Silver Ltd acquired all of the assets and liabilities of Pitt Ltd on 1 July 2019. The accountant, Ms Ball, has shown the Board of Directors of Silver Ltd the financial information regarding the acquisition. Ms Ball informed the board about the recognition of goodwill in the books of Silver as the residual value of business combination. The directors are not sure whether they want to record goodwill on Silver Ltds statement of financial position. Some directors are not sure what goodwill is, or why the company records it. Other directors even query whether goodwill is an asset, with some being concerned with future effects on the statement of profit or loss and other comprehensive income. Ms Ball has asked for your advice.

In exchange for these assets and liabilities, Pitt Ltd issued 100 000 shares that at date of issue had a fair value of $5.50 per share. Costs of issuing these shares amounted to $5000. Legal costs associated with the acquisition of Pitt Ltd amounted to $2700.

The asset and liabilities of Pitt Ltd at 1 July 2019 were as follows:

Carrying amount Fair value

Assets

Cash $2 000 $2 000

Accounts receivable 10 000 10 000

Inventory 64 000 68 000

Equipment 320 000 232 000

Accumulated depreciation equipment (96 000)

Patents 240 000 280 000

Liabilities

Accounts payable (16 000) (16 000)

Debentures (64 000) (64 000)

Required

1. Explain the nature of goodwill and how to account for it. (5 marks)
2. Prepare the acquisition analysis at 1 July 2019 for the acquisition of Pitt Ltd by Silver Ltd. (7 marks)
3. Prepare the journal entries in the records of Silver Ltd at 1 July 2019. (13 marks)