FACULTY OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND CORPORATE

GOVERNANCE

ACCG308, 2017

Week 8 Self-Study Solutions

Business combination
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16.3 Describe the accounting requirements when a collection of assets is
obtained that is not a business.
When the assets acquired are not a business, overpayments are not recorded as being goodwill.
The price paid for the collection shall instead be allocated:
to the individual identifiable assets and liabilities on the basis of their relative fair values at
the date of purchase. (AASB 3.2(b))

16.4 What is a business combination and how is it relevant in company

accounting?
When a collection of acquired assets constitutes a business, the accounting is governed by AASB 3:
Business Combinations.

The standard defines a business combination as [a] transaction or other event in which an acquirer
obtains control of one or more businesses. (AASB 3, Appendix A). The entity obtaining control
must then reflect that acquisition in its financial statements. When the assets involved are shares in
another company, and control over that company is obtained, preparation of consolidated financial
statements is also required.

Any goodwill or bargain purchase will need to be reported. When assets are acquired directly from
the vendor, the goodwill/ bargain purchase is reported in the investors statements. In the case of a
controlling share acquisition, goodwill/ bargain purchase is reported in the consolidated statements.
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16.23 Simple direct acquisition of a business for cash
OConnor and Lyneham
(a) The cost of acquisition was $100 000 cash.
Journal entries for OConnor Ltd:
The fair value of the assets acquired is $90 000, and the fair value of liabilities assumed is
$8 000, giving a net amount of $82 000. Accordingly there is an $18 000 discrepancy between
the fair value of the net assets acquired and the cost of acquisition ($100 000 $82 000). If
there is an acquisition of a business, then under AASB 3, the excess is recognised as
goodwill:

Dr Plant 25 000
Dr Land 40 000
Dr Vehicles 20 000
Dr Accounts receivable 5 000
Dr Goodwill 18 000
Cr Accounts payable 8 000
Cr Bank 100 000
Acquisition of net assets of a business from Lyneham for
$100 000 cash

(b) The cost of acquisition was $72 000 cash

In this case the cost of acquisition is $10 000 less than the fair value of the net assets acquired
of $82 000 (see part (a)). Under AASB 3 the underpayment is recognised as a bargain
purchase gain. The journal entry will be:

Dr Plant 25 000
Dr Land 40 000
Dr Vehicles 20 000
Dr Accounts receivable 5 000
Cr Gainbargain purchase 10 000
Cr Accounts payable 8 000
Cr Bank 72 000
Acquisition of net assets of a business from Lyneham for
$72 000 cash

Dr Gainbargain purchase 10 000

Cr Profit or loss 10 000
Close account to profit or loss
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16.24 Simple direct acquisition of assets and liabilities for cash
OConnor and Lyneham (again)
(a) The cost of acquisition was $100 000 cash.
Journal entries for OConnor Ltd:
The fair value of the assets acquired is $90 000, and the fair value of liabilities assumed is
$8 000, giving a net amount of $82 000. Accordingly there is an $18 000 discrepancy between
the fair value of the assets and liabilities acquired and the amount paid for them ($100 000
$82 000). When the direct acquisition of assets and liabilities does not constitute a business,
AASB 3.2 (b) requires a pro-rata adjustment of the acquired assets and liabilities to reflect the
overpayment. As noted in the text, p. 450, we do not think it is sound accounting practice to
restate monetary items such as accounts receivable. These items have a definite contracted
amount and to alter that amount is surely improper. AASB 3.2(b) appears to require such a
restatement as it does not make any distinction between monetary and non-monetary items (as
did previous standards). We suspect that this is a policy mistake or drafting error in the
standard which hopefully will be corrected in due course. In the solution below we do not
restate accounts receivable, therefore in the Factor f column we have used 85 rather than 90 to
exclude accounts receivables.

Asset Fair value Factor f f $18 000 discrepancy Adjusted value

$ $
Plant 25 000 25/85 5 294 30 294
Land 40 000 40/85 8 471 48 471
Vehicles 20 000 20/85 4 235 24 235
85 000 18 000 103 000

Journal entries for OConnor Ltd:

Dr Plant 30 294
Dr Land 48 471
Dr Vehicles 24 235
Dr Accounts receivable 5 000
Cr Accounts payable 8 000
Cr Bank 100 000
Acquisition of assets and liabilities from Lyneham for $100 000
cash
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(b) The cost of acquisition was $72 000 cash.
In this case the cost of acquisition is $10 000 less than the fair value of the assets and
liabilities acquired of $82 000 (see part (a)):

Asset Fair value Factor f f $10 000 discrepancy Adjusted value

$ $
Plant 25 000 25/85 2 941 22 059
Land 40 000 40/85 4 706 35 294
Vehicles 20 000 20/85 2 353 17 647
85 000 10 000 75 000

The journal entry will be:

Dr Plant 22 059
Dr Land 35 294
Dr Vehicles 17 647
Dr Accounts receivable 5 000
Cr Accounts payable 8 000
Cr Bank 72 000
Acquisition of assets and liabilities from Lyneham for $72 000
cash
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16.26 Complex direct acquisition of a business using shares
Watson and Dickson
(a) Calculate cost of acquisition:
Cash 20 000
20 000 Watson shares @ $1.10 22 000
$42 000

Since the fair value of the net assets acquired of $36 000 is less than the cost of acquisition of
$42 000, and we have the acquisition of a business, under AASB 3 the excess of $6 000 is
recognised as goodwill.

Journal entries for Watson Ltd (purchaser):

Dr Accounts receivable 10 000

Dr Land 20 000
Dr Vehicles 8 000
Dr Equipment 15 000
Dr Goodwill 6 000
Cr Estimated uncollectible debts1 7 000
Cr Accounts payable 10 000
Cr VendorDickson Ltd 42 000
Acquisition from Dickson Ltd of the net assets of a business
1 = gross value ($10 000) fair value ($3 000)

Dr VendorDickson Ltd 42 000

Cr Bank 20 000
Cr Paid-up capitalordinary 22 000
Payment of $20 000 and the issue of 20 000 fully paid ordinary
shares
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16.35 Acquisition of a company using shares and cash
Ainslie and Downer
(a) Calculate cost of acquisition:
100 000 Downer shares:
50 cents cash 50 000
1 Ainslie share @ $1.04 104 000
$154 000

Journal entries for Ainslie Ltd (purchaser):

20X1
30 June Dr Shares in Downer 154 000
Cr Bank 50 000
Cr Paid-up capital 104 000
Acquisition of 100 000 shares in Downer Ltd for consideration of
1 fully paid share plus 50c per share acquired

(b) The fair value of Downers net assets is $145 000 so Ainslie has paid a premium of $9000 to
obtain the investment and control of Downer. No goodwill is shown in the financial
statements of the parent Ainslie, or Downer the subsidiary. Goodwill is recognised in the
consolidated financial statements.
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16.36 Acquisition of a company using share consideration
Forrest and Deakin

(a) Calculate cost of acquisition for Forrest Ltd:

Number of Deakin shares acquired
= 60% of 500 000 shares = 300 000 shares

Consideration provided
300 000 Deakin shares @ 1 Forrest share, $2.55 $765 000

Journal entries for Forrest Ltd:

20X2
1 July Dr Shares in Deakin Ltd 765 000
Cr Paid-up capital 765 000
Acquisition of 300 000 shares in Deakin Ltd (60% of those
issued) in exchange for the issue of 300 000 fully paid ordinary
shares under takeover

(b) Balance sheet:

FORREST LTD
Balance sheet at 1 July 20X2
$ $
Bank 450 000
Shares in Deakin Ltd
(300 000 ordinary shares, issued for $1 fully paid;
market value $720 0001)
765 000
Other assets and liabilities 800 000

Net assets 2 015 000

Equity
Share capital
1 300 000 ordinary shares fully paid 1 765 000

Retained profits 250 000

Owners equity 2 015 000

1 Disclosure of market value (fair value) is required by AASB 7.25. In this case, 300 000 shares at
$2.40 = $720 000. This assumes that the takeover did not affect the market price of Deakin Ltd
shares.

(c) Amount of purchase difference.

Net assets of Deakin Ltd are $1 400 000. Forrest acquires 60 per cent of this, ie. $840 000, at
a cost of $765 000. Therefore, discount on acquisition of $75 000 will be dealt with in the
consolidated financial statements as a bargain purchase gain.