Reference no: EM133120656
Question - On January 1, 2020 Magin Limited, a public company, decided to buy most of the net assets of Bolder Inc. for $1,800,000 immediately paid for with the issuance of 10,000 of its own shares. The shares are currently trading at $60.00/share. In addition, Magin will borrow $500,000 at the current rate of interest with the balance in cash. Magin will not be acquiring the Investments which Bolder has. In addition, Magin has agreed to pay an additional $250,000 if the revenues of Bolder have a 5% growth over the next two years from the date of the acquisition. It has been determined that the fair value of this contingent consideration is $175,000. Magin incurred $5,000 of fees to pay its lawyers and accountants.
The balances showing on the statement of financial position for the two companies at December 31, 2019 are as follows:
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Magin
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Bolder
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Assets
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Cash
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845,000
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20,000
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Accounts receivable
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65,000
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35,000
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Inventory
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50,000
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80,000
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Investments
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0
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45,000
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Capital assets - net
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3,590,000
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1,020,000
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4,550,000
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1,200,000
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Liabilities
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Accounts payable
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1,465,000
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280,000
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Bonds payable
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1,350,000
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620,000
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Equity
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Common shares ($10/ share)
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950,000
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250,000
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Retained earnings
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785,000
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50,000
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4,550,000
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1,200,000
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After a review of the financial assets and liabilities, Magin determines that some of the assets of Bolder have fair values different from their carrying values. These items are listed below:
Capital assets - fair value is $1,100,000 Patent - fair value is $200,000
Brand name - fair value is $250,000
Required -
1. Determine the amount of goodwill that will be recorded on the business combination.
2. Prepare the statement of financial position of Magin as at January 1, 2020.
3. At Year-end of December 31, 2020 Magin now believes that it is less likely that they will have to pay the additional consideration and believe that it now has a value of $140,000. What would be the effect on the income statement and balance sheet for 2020 that Magin would make to reflect this?
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