Reference no: EM133505478

Question 1 Business Combinations

Birchwood Limited operates a nursery chain across Australia. The company is taking steps to vertically integrate its supply chain, starting with organic garden compost. They have entered a contract to purchase all the assets, except cash, of Organic Compost and Garden Soils Pty Ltd (OCGS). They will only acquire the accounts payable liability as part of the purchase. However, they have agreed to provide enough funds to OCGS, to cover all other liabilities and accrued expenses. After the transfer of assets and funds, OCGS will liquidate. Birchwood Limited has also agreed to cover the liquidation costs as part of the contract.

The acquisition date was 1 July 2023 and settlement occurred on that date. The Statement of Financial Position details at that date, together with additional information to create the acquisition entries are available in your Interact Site under Assessment Resources/Assessment 2.

Birchwood Limited have determined the that assets of OCGS were recorded at fair values except for land, plant, and accounts receivable. The fair value of those assets is as follows:

Required

Critically assess if Birchwood Ltd.'s purchase of assets in Organic Compost and Garden Soils Pty Ltd is treated as a business combination. (5 marks)
Determine if the business combination results in goodwill or gain on bargain purchase. (12 marks)
Prepare the journal entries to record the business combination in the records of Birchwood Limited on 1 January 2023. (10 marks)
Prepare the disclosure note for the acquisition. (3 marks)

Question 2 Topics 3 & 4 Consolidation - Wholly owned subsidiaries

TST Limited (TST) is a large transport company that operates out of Bathurst. On 1 July 2020, it acquired all the shares of a smaller rival company, Stoker Pty Ltd (Stoker), for $616,000. The shares were cum div, and the $4,000 dividend was paid in August 2020. At the acquisition date the equity of Stoker was as follows:

All the identifiable assets and liabilities were recorded at amounts equal to their fair values except for:

The Plant was purchased on 1 July 2018 and is being depreciated over 8 years using the straight-line method. As of 1 July 2020, the remaining useful life of the plant was 6 years. However, the revalued plant was sold 30 June 2022. Only 80% of the revalued inventory was sold by 30 June 2021. The remaining 20% of that inventory was sold in August 2021.

In addition, TST recognised $100,000 for the Stoker Brand and a $60,000 liability for a contractual dispute carried as a contingent liability by Stoker. The Brand asset is impairment tested yearly, but no impairment has been identified. However, the legal case was settled for $75,000 in May 2021.

Additional information regarding the intragroup transactions between TST Limited and Stoker Pty Ltd from 1 July 2020 to 30 June 2022 will be available in your Interact Site under Assessment Resources/Assessment 2. You will also be able to access a copy of TST and Stoker's income statement and financial position as at 30 June 22. These details will be used to complete the requirements of the question.

Required:

• Critically analyse the relationship between TST Ltd and Stoker Ltd, and how TST Ltd should account for the investment in Stoker Ltd. Support your discussion with references from relevant standards.
• Prepare the acquisition analysis for the investment in Stoker Ltd on 1 July 2020.
• Prepare the following consolidation worksheet entries for the investment in Stoker Ltd as at 30 June 2021 (i.e., two sets of transactions).
• Business combination valuation entries.
• Pre-acquisition elimination entries.
• Intragroup transaction eliminations.
• Prepare the following consolidation worksheet entries for the investment in Stoker Ltd as at 30 June 2022 (i.e., two sets of transactions).
• Business combination valuation entries.
• Pre-acquisition elimination entries.
• Intragroup transaction eliminations.