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 1 st 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

($) ($)

Plant and equipment 170000 177000

Land 80000 85000

Motor vehicles 40000 42000

Inventory 34000 38000

Accounts receivable 28000 26000

Total assets 352000 368000

Accounts Payable 45000 45000

Bank Overdraft 65000 65000

Total Liabilities 110000 110000

Net Assets 242000 258000

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.

Question 2: Consolidation: Controlled Entities

RamGopal Co is an investee company which has annual general meetings where decisions to direct the relevant activities are made. The next scheduled annual general meeting is in eight months. However, shareholders that individually or collectively hold at least 5 per cent of the voting rights can call a special meeting to change the existing policies over the relevant activities, but a requirement to give notice to the other shareholders means that such a meeting cannot be held for at least 30 days. Policies over the relevant activities can be changed only at special or scheduled annual general meetings.

Required

Discuss whether the following investor companies have the current ability to direct the relevant activities of RamGopal Co. Give reasons to support your answer.

a) KrisnGopal Co holds majority of the voting rights in RamGopal Co

b) ShyamGopal Co holds a substantive option to acquire majority of shares in RamGopal Cothat is exercisable in 25 days and is deeply out of money.

c)ShiuGopal Co is party to a forward contract to acquire majority of shares in RamGopal Co. The forward contract's settlement date is in 25 days.

d) MohanGopal Co is party to a forward contract to acquire majority of shares in RamGopal Co, with no other related rights over RamGopal Co. The forward contract's settlement date is in six months.