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SECTION A
Snap Ltd is a seafood business with headquarters in Apollo Bay. Snap Ltd products include many varieties of seafood but one item lacking in its product range is Tasmanian Atlantic Salmon. The board of Snap Ltd decided to investigate a takeover of a Tasmanian company, Southern Pty Ltd, whose major product is the packaging of Tasmanian Atlantic Salmon. Strategically, Southern Pty Ltd would be a good fit with Snap Ltd as Snap owns two processing factories in Devonport, one of which is under-utilised. If Southern were acquired, then Snap would liquidate the company and transfer all the processing work to one of the Devonport factories.
The financial statements of Southern Pty Ltd at 1 April 2020 showed the following information:
| Plant | $133 600 |
| Accumulated depreciation – plant | (32 000) |
| Land | 20 800 |
| Cash | 26 000 |
| Accounts receivable | 54 800 |
| Inventory | 27 200 |
| Total assets | 230 400 |
| Accounts payable | 34 800 |
| Loans | 55 200 |
| Total liabilities | 90 000 |
| Share capital – 60 000 A ordinary shares | 48 000 |
| Share capital – 40 000 B ordinary shares | 32 000 |
| Retained earnings | 60 400 |
| Total equity | 140 400 |
All the assets and liabilities of Southern Pty Ltd were recorded at amounts equal to fair value except for:
| Fair Value | |
| Plant | 112 000 |
| Land | 35 800 |
| Inventory | 28 000 |
Southern Pty Ltd also had a brand ’41 South’ that was not recorded by the company because it had been internally generated. It was valued at $12 000. Southern Pty Ltd had not recorded both the interest accrued on the loans amounting to $22 800 and annual leave entitlements of $13 000.
Snap Ltd decided to acquire all the assets of Southern Pty Ltd except for the cash. In exchange for these assets, Snap Pty Ltd agreed to provide:
- Two shares in Snap Ltd for every three A ordinary shares held in Southern Pty Ltd. The fair value of each Snap Ltd share was agreed to be $2.16.
- Artworks to the owners of the B ordinary shares held in Southern Pty Ltd. (These artworks were held in the records of Snap Ltd at $40 000 and valued at $58 000.)
- Sufficient additional cash to enable Southern Pty Ltd to pay off its liabilities.
The business combination occurred on 1 April 2020. Legal and accounting costs incurred by Snap Ltd in undertaking this business combination amounted to $1300. Costs to issue the shares to the A ordinary shareholders of Southern Ltd were $700.
Required
Prepare the journal entries in the records of Snap Ltd at 1 April 2020 to record the business combination (dates and narrations are required). Show all calculations.
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