Exercise 27.1
Acquisition analysis, acquisition date entries
On 1 July 2019, Christina Ltd acquired all the issued shares of Adeline Ltd, paying $120 000 cash and transferring 100 000 of its own shares to Adeline Ltd’s former shareholders. At that date, the financial statements of Adeline Ltd showed the following information.
All the assets and liabilities of Adeline Ltd were recorded at amounts equal to their fair values at the acquisition date. The fair value of Christina Ltd’s shares at acquisition date was $2 per share. Christina Ltd incurred $30 000 in acquisition‐related costs that included $5000 as share issue costs.
Required
1.Prepare the acquisition analysis at 1 July 2019.
2.Prepare the journal entries for Christina Ltd to recognise the investment in Adeline Ltd at 1 July 2019.
3.Prepare the consolidation worksheet entries for Christina Ltd’s group at 1 July 2019.
1. Acquisition analysis at 1 July 2019:
Net fair value of identifiable assets and liabilities acquired = $100 000 + $50 000 + $150 000 (equity) = $300 000
Consideration transferred = $120 000 + 100 000 x $2 = $320 000
Goodwill = $320 000 – $300 000 = $20 000
2. Journal entries for Christina Ltd to recognise the additional investment in Adeline Ltd at 1 July 2019:
Shares in Adeline Ltd Dr 320 000
Cash Cr 120 000
Share capital Cr 200 000
Acquisition expenses Dr 25 000
Share capital Dr 5 000
Cash Cr 30 000
The acquisition-related costs are not part of the consideration transferred as those amounts are not paid to the former shareholders of Adeline Ltd in exchange of their shares. Therefore, they are not recognised as part of the investment in Adeline Ltd: the share issue costs are treated as a reduction in the share capital (as all the share issue costs), while the remaining costs are recognised as expenses in the year of acquisition.
3. Consolidation worksheet entries at 1 July 2019:
BCVR entry at 1 July 2019:
There is a BCVR entry only for goodwill identified in the acquisition analysis as all the identifiable assets and liabilities of Adeline Ltd were recorded at amounts equal to their fair values at acquisition date.
Goodwill Dr 20 000
Business combination valuation reserve Cr 20 000
Pre-acquisition entry at 1 July 2019:
Retained earnings (1/7/19) Dr 150 000
Share capital Dr 100 000
General reserve Dr 50 000
Business combination valuation reserve Dr 20 000
Shares in Adeline Ltd Cr 320 000
The pre-acquisition entry eliminates the pre-acquisition equity (including the business combination valuation reserve recognised for the goodwill acquired) against the investment account recognised by the parent based on the consideration transferred.
Please note that if the fair value of the consideration transferred would have been less than the net fair value at acquisition date of identifiable assets acquired and liabilities assumed, the acquisition analysis will identify a gain on bargain purchase instead of a goodwill. Therefore, there won’t be any BCVR entries in that case and the pre-acquisition entry will need to eliminate the retained earnings, share capital and the general reserve of the subsidiary at acquisition date, together with the investment account recognised by the parent and recognise the gain on bargain purchase. For example, if the fair value of the consideration transferred would have been $270 000, the gain on bargain purchase would have been $30 000 and the only consolidation worksheet entry would have been the following pre-acquisition entry:
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