Questions

Question.1
Acquisition Analysis –
Alma Limited is acquiring 92% of the all shares of Davis Limited for $ 316,200. All the method. On the balance sheet all the items are represented using their book value except the plant, land and inventory. These assets value over the period of time have appreciated and hence, we need to take the price appreciation into account to ensure that the acquirer pays the fair value to the acquire for the control. Since, the acquirer is buying 92% of the total available shares.
We need to identify the fair value of the total identifiable assets and liabilities. Once we identify this, we will be in a position to understand whether it was a bargain purchase or a goodwill should be declared or not. Here, we try to find how much excess is the fair value over the carrying value. We also need to adjust for the tax rate.
For the net identifiable assets, we need to include the intangible assets as well. However, we need not include the goodwill of the acquiree since that does not add any value to the acquirer.
Method Partial goodwill    
Accounting Standard – AASB 3
Tax rate = 30%
Net Identifiable Assets = Identifiable Assets – Identifiable Liabilities
However, for fittings and liabilities, the fair value is same as carrying value. Because of this reason, we will only consider the
Fair Value of the Net identifiable assets = Share capital + Retained earnings + asset __________________________________ revaluation Reserves + Business __________________________________ Combination valuation reserve *(1- Tax rate)     __________________________________ (Inventory) + Business Combination ___________________________________valuation reserve *(1- Tax rate) (Plant) + ___________________________________Business Combination valuation reserve ___________________________________*(1- Tax rate) (Land)
Fair Value of the Net identifiable assets = 1,100,700 + 379,000 + 474,000 + 379,000 * (1- 30%) + 759,000 (1- 30%) + 886,000 (1 – 30%)
= 3,376,800
However, Alma Ltd. Is only acquiring 92% of the total outstanding shares for a consideration for 3,162,000.
Non-Controlling Interest = 3,376,800 * 8% = 270,144
Consideration Transferred = 3,162,000
Partial Goodwill = 3,162,000 + 270,144 – 3,376,800 = 55,344
Accumulated Depreciation on Plant = 1,993,000 – 1,107,000 = 886,000
Since, Alma Ltd is paying more than the actual fair value of all the identifiable net assets, a goodwill will be recognized.
This is the partial goodwill recognized by Alma Ltd. On its balance sheet after the acquisition.
Question 2.
Here, the additional amount over the book value of the inventory, plant and land are taken after-tax on the balance sheet. Hence, 30% of each asset is a tax liability which we need to remove. We are creating a Business Combination Valuation reserve account for the same purpose. Once the asset is depreciated or the inventory is sold, this account will be updated back to zero. For this purpose another account “transfer from business Combination Valuation reserve” account is created. This will be transferred to the retained earnings.
As we see here, the accumulated depreciation needs to be updated for using the gross and net block of the fixed assets. In the further years, the depreciation expense needs to be directed to retained earnings. Land has indefinite life and its depreciation is not required. - - - - =- - - - - - - - - - = - - - - - - - ----- - - - - - - -
These entries are important to record the acquirer’s assets and liabilities at a fait value.
Business Combination Valuation Reserves Entries –
Date 1 July, 2016
Inventory      Cr 379,000
Deferred tax Liability Dr     113,700    
    Business Combination valuation reserve          Dr 265,300
Land           Cr 759,000
Deferred tax Liability Dr     227,700    
    Business Combination valuation reserve     Dr 531,300
Plant           Cr 886,000    
Deferred tax Liability Dr     265,800    
    Business Combination valuation reserve     Dr ...