520,000 | 396,500 | |
Accumulated depreciation -vehicles | (130,000) | ||
Total assets | 3135000 | ||
Liabilities | |||
Accounts payable | 55,000 | 55,000 | |
Bank Loans | 260,000 | 260,000 | |
Total liabilities | 315,000 | ||
Equity | |||
Share capital - 100,000 shares | 1,625,000 | ||
Retained earnings | 1,300,000 | ||
Total equity | 2,925,000 | ||
Total liabilities and equity | 3,250,000 |
Additional information:
- The assets of Jim Ltd did not include a trademark that was valued by Karlin Ltd at $15,000.
- Jim Ltd had reported a contingent liability relating to a guarantee given by that company to another entity on 30 June 2022. Jim Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $50,000.
- Karlin Ltd incurred $15,000 in costs in relation to accounting and legal fees in relation to its acquisition of Jim Ltd.Costs of share issue were $2,000.
Required:
Prepare the journal entries in the records of Karlin Ltd in relation to its acquisition of Jim Ltd on 1 July 2022.
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