On 1 July 2020, Tall Ltd acquired all of the assets and liabilities of Blacks Ltd. In exchange for these assets and liabilities, Tall Ltd issued 100 000 shares that at date of issue had a fair value of $6.30 per share. Costs of issuing these shares amounted to $1000. Legal costs associated with the acquisition of Blacks Ltd amounted to $4200.

The asset and liabilities of Blacks Ltd at 1 July 2020 were as follows:

Carrying amountFair value

Assets

Cash$1 000$1 000

Accounts receivable10 00010 000

Inventory64 00068 000

Equipment 320 000232 000

Accumulated depreciation - equipment(96 000)

Patents240 000280 000

Liabilities

Accounts payable(16 000)(16 000)

Debentures(64 000)(64 000)

The accountant for Tall Ltd, Mr Spencer, knows that AASB 3 has to be applied in accounting for business combinations. However, he is confused as to how to account for the goodwill, what recognition criteria is applied to assets and liabilities acquired in the business combination, and how the varying dates such as the date of exchange and acquisition date will affect the accounting for the business combination.

Provide Mr Spencer with advice on the issues that are confusing him.

Required

1.Explain how to account for goodwill.(3 marks)

2.Discuss the importance of identifying the acquisition date (3 marks)

3.What recognition criteria is applied to assets and liabilities acquired in the business combination. Explain. (4 marks)

4.Prepare the acquisition analysis at 1 July 2020 for the acquisition of Blacks Ltd by Tall Ltd. (5 marks)

5.Prepare the journal entries in the records of Tall Ltd at 1 July 2020.(10 marks)