Question
On 9 March 2023, Prawn Ltd acquired all shares of Shrimp Ltd by issuing one million ordinary shares (market value $2) and paid $330,000 cash
On 9 March 2023, Prawn Ltd acquired all shares of Shrimp Ltd by issuing one million ordinary shares (market value $2) and paid $330,000 cash immediately to the former shareholders of Shrimp Ltd and will also pay additional cash of $260,000 two years after acquisition.
Prawn Ltd also agreed to assume a liability of $150,000 incurred by Shrimp Ltd. In the purchase agreement, if Shrimp Ltds profits exceed $2,000,000 for each of the three years after the acquisition, an additional payment of $600,000 is to be made to the former shareholders of Shrimp Ltd. Shrimp Ltd has historically made the profit between $3,000,000 and $5,000,000.
The discount rate used by Prawn Ltd is 7%.
Besides, Prawn Ltd paid the following expenses in relation to the acquisition:
Legal consultancy fee for acquisition: $72,000
Fee for valuation of net assets of Shrimp Ltd: $ 9,000
Broker fee for issuing ordinary shares by Prawn Ltd: $6,000
Required:
(a) Based on the IFRS 3, compute the fair value of total amount of consideration on
the acquisition date. (20 marks)
(Note: Please show each part of the total consideration separately.)
(b) Prepare journal entry for the above mentioned acquisition related expenses. (5 marks)
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