Reference no: EM132519934
Question - Flashy Ltd is involved in the manufacture of Ugg boots. The director wishes to sell the business to a long-standing competitor, Boots Ltd. The financial statements of Flashy Ltd at 1 July 2019 contained the following information:
Assets Current assets
Cash 7,500
Accounts receivable 11,000
Inventories 16,500
Total current assets 35,000
Non-current assets
Vehicles 32,000
Accumulated depreciation (5,500)
Trucks 37,000
Accumulated depreciation (6,300)
Machinery 22,000
Accumulated depreciation (3,000)
Buildings 49,000
Accumulated depreciation (4,500)
Land 90,000
Total non-current assets 210,700
Total assets 245,700
Liabilities
Accounts payable 18,900
Other payables 41,000
Provisions 27,000
Loans 63,000
Total liabilities 149,900
Equity
Share capital: 50,000 shares 48,000
Retained earnings 47,800
Total equity 95,800
An agreement was made whereby Boots Ltd takes over Flashy Ltd. Boots Ltd will acquire all the assets and liabilities of Flashy Ltd, except for the cash, motor vehicles and accounts payable. In exchange, Boots Ltd will give the shareholders of Flashy Ltd a block of land valued at $86,000 and a motor vehicle valued at $21,400. The land is carried at a cost of $40,000 while the motor vehicle is carried at $22,000, comprising cost of $23,000 and accumulated depreciation of $1,000. Boots Ltd will also provide sufficient additional cash to enable Flashy Ltd to pay off the accounts payable and the liquidation expenses of $4,300.
Boots Ltd recognised the brand 'Flashy' that was not recognised in the records of Flashy Ltd as it was an internally developed brand. It was calculated that this brand had a fair value of $22,000. Boots Ltd also incurred legal and valuation costs of $2,000 in undertaking the business combination.
The assets and liabilities of Flashy Ltd are recorded at amounts equal to fair value except for the following:
Fair value
Land 100,000
Buildings 56,000
Machinery 20,000
Trucks 30,000
Inventories 20,000
Required -
1. Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill.
2. Prepare the journal entries in the records of Boots Ltd to record its acquisition of Flashy Ltd on 1 July 2019.
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