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:
|Accounts receivable||11,000||Other payables||41,000|
|Total current assets||35,000||Loans||63,000|
|Vehicles||32,000||Share capital: 50,000 shares||48,000|
|Accumulated depreciation||-5,500||Retained earnings||47,800|
|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:
- Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill.
- 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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