Acquisition Issues 2010

ACCT 2 5 4 2
5 Class Test for 2010

th
QUESTION ONE
What is the definition of control that is used to identify the corporate group?
QUESTION TWO
On 1 July 20X6 A Ltd acquired all the ordinary voting shares of B Ltd in exchange for cash
consideration of $550,000. At the acquisition date the balance sheets of A Ltd and B Ltd and fair
values of B Ltds assets and liabilities are as follows:
A Ltd
Equity
Share capital
Retained profits
Liabilities
Provisions
Accounts payable
Tax liabilities
Total Equity and Liabilities
Assets
Cash
Inventory
Plant at cost
Accumulated depreciation
Land at cost
Investment in B Ltd
Total Assets
B Ltd
Carrying
Amount
$
Carrying
Amount
$
Fair Value
550,000
350,000
300,000
140,000
30,000
27,000
10,000
967,000
60,000
34,000
6,000
540,000
60,000
34,000
6,000
15,000
42,000
620,000
(380,000)
120,000
550,000
967,000
5,000
75,000
480,000
(170,000)
150,000
540,000
5,000
95,000
360,000
180,000
Additional information
The company income tax rate is 30%.
REQUIRED
(A) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.
(B) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the
acquisition date of 1 July 20X6.
QUESTION ONE SOLUTION (10 marks)

Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. (2 marks)
QUESTION TWO SOLUTION

PART (A)
Acquisition analysis
$
Cost of business combination to A Ltd
Book net assets (equity) of B Ltd
Share capital
Retained profits 1/7/X6
300,000
140,000
Fair value adjustments:

Inventory (20,000 x 0.7)
Plant (50,000 x 0.7)
Land (30,000 x 0.7)
14,000
35,000
21,000
Identifiable net assets acquired at fair value

Difference Purchased Goodwill
$
550,000
1/2
440,000
1/2
70,000
1/2
1/2
1/2
510,000
40,000
1/2
PART (B)
Consolidation Journal Entries 1 July 20X6
(1)
(2)
Dr. Inventory
Cr. Deferred tax liability
Cr. Business combination valuation reserve
$
20,000
Dr. Land
30,000
Dr. Accumulated depreciation

Cr. Plant at cost
170,000
(4) Dr. Goodwill

40,000
(5)
300,000
140,000
110,000
(3)
Dr. Share capital

Dr. Retained profits 1/7/X6
Dr. Business combination valuation reserve
Cr. Investment in B Ltd
$
6,000
14,000
9,000
21,000
120,000
15,000
35,000
40,000
1
550,000
ACCT 2 5 4 2
2
5th Class Test for 2010

QUESTION ONE
What factors would usually indicate whether one company has control of another?
QUESTION TWO
A Ltd
Equity
Share capital
Retained profits
Liabilities
Provisions
Accounts payable
Tax liabilities
Assets
Cash
Inventory
Plant at cost
Land at cost
Investment in B Ltd
Total Assets
B Ltd
Carrying
Amount
$
Carrying
Amount
$
Fair Value
550,000
350,000
300,000
140,000
30,000
27,000
30,000
987,000
60,000
34,000
6,000
540,000
60,000
34,000
6,000
15,000
42,000
620,000
(380,000)
120,000
570,000
987,000
5,000
75,000
480,000
(170,000)
150,000
540,000
5,000
90,000
340,000
200,000
REQUIRED
(C) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.
(D) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the

Capacity to cast the majority of votes using the decision-making arms of the company, i.e. the
shareholders in general meeting and the board of directors in meeting (2 marks)

PART (A)
$
Share capital
300,000
140,000

Plant (30,000 x 0.7)
Land (50,000 x 0.7)
10,500
21,000
35,000

$
570,000
1/2
440,000
1/2
66,500
1/2
1/2
1/2
506,500
63,500
1/2
PART (B)
(1)
(2)
Dr. Inventory
$
15,000
Dr. Land
50,000

Cr. Plant at cost
170,000
(4) Dr. Goodwill

63,500
(5)
300,000
140,000
130,000
(3)
Dr. Share capital

$
4,500
10,500
15,000
35,000
140,000
9,000
21,000
63,500
1
570,000
4
ACCT 2 5 4 2
5 Class Test for 2010
th
QUESTION ONE
Is it possible to have control of a company with less than 50% ownership? Explain how.
QUESTION TWO
A Ltd
Equity
Share capital
Retained profits
Liabilities
Provisions
Accounts payable
Tax liabilities
Assets
Cash
Inventory
Plant at cost
Land at cost
Investment in B Ltd
Total Assets
B Ltd
Carrying
Amount
$
Carrying
Amount
$
Fair Value
550,000
350,000
300,000
140,000
30,000
27,000
20,000
977,000
60,000
34,000
6,000
540,000
60,000
34,000
6,000
15,000
42,000
620,000
(380,000)
120,000
560,000
977,000
5,000
75,000
480,000
(170,000)
150,000
540,000
5,000
105,000
350,000
170,000
REQUIRED
(E) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.
(F) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the

Yes this is described as effective control. It would occur where there is dispersed ownership and a
significant proportion of shareholders do not vote at meetings. (2 marks)

PART (A)
$
Share capital
300,000
140,000

Plant (40,000 x 0.7)
Land (20,000 x 0.7)
21,000
28,000
14,000

$
560,000
1/2
440,000
1/2
63,000
1/2
1/2
1/2
503,000
57,000
1/2
PART (B)
(1)
(2)
Dr. Inventory
$
30,000
Dr. Land
20,000

Cr. Plant at cost
170,000
(4) Dr. Goodwill

57,000
(5)
300,000
140,000
120,000
(3)
Dr. Share capital

$
9,000
21,000
6,000
14,000
130,000
12,000
28,000
57,000
1
560,000
ACCT 2 5 4 2
6
5th Class Test for 2010

QUESTION ONE
X Ltd holds 60% of the shares in Y Ltd. X Ltd is a passive investor and takes no part in the
management of Y Ltd. Does X Ltd have control of Y Ltd? Explain
QUESTION TWO
A Ltd
Equity
Share capital
Retained profits
Liabilities
Provisions
Accounts payable
Tax liabilities
Assets
Cash
Inventory
Plant at cost
Land at cost
Investment in B Ltd
Total Assets
B Ltd
Carrying
Amount
$
Carrying
Amount
$
Fair Value
550,000
350,000
300,000
140,000
30,000
27,000
40,000
997,000
60,000
34,000
6,000
540,000
60,000
34,000
6,000
15,000
42,000
620,000
(380,000)
120,000
580,000
997,000
5,000
75,000
480,000
(170,000)
150,000
540,000
5,000
90,000
370,000
190,000
REQUIRED
(G) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.
(H) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the
7

Yes a passive investment can yield control because the definition refers only to the power to govern
it does not require the active exercise of that power. (2 marks)

PART (A)
$
Share capital
300,000
140,000

Plant (60,000 x 0.7)
Land (40,000 x 0.7)
10,500
42,000
28,000

$
580,000
1/2
440,000
1/2
80,500
1/2
1/2
1/2
520,500
59,500
1/2
PART (B)
(1)
(2)
Dr. Inventory
$
15,000
Dr. Land
40,000

Cr. Plant at cost
170,000
(4) Dr. Goodwill

59,500
(5)
300,000
140,000
140,000
(3)
Dr. Share capital

$
4,500
10,500
12,000
28,000
110,000
18,000
42,000
59,500
1
580,000
8

Acquisition Issues 2010

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Acquisition Issues 2010

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ACCT 2 5 4 2

5 Class Test for 2010

The company income tax rate is 30%.

QUESTION ONE SOLUTION (10 marks)

QUESTION TWO SOLUTION

Fair value adjustments:

Identifiable net assets acquired at fair value

Dr. Accumulated depreciation

(4) Dr. Goodwill

Dr. Share capital

5th Class Test for 2010

The company income tax rate is 30%.

QUESTION ONE SOLUTION (10 marks)

QUESTION TWO SOLUTION

Fair value adjustments:

Identifiable net assets acquired at fair value

Dr. Accumulated depreciation

(4) Dr. Goodwill

Dr. Share capital

The company income tax rate is 30%.

QUESTION ONE SOLUTION (10 marks)

QUESTION TWO SOLUTION

Fair value adjustments:

Identifiable net assets acquired at fair value

Dr. Accumulated depreciation

(4) Dr. Goodwill

Dr. Share capital

5th Class Test for 2010

The company income tax rate is 30%.

QUESTION ONE SOLUTION (10 marks)

QUESTION TWO SOLUTION

Fair value adjustments:

Identifiable net assets acquired at fair value

Dr. Accumulated depreciation

(4) Dr. Goodwill

Dr. Share capital

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