Topic 2 – Business Combinations

Flashy Ltd is involved in the manufacture of Ugg boots. The director wishes to sell the business to a long-standing competitor, Boots Ltd. The financial statements of Flashy Ltd at 1 July 2019 contained the following information:

Assets Liabilities
Current assets Liabilities
Cash 7,500 Accounts payable 18,900
Accounts receivable 11,000 Other payables 41,000
Inventories 16,500 Provisions 27,000
Total current assets 35,000 Loans 63,000
Total liabilities 149,900
Non-current assets Equity
Vehicles 32,000 Share capital: 50,000 shares 48,000
Accumulated depreciation -5,500 Retained earnings 47,800
Trucks 37,000 Total equity 95,800
Accumulated depreciation -6,300
Machinery 22,000
Accumulated depreciation -3,000
Buildings 49,000
Accumulated depreciation -4,500
Land 90,000
Total non-current assets 210,700
Total assets 245,700 Total liabilities  and equity 245,700


An agreement was made whereby Boots Ltd takes over Flashy Ltd. Boots Ltd will acquire all the assets and liabilities of Flashy Ltd, except for the cash, motor vehicles and accounts payable. In exchange, Boots Ltd will give the shareholders of Flashy Ltd a block of land valued at $86,000 and a motor vehicle valued at $21,400. The land is carried at a cost of $40,000 while the motor vehicle is carried at $22,000, comprising cost of $23,000 and accumulated depreciation of $1,000. Boots Ltd will also provide sufficient additional cash to enable Flashy Ltd to pay off the accounts payable and the liquidation expenses of $4,300.

Boots Ltd recognised the brand ‘Flashy’ that was not recognised in the records of Flashy Ltd as it was an internally developed brand. It was calculated that this brand had a fair value of $22,000. Boots Ltd also incurred legal and valuation costs of $2,000 in undertaking the business combination.

The assets and liabilities of Flashy Ltd are recorded at amounts equal to fair value except for the following:

Fair Value
Land 100,000
Buildings 56,000
Machinery 20,000
Trucks 30,000
Inventories 20,000



  1. Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill.
  2. Prepare the journal entries in the records of Boots Ltd to record its acquisition of Flashy Ltd on 1 July 2019.

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