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Solutions - Chapter 3

- Problem 3-1 discusses journal entries to record a business combination between Lanigan and Macklin. It provides the balance sheets of both companies after the combination. - Problem 3-2 discusses the journal entry to record Rodriguez's purchase of shares in Vancouver, and provides the balance sheets of both companies after the transaction. - Problem 3-3 discusses journal entries and balance sheets to record the acquisition of Abdul's business by Lana. - Problem 3-4 discusses the calculation of goodwill from D Ltd.'s acquisition of another company, and D Ltd.'s opening balance sheet after the acquisition. - Problem 3-5 discusses Davis's acquisition of Bagley Inc., including journal entries, goodwill calculation

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40 views6 pages

Solutions - Chapter 3

- Problem 3-1 discusses journal entries to record a business combination between Lanigan and Macklin. It provides the balance sheets of both companies after the combination. - Problem 3-2 discusses the journal entry to record Rodriguez's purchase of shares in Vancouver, and provides the balance sheets of both companies after the transaction. - Problem 3-3 discusses journal entries and balance sheets to record the acquisition of Abdul's business by Lana. - Problem 3-4 discusses the calculation of goodwill from D Ltd.'s acquisition of another company, and D Ltd.'s opening balance sheet after the acquisition. - Problem 3-5 discusses Davis's acquisition of Bagley Inc., including journal entries, goodwill calculation

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haida
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Solutions – Chapter 3

Problem 3-1
(a)
Journal entry on Lanigan’s books

Cash and receivables 155,000


Inventory 110,000
Buildings and equipment 200,000
Current liabilities 85,000
Long-term debt 130,000
Cash 250,000

Journal entry on Macklin’s books

Cash 250,000
Current liabilities 85,000
Long-term debt 130,000
Cash and receivables 155,000
Inventory 110,000
Buildings and equipment 200,000

(b) Lanigan Macklin

Cash and receivables $ 507,000 $ 250,000


Inventory 320,000 0
Buildings and equipment (net) 520,000 0
$1,347,000 $250,000

Current liabilities $ 277,000 $ 0


Long-term debt 480,000 0
Common shares 200,000 110,000
Retained earnings 390,000 140,000
$1,347,000 $250,000
Problem 3-2
(a)
Journal entry on Rodriguez’s books

Investment in Vancouver 230,000


Cash 230,000

There would be no journal entry on Vancouver’s books because the transaction was with the
shareholders of Vancouver and not with Vancouver.

(b) Rodriquez Vancouver

Cash and receivables $ 71,000 $ 55,000


Inventory 105,000 140,000
Property and equipment (net) 160,000 270,000
Investment in Vancouver 230,000 0
$566,000 $465,000

Current liabilities $ 96,000 $ 110,000


Long-term debt 175,000 125,000
Common shares 100,000 150,000
Retained earnings 195,000 80,000
$566,000 $465,000

(c) Rodriquez

Cash and receivables $ 126,000


Inventory 245,000
Property and equipment (net) 430,000
$801,000

Current liabilities $ 206,000


Long-term debt 300,000
Common shares 100,000
Retained earnings 195,000
$801,000

Problem 3-3
(a)
Journal entry on Abdul’s books

Cash and receivables 20,150


Inventory 10,050
Plant assets 70,100
Goodwill (plug) 19,100
Current liabilities 27,600
Long-term debt 33,800
Cash 58,000

Journal entry on Lana’s books

Cash 58,000
Current liabilities 27,600
Long-term debt 40,100
Cash and receivables 20,150
Inventory 8,150
Plant assets 66,350
Gain on sale of net assets 31,050

(b) Abdul Lana

Cash and receivables $ 55,150 $ 58,000


Inventory 70,550 0
Plant assets (net) 306,100 0
Goodwill 19,100 0
$450,900 $58,000

Current liabilities $ 93,100 $ 0


Long-term debt 128,050 0
Common shares 140,500 40,050
Retained earnings (deficit) 89,250 17,950
$450,900 $58,000

Problem 3-4
Acquisition cost (300,000 shares  $9.00) $2,700,000 (a)
Fair value of net assets 2,290,000
Favourable lease contract** 60,000 (b)
Goodwill $350,000 (c)

** IFRS 3 requires favourable lease terms to be recognized at fair value as an identifiable asset in a
business combination (par. B29 to B31). Note that the fact that the lease cannot be transferred or
assigned does not affect the requirement to recognize it as an identifiable asset on acquisition as it still
meets the contractual-legal criterion (i.e. the asset results from contractual or other legal rights
(regardless of whether those rights are transferable or separable from the acquired enterprise or from
other rights and obligations).

D Ltd.
Balance Sheet
July 1, Year 5

Current assets (450,000 + 510,000) $ 960,000


Noncurrent assets (4,950,000 + 3,500,000) 8,450,000
Intangible asset – lease contract (b) 60,000
Goodwill (c) 350,000
$9,820,000

Current liabilities (600,000 + 800,000) $1,400,000


Long-term debt (1,100,000 + 920,000) 2,020,000
Common shares (2,500,000 + (a) 2,700,000) 5,200,000
Retained earnings 1,200,000
$9,820,000
Problem 3-5

(a)
Acquisition cost $1,090,600
Fair value of net assets 952,000
Goodwill $138,600

Davis journal entry

Current assets 510,000


Plant and equipment 1,056,000
Patents 81,000
Goodwill 138,600
Current liabilities 276,000
Long-term debt 419,000
Cash 1,090,600

Professional fees expense 21,000


Cash 21,000

(b)
Davis is clearly the acquirer because its shareholder group holds the largest block of shares.
(i) The goodwill calculation is the same as in (a) above because 133,000 shares @ $8.20 per share
equals $1,090,600.
Current assets 510,000
Plant and equipment 1,056,000
Patents 81,000
Goodwill 138,600
Current liabilities 276,000
Long-term debt 419,000
Ordinary shares (133,000 shares x $8.2) 1,090,600

Ordinary shares 6,800


Cash 6,800
Professional fees expense 21,000
Cash 21,000

(ii)
Bagley Incorporated
Statement of Financial Position
August 1, Year 4

Investment in Davis Inc. $1,090,600

Ordinary shares $185,000


Retained earnings (517,000 + 388,600*) 905,600
$1,090,600
*Gain on sale (1,090,600 – [1,371,000 – 393,000 – 276,000] = 388,600)

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