Question 1

Business Combination

Raftaar Data Ltd's major business is in the internet industry. It provides several data

bundles for different target groups, as well as having a very promising line on mobile

phone accessories.

Raftaar Data has been interested in the operations of Slow Data Ltd, a rival entity with

similar operations. Given its interest in the internet business and its desire to stay as one

of the leaders in this area, Raftaar Data Ltd began negotiations with Slow Data Ltd to

acquire its internet service division.

Negotiations began in July 2019. After months of discussion between the relevant parties

of both companies, an agreement was reached on 14th February 2020 for Raftaar Data to

acquire the internet service division. The agreement was ratified by the board of directors

on 1st March 2020. Th net assets were exchanged on this date.

The net assets of internet service division as of 1st March 2020, showing the carrying

amounts at that date and the fair values as estimated by Raftaar Data Ltd from

documentation supplied by Slow Data Ltd, were as shown below:

Carrying Amount Fair Value

$ $

1. Plant and equipment 170 000 177 000
2. Land 80 000 85 000
3. Motor vehicles 40 000 42 000
4. Inventory 34 000 38 000
5. Accounts receivable 28 000 26 000
6. Total assets 352 000 368 000
7. Accounts Payable 45 000 45 000
8. Bank overdraft 65 000 65 000
9. Total Liabilities 110 000 110 000
10. Net Assets 242 000 258 000

Details of the consideration Raftaar Data Ltd agreed to provide in exchange for the net assets of the division are described below:

100 000 shares in Raftaar Data Ltd - movements in the share price were as follows:

1 July 2019 $1.00

1 October 2019 1.20

1 January 2020 1.25

1 February 2020 1.40

14 February 2020 1.42

16 February 2020 1.55

1 March 2020 1.60

Because of doubts as to whether it could sustain a share price of at least $1.60, Raftaar Data Ltd agreed to supply cash to the value of any decrease in the share price below $1.60 for the 100 000 shares issues, this guarantee of the share price lasting until 31st July. Raftaar Data Ltd believed that there was an 80% chance that the share price would remain at $1.60 or higher and a 20% chance that it would fall to $1.58.

Cash of $60,000, two-thirds to be paid on the date of acquisition and one-third in one year's time.

Supply of a patent relating to the design of a data bundle. This has a fair value of $40 000 but has not been recognized in the records of Raftaar Data Ltd because it resulted from an internally generated research project.

Low Data Ltd was currently being sued for damages relating to a claim by an internet customer who had bought a data bundle from the company and claimed that the bundle was not working according to the promotion. Raftaar Data Ltd agreed to pay any resulting damages in relation to this litigation. The expected damages were $60,000. The company attorney, Ms. Mawtu, estimated that there was only a 30% chance of losing the litigation. Raftaar Data Ltd supplied the cash on the acquisition date as well as surrendering the patent. The shares were issued on 5th March, and the costs of issuing the shares amounted to $2,000. The 6 monthly incremental borrowing rate for Raftaar Data Ltd is 5%. Acquisition-related costs paid by Raftaar Data Ltd amounted to $7,000. On 31st July, the share price of Raftaar Data Ltd's shares was $1.62.

Required:

Prepare the acquisition analysis and journal entries in the records of Raftaar Data Ltd.