How the Existence of a Bargain Purchase Affects the Pre-Acquisition Entries - Assignment Example

Accounting Name of the student Name of the Institution Date of submission a. Calculate gain or loss on purchase (Marks 1.5) Total sales cost $ 15,000 Equity cost = $ 13500 Other Assets = $ 16500 Total Net worth =$30,000 Therefore, the gain on the purchase = $ 30,000 – $ 15,000 = $ 15,000 (b) Prepare the valuation entries at 1 July 2015 (Marks 2) Dr Land $ 2000 Plant $ 1000 Inventory $ 1000 Cr valuation account $ 4000 (To record asset valuation at the acquisition date) (c) Prepare the consolidation worksheet (Marks 6) CONSOLIDATED WORKSHEET Income statement     Profit before tax 5000   Income tax expense $ 1,540.00   profit for the year $ 3,460.00   Retained earning $ 3,600.00       $ 7,060.00 Dividend paid $ 500.00 $ (500.00) R/E   $ 6,560.00 Share capital $ 35,000.00   General reserves $ 11,000.00   Other component of equity $ 1,500.00   Liability $ 6,300.00       $ 53,800.00     $ 60,360.00 Land $ 14,600.00   Plant $ 23,500.00   Accumulated depreciation $ (6,000.00)       $ 32,100.00 Financial Assets $ 5,000.00   Inventory $ 7,600.00   Cash $ 660.00   Shares in plant limited $ 15,000.00       $ 28,260.00     $ 60,360.00 (d) Prepare the Consolidated Statement of Comprehensive Income for the financial year ending 30 June 2015 Consolidated Statement of Comprehensive Income For the financial year ending 30 June 2015 Income statement     Profit before tax $ 5,000.00   Income tax expense $ 1,540.00   profit for the year $ 3,460.00   Retained earning $ 3,600.00       $ 7,060.00 Dividend paid $ 500.00 $ (500.00) R/E   $ 6,560.00 (e) Prepare the Consolidated Statement of Changes in Equity for the financial year ending 30 June 2015 (Marks 3.5) Consolidated Statement of Changes in Equity For the financial year ending 30 June 2015 Share capital $ 35,000.00 General reserves $ 11,000.00 Other component of equity $ 1,500.00 Total $ 47,500.00 (f) Prepare the Consolidated Statement of Financial Position for the financial year ending 30 June 2015 (Marks 4) Consolidated Statement of Financial Position For the financial year ending 30 June 2015 Assets Land $ 14,600.00   Plant $ 23,500.00   Accumulated depreciation $ (6,000.00)       $ 32,100.00 Financial Assets $ 5,000.00   Inventory $ 7,600.00   Cash $ 660.00   Shares in plant limited $ 15,000.00       $ 28,260.00     $ 60,360.00 Liabilities and equities Share capital $ 35,000.00   Retained earning $6,560   General reserves $ 11,000.00   Other component of equity $ 1,500.00   Liability $ 6,300.00       $ 60,360.00     $ 60,360.00 Question two (a) Explain how the existence of a bargain purchase affects the pre-acquisition entries, both in the year of acquisition and in subsequent years (Marks 3) The main purpose for pre-acquisition entry is to help in preventing double accounting of the assets of a given economic entity. It also helps in preventing double accounting of the equity of the economic entity (Netter, Stegemoller & Wintoki 2011). It helps in the recognition of any goodwill or gin on the bargain purchase on consolidation. Furthermore, it helps in recognition of assets and liabilities acquired within the business combination and not to recognize by the group entity (Cartwright & Cooper 2012). In the case of orange and Pulm limited, Orange limited has formed Pulm limited, immediately after formation should reflect assets for the two companies combined. This is well captured in the AASB 10, enumerating the concept of entity, ownership concept and parent entity concept in calculating the both pre –acquisition and post acquisition (Netter, Stegemoller & Wintoki 2011). AASB3 requires that at the acquisition date, the acquirer should be able to recognize goodwill acquired in a business combination as an asset of the company (Cartwright & Cooper 2012). This makes negotiation important since it will have effect in the total asset that the company will record in its books of account and to some extend cost of acquisition. The acquirer should ensure that he initially measure the good will cost which is the excess of the cost of business combination over the acquirer’s interest in the fair value of the company assets. He should be able to recognize and measure goodwill or gain from the bargain purchase and lastly, be able to recognize and measure the identifiable assets acquired, the liabilities assumed and any non controlling interest in the acquire (Cartwright & Cooper 2012). The calculated goodwill will have to appear in the consolidated financial statements and this have potential impact in the operation and subsequent accounting for the company, hence pre-negotiation is very important and can impact either positively or negatively in the process of acquisition of another business or company (Netter, Stegemoller & Wintoki 2011). (b) Some adjustment entries in the previous period’s consolidation worksheet are also made in the current period’s worksheet; explain It should be noted that a consolidated worksheet is just a worksheet. In accounting, the consolidated worksheet in most cases does not have any impact on the underlying financial statements or the accounts of the parent company or its subsidiary thereafter (Offenberg & Pirinsky 2015). Hence, the last financial year profit are required to be adjusted on consolidate financial statements, and then potentially retained earnings to be adjusted in the current financial period In the same manner, a BCVR entry required to recognize the land on hand at the acquisition at its fair value should be made in the consolidated worksheet for each year that the said land remains in the subsidiary (Pereiro 2014). It should be noted that, the accounting standards does not allow entries to be changed year to year (Kang 2012). Furthermore, the reason is that the adjustment to the carrying amount of the acquired land is only made in a worksheet and not in the actual accounting records of the subsidiary itself (Offenberg & Pirinsky 2015). Bibliography Cartwright, S., & Cooper, C. L. 2012 Managing Mergers Acquisitions and Strategic Alliances. Routledge. Kang, J. W. 2012 Cross-border mergers and acquisitions in Korea: strategic motivations, transition management and competitiveness (Doctoral dissertation, University of London). Netter, J., Stegemoller, M., & Wintoki, M. B. 2011 Implications of data screens on merger and acquisition analysis: A large sample study of mergers and acquisitions from 1992 to 2009. Review of Financial Studies, hhr010. Offenberg, D., & Pirinsky, C. 2015 How do acquirers choose between mergers and tender offers?. Journal of Financial Economics, 116(2), 331-348. Pereiro, L. E. 2014 The Misvaluation Curse in Mergers and Acquisition: A Behavioral Model. Available at SSRN 2558424. Read More