Question
Salad Ltd acquired all the net assets of an existing business, Lettuce Ltd on 1 July 2020. The statements of financial position of the two companies immediately prior to the acquisition were as follows:
| Salad Ltd | Lettuce Ltd | ||
| Cash | $4,200 | $2,000 | |
| Accounts receivable | 30,000 | 16,500 | |
| Freehold land | 265,000 | 100,000 | |
| Building (net) | 35,000 | 28,000 | |
| Cultivation equipment (net) | 69,000 | 46,000 | |
| Irrigation equipment | 18,000 | 21,000 | |
| Delivery trucks | 46,000 | 36,000 | |
| Motor vehicles | 30,000 | 32,000 | |
| 497,200 | 281,500 | ||
| Accounts payable | 29,000 | 24,500 | |
| Loan – Bank of NSW | 155,000 | 79,000 | |
| Loan – Bernard Bros | 35,000 | 34,000 | |
| Loan – Golds Corp. | 72,000 | 52,500 | |
| Share capital | 110,000 shares | 110,000 | – |
| 60,000 shares | – | 60,000 | |
| Reserves | 28,500 | – | |
| Retained earnings | 67,700 | 31,500 | |
| 497,200 | 281,500 |
All of the assets of Lettuce Ltd are recorded at fair value, with the exception of:
| Fair value | |
| Freehold land* | 120,000 |
| Buildings | 40,000 |
| Cultivation equipment | 40,000 |
| Motor vehicle | 34,000 |
*Fair value excluding Lettuce’s vacant land.
The terms of the acquisition are as follows:
- Salad Ltd is to acquire all of the assets, except cash, delivery trucks and motor vehicles of Lettuce Ltd and will assume all of the liabilities except accounts payable.
- Salad Ltd is to give the share-holders of Lettuce Ltd a block of vacant freehold land, two delivery vehicles and sufficient additional cash to enable the company to pay of the accounts payable and then liquidation costs of $1,600.
- On the liquidation of Lettuce Ltd, the former directors are to receive the land, motor vehicles and the delivery trucks. The land and vehicles had the following values at 1 July 2020:
| Carrying amount | Fair Value | |
| Freehold Land | $50,000 | $120,000 |
| Delivery Trucks | 30,000 | 27,000 |
Required:
- Prepare the acquisition analysis in relation to the acquisition.
- Prepare the journal entries in Salad Ltd to record the business combination.
- Prepare the statement of financial position of Salad Ltd immediately subsequent to the acquisition.
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