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Acquisition of Assets. TEXT CHAP 10. Objectives. Prepare the entries in the acquiring company for the acquisition of assets . Applicable accounting standards. AASB 1015 Acquisition of Assets AASB 1013 Accounting for Goodwill. Acquisition of Assets. Single asset Set of Assets

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objectives
Objectives
  • Prepare the entries in the acquiring company for the acquisition of assets
applicable accounting standards
Applicable accounting standards
  • AASB 1015 Acquisition of Assets
  • AASB 1013 Accounting for Goodwill
acquisition of assets4
Acquisition of Assets
  • Single asset
  • Set of Assets
  • Acquisition of an entity (collection of net assets)
acquisition of an entity
Acquisition of an entity
  • A company is allowed to acquire the net assets of another company and is also allowed to indirectly acquire the net assets by purchasing the shares of another company
  • Their are 4 principal forms of acquisition of net assets of a company
four principal forms of acquisition of an entity
Four principal forms of acquisition of an entity
  • A Ltd purchases the net assets of B Ltd. B Ltd continues with its assets and liabilities replaced with purchase consideration
  • A Ltd acquires the net assets of B Ltd . B Ltd liquidates
  • C Ltd is formed to acquire the net assets of A Ltd & B Ltd. Both A Ltd & B Ltd are liquidated
  • A Ltd acquires the issued shares of B Ltd , B Ltd continues with its shares owned by A Ltd
acquisition of assets7
Acquisition of Assets
  • Accounting entries for acquisition
    • cost of acquisition ie Assets given up
    • fair value of assets acquired
    • in the case of purchase of an entity whether goodwill/discount on acquisition AASB 1013
cost of acquisition
Cost of acquisition
  • The cost of acquisition consists of the purchase consideration & any incidental costs incurred
  • The purchase consideration is rarely in a single form usually it consists cash, shares and other assets (e.g. Land & Buildings)
  • These assets given up as per AASB 1015 must be valued at their fair value
fair value of assets given up
Fair Value of Assets Given Up
  • Cash - normally equivalent but if settlement date deferred - discount to present value
  • Non-monetary assets
    • e.g. Land & Buildings (valued by use of experts)
  • Securities
    • listed companies (current market price)
    • unlisted (various techniques but may have to use a surrogate eg fair value of assets acquired)
  • Liabilities
    • Present value of future amount
  • Acquisition Date
    • Important -(date rights & obligations exchange)
accounting entries
Accounting entries
  • Single asset
    • entry recorded at the cost of acquisition
  • Set of asset
    • Where the asset consists of more than one asset then the cost of the asset is apportioned over the assets acquired.
    • The process is to allocate in proportion to fair values of assets acquired

eg Purchased for $300 000

Land FV 40 000

Buildings FV 200 000

Furniture FV 80 000

$320 000

accounting entries11
Accounting entries
  • Single asset
    • entry recorded at the cost of acquisition
  • Set of asset
    • Where the asset consists of more than one asset then the cost of the asset is apportioned over the assets acquired.
    • The process is to allocate in portion to fair values of assets acquired

eg Purchased for $300 000

Land FV 40 000

Buildings FV 200 000

Furniture FV 80 000

$320 000

Entry

Dr Land (40/320*300) 37 500

Dr Blgds (200/320*300) 187 500

Dr Furn (80/320*300) 75 000

Cr Cash 300 000

accounting requirements acquisition of an entity
Accounting requirementsAcquisition of an entity

Assets acquired $ x (fair values)

less::

Cost of acquisition $ x (fair values of

assets given up)

-----

Difference$ x (goodwillor

discount on acquisition)

(AASB 1013 ACCOUNTING FOR GOODWILL)

accounting entries13
Accounting entries
  • entry::

Dr Assets acquired (at their fair values)

CR Liabilities (acquired)

Dr Goodwill

Cr Share Capital (shares given up)

aasb 1013 accounting for goodwill
AASB 1013 Accounting for Goodwill
  • Goodwill
    • has to be written off using straight line method over 20 years or at director’s discretion provided less than 20 years
  • Discount on acquisition
    • is to be written off the non-monetary assets in proportion to their fair values

non-monetary assets not defined but

    • monetary assets as per AASB 1010 cash & receivables
    • Therefore allocate against assets other than cash & receivables
example
Example

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

ASSUME::

*WOLF LTD TAKES OVER

NET ASSETS OF RABBIT LTD

*COSTS WOLF LTD $2050

*SHAREHOLDERS TO

RECEIVE I SHARE FOR

EVERY 1 SHARE HELD

(M.V. $2)

*DEBENTURE HOLDERS

TO BE PAID IN CASH +2%

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

example16
Example

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

ASSUME::

*WOLF LTD TAKES OVER

NET ASSETS OF RABBIT LTD

*COSTS WOLF LTD $2050

*SHAREHOLDERS TO

RECEIVE I SHARE FOR

EVERY 1 SHARE HELD

(M.V. $2)

*DEBENTURE HOLDERS

TO BE PAID IN CASH +2%

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

COST OF ACQUISITION

CASH::

COSTS 2,050

DEBENTURES 4,080

SHARES(36,000* $2) 72,000

$78,130

(also have to pay the GST ignored for

our examples)

example17

COST $78,130

ASSUME FAIR VALUE

ASSETS ACQUIRED::

EQUIPMENT 36,000

INVENTORY 20,000

DEBTORS 9,000

PATENTS 4,000

BILLS REC. 6,000

CREDITORS (8,000)

$67,000

EXAMPLE

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

example18

COST $78,130

ASSUME FAIR VALUE

ASSETS ACQUIRED::

EQUIPMENT 36,000

INVENTORY 20,000

DEBTORS 9,000

PATENTS 4,000

BILLS REC. 6,000

CREDITORS (8,000)

$67,000

EXAMPLE

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

ASSETS ACQUIRED 67,000

COST 78,130

CASH 6,130

SHARES 72000

(36,000 *$2)

GOODWILL $11,130

example19

COST $78,130

ASSUME FAIR VALUE

ASSETS ACQUIRED::

EQUIPMENT 36,000

INVENTORY 20,000

DEBTORS 9,000

PATENTS 4,000

BILLS REC. 6,000

CREDITORS (8,000)

$67,000

EXAMPLE

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

GOODWILL EXAMPLE:::entry

DR EQUIPMENT 36,000

DR INVENTORY 20,000

DR DEBTORS 10,000

CR PROV D, DEBTS 1,000

DR PATENTS 4,000

DR BILLS REC 6,000

DR GOODWILL 11,130

CR CREDITORS 8,000

CR RABBIT LTD 72,000

CR CASH 6,130

DR RABBIT LTD 72,000

CR SHARE CAPITAL 72 000

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

ASSETS ACQUIRED 67,000

COST 78,130

CASH 6,130

SHARES 72000

(36,000 *$2)

GOODWILL $11,130

amortisation of goodwill
Amortisation of Goodwill
  • Goodwill- $11 130
    • Assume that the goodwill is written off over 10 years
  • Journal Entry

Dr Amortisation of Goodwill 1 113

CR Goodwill 1 113

(or Provision for Goodwill)

  • Balance Sheet

Intangibles (Note x) 10 017

example21

COST $78,130

ASSUME FAIR VALUE

ASSETS ACQUIRED::

EQUIPMENT 45,000

INVENTORY 25,000

DEBTORS 9,000

PATENTS 5,000

BILLS REC. 6,000

CREDITORS (8,000)

$82,000

EXAMPLE

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

DISCOUNT

EXAMPLE

example22

COST $78,130

ASSUME FAIR VALUE

ASSETS ACQUIRED::

EQUIPMENT 45,000

INVENTORY 25,000

DEBTORS 9,000

PATENTS 5,000

BILLS REC. 6,000

CREDITORS (8,000)

$82,000

EXAMPLE

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

ASSETS ACQUIRED 82,000

COST 78,130

CASH 6,130

SHARES 72000

(36,000 *$2)

DISCOUNT $3.870

example23

COST $78,130

ASSUME FAIR VALUE

ASSETS ACQUIRED::

EQUIPMENT 45,000

INVENTORY 25,000

DEBTORS 9,000

PATENTS 5,000

BILLS REC. 6,000

CREDITORS (8,000)

$82,000

EXAMPLE

RABBIT LTD

TRIAL BALANCE AS AT 1/1/92

DISCOUNT::

NON-M F.V. ALLOCATION COST

EQUIP 45,000 2,322 (45/75) 42,678

INVENT 25,000 1,290 (25/75) 23,710

PATENTS 5,000 258 ( 5/75) 4,742

-------- ------- --------

$75,000 $3,870 $71,130

DR EQUIP 42,678

DR INVENT 23,710

DR PATENTS 4,742

DR BILLS REC 6,000

DR DEBTORS 10,000

CR PROV D. DEBTS 1,000

CR CREDITORS 8,000

CR CASH 6,130

CR RABBIT LTD 72,000

PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500

EQUIPMENT 42,000

ACC. DEPRECIATION 10,000

INVENTORY 18,000

DEBTORS 10,000

BILLS RECEIVABLE 6,000

PATENTS 3,500

DEBENTURES 4,000

CREDITORS 8,000

$79,500 $79,500

ASSETS ACQUIRED 82,000

COST 78,130

CASH 6,130

SHARES 72000

(36,000 *$2)

DISCOUNT $3.870

buying company purchases the shares
Buying Company Purchases the Shares
  • Where the buying company purchases the net assets of another company indirectly by purchasing the issued shares of that company

entries

    • in selling company nil

entries

    • - in the buying company
    • DR INVESTMENT

CR SHARE CAPITAL

tutorial questions
Tutorial Questions

Exercise 10.2 (Part B only)

Exercise 10.3

Exercise 10.4

( Amend ARR $140 000)

Problem 10.1 (Part A only)

Problem 10.5 (parts B & C only)

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