Question 1:
On 1 July 2013, Liverpool Ltd acquired the assets and liabilities of Eastwood Ltd. The assets and liabilities of Eastwood Ltd consisted of:
Carrying amount Fair value
| |
Carrying amount
|
Fair value
|
|
Plant A (cost $640000)
|
$620000
|
$600000
|
|
Plant B (cost S680000) Furniture (cost $160000)
|
362
120
|
000
000
|
350 000
100 000
|
|
Land Liabilities
|
200
(300
|
000
000)
|
260 000
(300 0001
|
In exchange for the business of Eastwood Ltd, Liverpool Ltd provided the following to Eastwood Ltd:
• 400,000 shares in Liverpool Ltd, these having a fair value of $2.00 per share
• cash of $360 000.
The acquisition went ahead as planned. The plant acquired was considered by Liverpool Ltd to have a further 10-year life with benefits being received evenly over that period, the furniture had an expected life of 5 years.
During the first year after the acquisition, the management of Liverpool Ltd decided to measure, at 30 June 2014, the plant at fah value (both plant assets being in the same class) and the furniture at cost.
At 30 June 2014, Liverpool Ltd assessed the fair values of its assets:
• Plant A was valued at $552000, with an expected remaining useful life of 8 years.
• Plant B was valued at $320000, with an expected remaining useful life of 8 years.
At 30 June 2014, the furniture's recoverable amount was assessed to be $70000, with an expected useful life of 4 years.
Required
Prepare the journal entries in the records of Liverpool Ltd for the year ending 30 June 2014.
Selling price and goodwill
The summarised statements of financial position for two business entities are presented below:
|
|
Framers & Son
|
Developers & Co.
|
|
ASSETS
|
|
|
|
Cash at bank Accounts receivable
|
S 10 000
12 000
|
$ 13 000
19 000
|
|
Inventory
Property and plant (net)
|
15 000
40000
|
17 000
60 000
|
|
Intangibles
|
25 000
|
|
|
TOTAL ASSETS
|
102 000
|
109 000
|
|
LIABILITIES
|
|
|
|
Current liabilities Non-current liabilities
|
11 000
20 000
|
16 000
25 000
|
|
TOTAL LIABILITIES
|
31 000
|
41 000
|
|
NET ASSETS
|
$ 71000
|
$ 68 000
|
|
EQUITY
|
|
|
|
A. Teske, Capital
S. Teske, Capital
|
S 40 000
31 000
|
=
|
|
Pitcher, Capital
|
D.
-
|
68000
|
|
TOTAL EQUITY
|
S 71 000
|
$ 68 000
|
Sharp Photographics is considering the possibility of acquiring the businesses of Framers & Son and Developers & Co., and is interested in establishing an appropriate purchase price for making offers to the two entities. An assessment of the fair values of the entities' assets is as follows:
| |
Fair value |
|
|
Framers & Son
|
Developers & Co.
|
|
Receivables
|
$12000
|
$18000
|
|
Inventory
Property and plant (net)
|
20 000
60000
|
25000
70000
|
|
Intangibles
|
40 000
|
15000
|
The owners of Framers & Son are prepared to sell their firm at a price of 160% of the carrying amount of the entity's net assets, and the owner of Developers & Co. is prepared to sell at 180% of the carrying amount of the net assets of his business.
The owners of Sharp Photographics examined the earnings records and financial positions of the two entities over a number of years, and offered to pay the price required by Framers & Son, but offered to pay only 120% of the fair value of Developers & Co.'s net assets.
Required:
A. Calculate the selling price being asked by each business and the purchase price offered by Sharp Photographics. Should each business sell out to Sharp Photographics?
B. The sale between Sharp Photographics and Framers & Son went ahead at the negotiated price; and the eventual sale price of Developers & Co. was $121 300. How much goodwill (if any) should be recognised by Sharp Photographics? Calculate the total valuations for all assets acquired from both businesses. Explain.
Accounting for revaluations
On 1 January 2013, Good Ltd acquired a block of land for $100 000 cash, and on the same day Better Ltd purchased the adjacent block, which was virtually identical to the block purchased by Good Ltd, also for $100000 cash. Both companies intended to construct industrial warehouses on these properties. For the next 2 years, the property market went through a boom period and, by coincidence, on 30 June 2015, both companies obtained independent valuations of $180 000 for their blocks of land.
Good Ltd has decided to adopt the revaluation model for land in the accounts on the last day of the year ended 30 June 2015 by following the requirements of IAS 16/AASB 116. Better Ltd decided loose the cost model.
On 30 April 2016, each company sold its block of land for $200 000 cash.
Required
A. In relation to the land, how much profit would each company report for the years ended 30 June 2015 and 30 June 2016?
B. Give reasons for the discrepancy in profit figures between the two companies. Does the exist¬ence of the discrepancy make sense? What message is being conveyed to users about the perfor¬mance of both companies? Discuss fully. How can the discrepancy be avoided?
C. What profit would Good Ltd have made for the year ended 30 June 2016 if the revaluation of land had occurred 00 29 April 2016, instead of on 30 June 2015? Compare this with the profit made by Better Ltd in the same year, and explain whether you regard the differences as satis¬factory reporting.
Research and development costs
GeneTech Ltd is a biological research company that is developing gene technology in the hope of finding a vaccine for skin cancer. During the last financial year, GeneTech Ltd spent $1.2 million on research. The scientistt involved in the project believe they may be on the right track with the research, although many other companies are claiming the same thing and as yet no one has patented a vaccine.
Required:
In groups of three or four, discuss the options under IAS 38/AASB 138 Intangible Assets for the accounting treatment of the $1.2 million. What impact will each of these options have on the com¬pany's profit? Prepare a one-page letter to the managing director of GeneTech Ltd advising her of your preferred treatment for the research and development costs.