Question 2 (11 marks) On 1 January 2022, A Co purchased 90% of the equity of B Co from B's existing owners. The following transactions arose on or just prior to the acquisition date. Transaction costs are paid in cash. Note (1) 1,200,000 $170,000 $6,000 $4,000 Number of A's shares issued to B's existing owners Immediate cash payment Due diligence fees paid to consultants Cost of issuing shares Equipment transferred in settlement by A: Net book value of equipment Fair value of equipment Contingent payment by sellers to A $25,000 $30,000 $500,000 Note (2) Notes: (1) The number of A's shares before the new issue is 1,800,000. At the date of exchange of shares, fair value of the equity of A is $3,000,000, which includes the effects of the acquisition of B. (2) Under the agreement, the sellers have an obligation to pay an amount of $500,000 if the profit of B drops below $900,000 per year in 2022 and 2023. The probability of payment is estimated at 40%. (3) A's effective interest rate is 2% per annum. Required: Prepare the journal entries in A's books to record (a) consideration transferred, (b) acquisition related costs, and (c) other transactions entered into on 1 January 2022. Unamortized discount or premium, where applicable, should be shown separately. Question 2 (11 marks) On 1 January 2022, A Co purchased 90% of the equity of B Co from B's existing owners. The following transactions arose on or just prior to the acquisition date. Transaction costs are paid in cash. Note (1) 1,200,000 $170,000 $6,000 $4,000 Number of A's shares issued to B's existing owners Immediate cash payment Due diligence fees paid to consultants Cost of issuing shares Equipment transferred in settlement by A: Net book value of equipment Fair value of equipment Contingent payment by sellers to A $25,000 $30,000 $500,000 Note (2) Notes: (1) The number of A's shares before the new issue is 1,800,000. At the date of exchange of shares, fair value of the equity of A is $3,000,000, which includes the effects of the acquisition of B. (2) Under the agreement, the sellers have an obligation to pay an amount of $500,000 if the profit of B drops below $900,000 per year in 2022 and 2023. The probability of payment is estimated at 40%. (3) A's effective interest rate is 2% per annum. Required: Prepare the journal entries in A's books to record (a) consideration transferred, (b) acquisition related costs, and (c) other transactions entered into on 1 January 2022. Unamortized discount or premium, where applicable, should be shown separately
