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On 30 June 2020 River Ltd acquired 70% shares in Tributary Ltd for $90,000. The statements of financial position of both companies at that date

  1. On 30 June 2020 River Ltd acquired 70% shares in Tributary Ltd for $90,000. The statements of financial position of both companies at that date (but prior to acquisition) were as follows:
  1. On 30 June 2020 River Ltd acquired 70% shares in Tributary Ltd for $90,000. The statements of financial position of both companies at that date (but prior to acquisition) were as follows:

River Ltd ($)

Tributary Ltd ($)

Cash

125,000

1,000

Accounts receivable

30,000

25,000

Inventories

50,000

18,000

Property, plant and equipment

275,000

155,500

Goodwill

20,000

0

Financial assets

60,000

22,500

560,000

222,000

Accounts payable

65,000

80,000

Loan payable

0

40,000

Share capital - $1 share

400,000

82,000

Retained earnings

95,000

20,000

560,000

222,000

The notes to Tributary Ltds financial statements reported a contingent liability relating to a loan guarantee. Although a present obligation existed, Tributary Ltd did not recognise a liability because of the difficulty of measuring the ultimate amount to be paid.

River Ltd assessed the fair values of the recorded identifiable assets of Tributary Ltd as:

Cash

$1,000

Accounts receivable

21,000

Inventories

16,000

Property, plant and equipment

180,000

Financial assets

$25,000

Tributary Ltd had also been undertaking research into new manufacturing equipment and had expensed a total of $15,000 research costs. River Ltd assessed that the fair value of the in-process research was $6,000. All liabilities were recorded at fair value and the contingent liability was assessed to have a fair value of $2,500. The tax rate is 28%.

Required:

Prepare the business combination valuation entries. (6 marks)

Prepare the pre-acquisition entry. (2 mark)

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