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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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Acquisition of assets l.jpg
Acquisition of Assets

TEXT

CHAP 10


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Objectives

  • Prepare the entries in the acquiring company for the acquisition of assets


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Applicable accounting standards

  • AASB 1015 Acquisition of Assets

  • AASB 1013 Accounting for Goodwill


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Acquisition of Assets

  • Single asset

  • Set of Assets

  • Acquisition of an entity (collection of net assets)


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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


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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


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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


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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


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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)


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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


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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


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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)


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Accounting entries

  • entry::

    Dr Assets acquired (at their fair values)

    CR Liabilities (acquired)

    Dr Goodwill

    Cr Share Capital (shares given up)


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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


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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


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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 l.jpg

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 l.jpg

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 l.jpg

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


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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


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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 l.jpg

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 l.jpg

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


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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


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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)