Discuss the importance of identifying the acquisition date when accounting for a business combination

Prepare the acquisition analysis and journal entries at 30 June 2014 for the preparation of the consolidated financial statements of John Ltd

 

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Question 1

Blue Ltd’s profit before tax for the year ended 30 June 2013 was $252,450. Included in this profit are the following items of income and expense:

At 30 June, the company’s draft statements of financial position showed the following balances:

 

Additional information:

– A tax deduction for development expenditure of 125% of the $120 000 spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period.

– The tax depreciation rate for equipment is 20%. The equipment sold on 30 June 2013 cost $66 667 when it was purchased 3 years ago.

– Deductions are only available for annual leave when amounts are paid and not as they are accrued.

– Actual amounts paid for insurance are allowed as a tax deduction.

– No deduction is allowed for taxation purposes in relation to entertainment.

– Rent revenue is taxable when amounts are received.

– The deferred tax asset (DTA) balance at 30 June 2012 comprised: DTAs relating to temporary differences: $20,000 DTAs relating to carried forward tax losses: $8,220

– No journal entries related to tax have been recorded for the year ended 2013. Assume the tax balances at 30 June 2012 are correct.

– The tax rate is 30%.

 

Required:

A. Calculate the taxable income and current tax liability using an appropriate worksheet for the year ended 30 June 2013 (show all workings).

 

B. Prepare a journal entry to record the current tax liability.

 

C. Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2013.

 

D. Prepare the journal entries to recognise the deferred tax assets and liabilities at 30 June 2013.

 

Question 2

A. Lynx Ltd acquired all the assets and liabilities of Bob Ltd on 1 July 2014. At this date, the assets and liabilities of Bob Ltd consisted of:

 

In exchange for these net assets above, Lynx Ltd agreed to:

•Issue 10 Lynx Ltd shares for every Bob Ltd share — Lynx Ltd shares were considered to have a fair value of $10 per share. Costs of the share issue were $500

•transfer a patent to the former shareholders of Bob Ltd — the patent was carried in the records of Lynx Ltd at $350,000 but was considered to have a fair value of $1 million

•pay $5.20 per share in cash to each of the former shareholders of Bob Ltd.

Lynx Ltd incurred $10 000 in costs associated with the acquisition of these net assets.

 

Required:

1.Prepare an acquisition analysis in relation to this acquisition.

 

2.Prepare the journal entries in Lynx Ltd to record the acquisition.

 

B. Discuss the importance of identifying the acquisition date when accounting for a business combination.

 

C.With reference to AASB 3, how is a gain on bargain purchase accounted for?

 

Question 3

A.

At 1 July 2013, John Ltd acquired all the shares of Fred Ltd for $283,000. At this date, the equity of Fred Ltd consisted of:

 

All the identifiable assets and liabilities of Fred Ltd were recorded at amounts equal to fair value except for the following assets:

 

The plant has a remaining useful life of 5 years, and depreciation is calculated on a straight-line basis.

The tax rate is 30%.

 

Required:

Prepare the acquisition analysis and journal entries at 30 June 2014 for the preparation of the consolidated financial statements of John Ltd.

 

B.

Koala Ltd gained control of Kookaburra Ltd by acquiring its share capital on 1 January 2013. The statement of financial position of Kookaburra Ltd at that date showed:

 

 

At 1 January 2013, the recorded amounts of Kookaburra Ltd’s assets and liabilities were equal to their fair values except as follows:

 

The plant has a remaining useful life of 5 years, and depreciation is calculated on a straight-line basis.

The tax rate is 30%.

 

At 31 December 2013, the following information was obtained from both entities:

 

 

Required:

Prepare the acquisition analysis and journal entries as at 31 December 2013 for the preparation of the consolidated financial statements of Koala Ltd.

 

C.

When there is a dividend payable by the subsidiary at acquisition date, under what conditions should the existence of this dividend be taken into consideration in preparing the pre-acquisition entries? Provide an example of how a dividend should be accounted for under the cum div. basis.

 

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