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Assignment Questions - Ch14 - Ex14.1,14.2,14.4

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Assignment Questions - Ch14 - Ex14.1,14.2,14.4

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ACCT4104_Advanance financial accounting

Assignment questions for Ch.14: Ex 14.1, Ex 14.2 and Ex 14.4

Exercise 14.1 Accounting by the acquirer


On 1 July 2016, New Ltd acquired the following assets and liabilities from Day Ltd:
Carrying amount Fair value
Land $300,000 $351,000
Plant (cost $400 000) 280,000 290,000
Inventory 80,000 86,000
Cash 15,000 15,000
Accounts payable (20,000) (20,000)
Loans (80,000) (80,000)
In exchange for these assets and liabilities, New Ltd issued 100 000 shares that had been issued for $1.20
per share but at 1 July 2016 had a fair value of $6.50 per share.

Required
1. Prepare the journal entries in the records of New Ltd to account for the acquisition of the assets and
liabilities of Day Ltd.
2. Prepare the journal entries assuming that the fair value of New Ltd shares was $6 per share.

Exercise 14.2 Acquisition of shares in acquiree


On 1 January 2016, Desert Ltd acquired all the issued shares of Island Ltd. At this date the equity of Island
Ltd consisted of:

Share capital — 100,000 shares issued at $5 per share $500,000


General reserve 200,000
Asset revaluation surplus 100,000
Retained earnings 50,000

In exchange for these shares, Desert Ltd agreed to pay the former shareholders of Island Ltd two shares in
Desert Ltd, these having a fair value of $4.5 per share, plus $1.50 cash for each share held in Island Ltd.
Thecosts of issuing the shares were $700.

Required
Prepare the journal entries in the records of Desert Ltd to record these events.

P.1
Exercise 14.4 Identifying the acquirer
White Ltd has been negotiating with Cloud Ltd for several months, and agreements have finally been
reached for the two companies to combine. In considering the accounting for the combined entities,
management realises that, in applying IFRS 3, an acquirer must be identified. However, there is debate
among the accounting staff as to which entity is the acquirer.

Required
1. What factors/indicators should management consider in determining which entity is the acquirer?
2. Why is it necessary to identify an acquirer? In particular, what differences in accounting would arise
if White Ltd or Cloud Ltd were identified as the acquirer?

P.2

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