Business Combination Valuation Entries Pre-Acquisition Entries | Assignment Help

Business Combination Valuation Entries Pre-Acquisition Entries  1 July 2016, Mutt Ltd acquired all the issued shares of Jeff Ltd for $174 800. At this date the

equity of Jeff Ltd consisted of share capital of $80 000 and retained earnings of $68 800. All the

Business Combination Valuation Entries Pre-Acquisition Entriesidentifiable assets and liabilities of Jeff Ltd were recorded at amounts equal to fair value except for: 

                                                            Carrying amount                    Fair value

Patent                                                  $60 000                                               $72 000

Plant (net of $40 000 depreciation)    40 000                                     48 000

Inventory                                            21 600                                     28 000 

   The patent was considered to have an indefinite life. It was calculated that the plant had a

further life of 10 years, and was depreciated on a straight-line basis. All the inventory was sold

by 30 June 2017. In June 2017, Jeff Ltd conducted an impairment test on the patent, as it was

considered to have an indefinite life, and the goodwill. As a result, the goodwill was considered

to be impaired by $1200.

   In May 2017, Jeff Ltd transferred $20 000 from the retained earnings on hand at 1 July 2016

to a general reserve. The tax rate is 30%. 

Required

Prepare the consolidation worksheet adjustments entries at 1 July 2016 and 30 June 2017. 

At 1 July 2016:

Net fair value of identifiable assets

and liabilities of Jeff Ltd                   =       ($80 000 + $68 800) (equity)

+$6 400 (1 – 30%) (inventory)

+ $12 000 (1 – 30%) (patent)

+ $8 000 (1 – 30%) (plant)

=       $167 280

Consideration transferred                  =       $174 800

Goodwill                                           =       $7 520

Worksheet entries at 1 July 2016

Business combination valuation entries

Inventory                                                               Dr           6 400

Deferred tax liability                                        Cr                                1 920

Business combination valuation reserve          Cr                                4 480

Patent                                                                     Dr         12 000

Deferred tax liability                                        Cr                                3 600

Business combination valuation reserve          Cr                                8 400

*Accumulated depreciation – equipment               Dr         40 000

Equipment                                                       Cr                              32 000

Deferred tax liability                                        Cr                                2 400

Business combination valuation reserve          Cr                                5 600

*refer to end of solution for an alternative to this journal entry

Goodwill                                                                Dr           7 520

Business combination valuation reserve          Cr                                7 520

Pre-acquisition entries

Retained earnings (1/7/16)                                     Dr         68 800

Share capital                                                          Dr         80 000

Business combination valuation reserve                Dr         26 000

Shares in Jeff Ltd                                            Cr                            174 800

Business Combination Valuation Entries Pre-Acquisition Entries | Assignment Help

Worksheet entries at 30 June 2017

Business combination valuation entries

The entries at 1 July 2013 are affected by:

  • the sale of the inventory
  • the depreciation of the plant
  • the impairment of the goodwill

Cost of sales                                                       Dr           6 400

Income tax expense                                      Cr                                   1 920

Transfer from business combination

valuation reserve                                          Cr                                   4 480

Patent                                                                  Dr         12 000

Deferred tax liability                                     Cr                                   3 600

Business combination valuation reserve       Cr                                   8 400

Accumulated depreciation – equipment              Dr         40 000

Equipment                                                    Cr                                 32 000

Deferred tax liability                                     Cr                                   2 400

Business combination valuation reserve       Cr                                   5 600

Depreciation expense                                         Dr              800

Accumulated depreciation                            Cr                                      800

(10% x $8 000)

Deferred tax liability                                           Dr              240

Income tax expense                                      Cr                                      240

(30% x $1 000) 

Goodwill                                                             Dr           7 520

Business combination valuation reserve       Cr                                   7 520

Impairment loss – goodwill                                 Dr           1 200

Accum. impairment losses – goodwill          Cr                                   1 200 

Pre-acquisition entries

The pre-acquisition entries are affected by:

  • transfer from business combination valuation reserve

Retained earnings (1/7/16)                                     Dr         68 800

Share capital                                                          Dr         80 000

Business combination valuation reserve                Dr         26 000

Shares in Jeff Ltd                                            Cr                            174 800

General reserve                                                     Dr           12 000

Transfer to general reserve                              Cr                               12 000

Transfer from business comb. valuation reserve   Dr             4 480

Business combination valuation reserve          Cr                                 4 480 

*Alternative BCVR entry for Equipment

Accumulated depreciation – equipment                 Dr         40 000

Equipment                                                       Cr                              40 000

Equipment                                                             Dr           8 000

Deferred tax liability                                       Cr                                2 400

Business combination valuation reserve         Cr                                5 600

The above BCVR entry demonstrates the 2 steps for the recognition of a change in fair value on consolidation.

  1. Write back all of the accumulated depreciation for the asset at date of aqusition.
  2. Recognise the increase/decrease to the asset’s fair value with the tax effect. 

NB: From these 2 journal entries it is easier to see that the depreciation adjustments then required at the end of each year for consolidation purposes are based on the $8 000 increase to fair value. That is, the additional amount of the asset that needs to be depreciated.

In this question….$8,000 / 10years = $800 per year.