Determine if the business combination results in goodwill

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Reference no: EM133434356

Top Ltd is a renowned merchandising brand which has been in business for many years. Top Ltd's directors intend to expand the business to include manufacturing activities. On 1 January 2023, Top Ltd acquired all of the assets and liabilities from Vogue Ltd in Wagga Wagga, except for cash and income tax payable.

The statement of financial position of Vogue Ltd as at 1 January 2023 contained the following:

Assets:	$
Land	800,000
Motor vehicles (at cost)	500,000
Less: accumulated depreciation	(200,000)
Plant (at cost)	380,000
Less: accumulated depreciation	(120,000)
Accounts receivable	80,000
Inventory	175,000
Cash	32,000
	1,647,000
Liabilities and Equity:
Accounts payable	70,000
Income tax payable	18,000
Loans payable	230,000
Share capital	1,000,000
Retained earnings	329,000
	1,647,000

The assets of Vogue Ltd were all recorded at fair values except for the following:

Land had a fair value of $200,000 more than its carrying amount
Plant was considered to be worth $300,000, and
Total fair value of all motor vehicles was $20,000 more than their carrying amount

In exchange for the net assets, Top Ltd agreed to:

Pay Vogue Ltd $200,000 on 1 January 2023, and $200,000 on 31 December 2023
Transfer a patent, which had a carrying amount of $150,000 in Top Ltd's financial statements, but is considered to have a fair value of $205,000 on 1 January 2023
Issue 75,000 new shares in Top Ltd to Vogue Ltd. At the date of acquisition, Top Ltd's shares were trading on the Australian Securities Exchange at $18.75 per share.

The incremental borrowing rate for Top Ltd is 10%. Top Ltd incurred incidental costs of $10,000 in relation to the acquisition, and costs of issuing the shares in Top Ltd were $5,800.

Required:

Determine if the business combination results in goodwill or gain on bargain purchase

Reference no: EM133434356

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