Union Limited was incorporated with an authorized share capital of N250,000, divided into 600,000 ordinary shares of 25 kobo each and 100,000 N1 10% Preference shares to take over the existing businesses (including cash) of the Wife and Husband as at 31st December 2016.
The draft statement of the financial position of Wife Limited and Husband Limited as of 31st December 2016 showed the following:
Wife Husband Wife Husband Ltd Ltd Ltd Ltd
NN NN
Ordinary Share capital @N1 each Reserve
Trade Payables
Bank overdraft
Additional Information:
30,000 18,000 13,000 14,000
_____ 75,000
20,000 Freehold Property @ cost 6,500 Plant at cost
26,000 Depreciation on Plant Development Expense
28,000
32,000 (10,000)
12,000
25,000 (8,000) 10,000 7,500 2,000 4,000 52,500
- Inventories 15,000 Trade Receivables 10,000
_____ Bank _____ 52,500 75,000
(a) The purchase consideration for the business acquired is to be the amount which Union Ltd would have to invest at 15% per annum to yield the weighted average profit of the past three years.
(b) The Non-current Assets have a fair value as at 31st December, 2016 as follows:
2014
2015
2016
8,000 14,000 16,500
17,000 13,000 6,500
(c) The Non-current Assets have a fair value as of 31st December 2016 as follows:
Wife Ltd Husband Ltd
NN Freehold Property 35,000 18,000 Plant 17,500 22,000
(d) The development expenditure of N10,000 has been reviewed. The project, it relates to is technically viable but unless the new company is formed to acquire Husband Ltd and provide additional funds, there are doubts as to whether Husband Ltd is a going concern. However, subject to the takeover, it is felt that the carrying value shall remain at N10,000.
(e) Provisions are to be made as follows:
Wife Ltd Husband Ltd
Wife Ltd Husband Ltd
NN

For obsolete stock
For doubtful debts Contingent liability
5% of statements of the financial position value
3% of trade receivables 21/2 of trade receivables N6,000
(f) The purchase consideration is to be satisfied as follows:
- Preference shares are to be issued for the full value of the freehold property - 75% of the remaining purchase consideration is to be satisfied by the issue of ordinary shares in Union Ltd at a premium of 5 kobos per share.
- The remainder of the purchase consideration is to be satisfied by cash.
(g) Union Ltd is to issue sufficient ordinary shares at a premium of 5 kobos per share to establish a liquidity ratio of 1.
Required:
(i) Calculate the purchase consideration payable for Wife Ltd and Husband Ltd.
(ii) Prepare the opening statement of the financial position of Union Limited.