Tutorial 5

TUTORIAL 5
ACCT2201
Exercise 27.2
Acquisition analysis, acquisition date entries
On 1 July 2022, Michael Ltd acquired all the issued shares of Andrew Ltd, paying $60 000
cash and transferring 50 000 of its own shares to Andrew Ltd’s former shareholders. At that
date, the financial statements of Andrew Ltd showed the following information.
Share capital $50 000

General reserve 25 000
Retained earnings 75 000
All the assets and liabilities of Andrew Ltd were recorded at amounts equal to their fair
values at the acquisition date. The fair value of Michael Ltd’s shares at the acquisition date
was $2 per share. Michael Ltd incurred $15 000 in acquisition-related costs that included
$2500 as share issue costs.
Required
1. Prepare the acquisition analysis at 1 July 2022.
2. Prepare the journal entries for Michael Ltd to recognise the investment in Andrew
Ltd at 1 July 2022.
3. Prepare the consolidation worksheet entries for Michael Ltd’s group at 1 July 2022.
(LO3 and LO4)
1. Acquisition analysis at 1 July 2022:
Net fair value of identifiable assets

and liabilities acquired = $50 000 + $25 000 + $75 000 (equity)
= $150 000
Consideration transferred = $60 000 + 50 000 x $2
= $160 000
Goodwill = $160 000 – $150 000
= $10 000
2. Journal entries for Michael Ltd to recognise the additional investment in Andrew Ltd at 1
July 2022:
Shares in Andrew Ltd Dr 160 000

Cash Cr 60 000
Share capital Cr 100 000
Acquisition expenses Dr 12 500

Share capital Dr 2 500
Cash Cr 15 000
The acquisition-related costs are not part of the consideration transferred as those amounts
are not paid to the former shareholders of Andrew Ltd in exchange of their shares. Therefore,
they are not recognised as part of the investment in Andrew Ltd: the share issue costs are
treated as a reduction in the share capital (as all the share issue costs), while the remaining
costs are recognised as expenses in the year of acquisition.
3. Consolidation worksheet entries at 1 July 2022:
BCVR entry at 1 July 2022:
There is a BCVR entry only for goodwill identified in the acquisition analysis as all the
identifiable assets and liabilities of Andrew Ltd were recorded at amounts equal to their fair
values at acquisition date.
Goodwill Dr 10 000
Business combination valuation reserve Cr 10 000
Pre-acquisition entry at 1 July 2022:
Retained earnings (1/7/22) Dr 75 000

General reserve Dr 25 000
Business combination valuation reserve Dr 10 000
Shares in Andrew Ltd Cr 160 000
The pre-acquisition entry eliminates the pre-acquisition equity (including the business
combination valuation reserve recognised for the goodwill acquired) against the investment
account recognised by the parent based on the consideration transferred.
Please note that if the fair value of the consideration transferred would have been less than
the net fair value at the acquisition date of identifiable assets acquired and liabilities assumed,
the acquisition analysis will identify a gain on bargain purchase instead of goodwill.
Therefore, there won’t be any BCVR entries in that case and the pre-acquisition entry will
need to eliminate the retained earnings, share capital and the general reserve of the subsidiary
at the acquisition date, together with the investment account recognised by the parent and
recognise the gain on bargain purchase. For example, if the fair value of the consideration
transferred would have been $135 000, the gain on bargain purchase would have been $30
000 and the only consolidation worksheet entry would have been the following pre-
acquisition entry:

Gain on bargain purchase Cr 15 000
Shares in Andrew Ltd Cr 135 000
Exercise 27.4
Undervalued and unrecorded assets, unrecorded liabilities
On 1 July 2022, Dean Ltd acquired all the issued shares of Lewis Ltd for a cash consideration
of $1 000 000. At that date, the financial statements of Lewis Ltd showed the following
information.
All the assets and liabilities of Lewis Ltd were recorded at amounts equal to their fair values
at the acquisition date, except some equipment recorded at $50 000 below its fair value with a
related accumulated depreciation of $80 000. Also, Dean Ltd identified at acquisition date a
contingent liability related to a lawsuit where Lewis Ltd was sued by a former supplier and
attached a fair value of $40 000 to that liability.
Required
1. Prepare the acquisition analysis at 1 July 2022.
2. Prepare the consolidation worksheet entries for Dean Ltd’s group at 1 July 2022,
assuming that Lewis Ltd has not revalued the equipment in its own accounts.
3. Prepare the consolidation worksheet entries for Dean Ltd’s group at 1 July 2022,
assuming that Lewis Ltd has revalued the equipment in its own accounts.
(LO3 and LO4)
1. Acquisition analysis at 1 July 2022:

and liabilities acquired = $650 000 + $20 000 + $250 000 (equity)
+ $50 000 x (1 – 30%) (BCVR – equipment)
- $40 000 x (1 – 30%) (BCVR – cont. liability)
= $927 000
Consideration transferred = $1 000 000
Goodwill = $1 000 000 – $927 000
= $73 000
2. Consolidation worksheet entries at 1 July 2022 if the equipment is not revalued in

subsidiary’s accounts:
BCVR entries at 1 July 2022:
The BCVR entries will need to recognise the increase in value of the equipment, the
contingent liability that was not recorded prior to the acquisition date in the subsidiary’s
accounts and the goodwill identified in the acquisition analysis. It is assumed that the
carrying amount of the equipment is $50 000 below its fair value, meaning its historical cost
is $30 000 above its fair value given the accumulated depreciation of $80 000.
Accumulated depreciation – equipment Dr 80 000

Equipment Cr 30 000
Deferred tax liability Cr 15 000
Deferred tax asset Dr 12 000

Provision for damages Cr 40 000
Goodwill Dr 73 000

Shares in Lewis Ltd Cr 1 000 000
3. Consolidation worksheet entries at 1 July 2022 if the equipment is revalued in subsidiary’s

accounts:
BCVR entries at 1 July 2022:
The BCVR entries will only need to recognise the contingent liability that was not recorded
prior to the acquisition date in the subsidiary’s accounts and the goodwill identified in the
acquisition analysis. The value increment for the equipment is recognised in the subsidiary’s
accounts.
Deferred tax asset Dr 12 000

Provision for damages Cr 40 000
Goodwill Dr 73 000
If the value increment for the equipment is recognised in the subsidiary’s accounts, an asset
revaluation surplus would have been raised for the increase in value after tax (i.e. $50 000 x
(1-30%)). The pre-acquisition entry would then need to eliminate that asset revaluation
surplus, together with the retained earnings, general reserve and share capital recorded by the
subsidiary at acquisition date, the business combination valuation reserve recorded in the
BCVR entries above and the investment accounts recognised by the parent in the subsidiary
based on the consideration transferred at acquisition date.

Asset revaluation surplus Dr 35 000
Shares in Lewis Ltd Cr 1 000 000
Exercise 27.7
Pre-acquisition dividends, previously recorded goodwill

On 1 January 2023, Daniel Ltd acquired all the issued shares (cum div.) of Powter Ltd for
$526 000. At that date the equity of Powter Ltd was recorded as follows.
Share capital $ 300 000

On 1 January 2023, the records of Powter Ltd showed that the company had previously
recorded a goodwill at cost of $10 000. Further, Powter Ltd had a dividend payable of $20
000, the dividend to be paid in March 2023. All other assets and liabilities were carried at
amounts equal to their fair values.
Required
1. Prepare the acquisition analysis at 1 January 2023.
2. Prepare the consolidation worksheet entries for Daniel Ltd’s group at 1 January
2023.
3. Prepare the consolidation worksheet entries for Daniel Ltd’s group at 30 June 2023.
4. How will the entries for 2 and 3 above change if the consideration transferred was
$498 000.
(LO3, LO4 and LO5)
1. Acquisition analysis at 1 January 2023:

and liabilities of Powter Ltd = ($300 000 + $80 000 + $120 000) (equity)
– $10 000 (goodwill)
= $490 000
Net consideration transferred = $526 000 – $20 000 (dividend)*
= $506 000
Goodwill acquired = $506 000 – $490 000
= $16 000
Recorded goodwill = $10 000
Unrecorded goodwill = $16 000 – $10 000
= $6 000
* As the dividend was declared prior to the acquisition and the acquisition is cum div., the
dividend is recognised as a refund of the consideration transferred. That also means that the
investment account recognised by Daniel Ltd as Shares in Powter Ltd will be recognised as
$506 000 (net consideration transferred) and not $526 000.
2. Consolidation worksheet entries at 1 January 2023:
Business combination valuation entries:
The BCVR entries only record the previously not recorded goodwill.
Goodwill Dr 6 000
Pre-acquisition entries:

Shares in Powter Ltd Cr 506 000
Dividend payable Dr 20 000

Dividend receivable Cr 20 000
As the dividend was declared prior to the acquisition out of pre-acquisition equity and it is
recognised by Daniel Ltd as receivable (the acquisition is cum div.), the dividend payable and
the dividend receivable related to it are eliminated in the pre-acquisition entry.
3. Consolidation worksheet entries at 30 June 2023:
The entries are the same as in 2 above except that the dividend payable/receivable entry will
no longer be required as the dividend has been paid by Powter Ltd.
4. If the consideration transferred was $498 000, then the entries may change as the goodwill
changes and it may even become a gain on bargain purchase. To identify the changes, a new
acquisition analysis will need to be performed as at 1 January 2023:

and liabilities of Powter Ltd = ($300 000 + $80 000 + $120 000) (equity)
– $10 000 (goodwill)
= $490 000
Net consideration transferred = $498 000 – $20 000 (dividend)
= $478 000
Gain on bargain purchase = $490 000 – $478 000
= $12 000
Recorded goodwill = $10 000
Goodwill written off = $10 000
If, as a result of the acquisition analysis it is determined that there is a gain on bargain
purchase and not goodwill, at 1 January 2023, the previously recorded goodwill needs to be
written-off in the BCVR entries by debiting the BCVR account. In the pre-acquisition entries
at 1 January 2023, the gain on bargain purchase needs to be recognised and the BCVR needs
to be eliminated by crediting the account.

Goodwill Cr 10 000

Gain on bargain purchase Cr 12 000
Shares in Powter Ltd Cr 478 000
Dividend payable Dr 20 000

Dividend receivable Cr 20 000
The entries at 30 June 2023 will not include the dividend payable/receivable entry as the
dividend has been paid by Powter Ltd. However, the main pre-acquisition entry at 1 January
2023 will be repeated unchanged at 30 June 2023. There will not be any other pre-acquisition
entries because there were no other events that impacted on pre-acquisition equity during the
period.
Exercise 27.12
Undervalued assets, pre-acquisition reserves transfers
Billy Ltd acquired all the issued shares of Joel Ltd on 1 January 2022 for $36 000. At this
date the equity of Joel Ltd consisted of the following.
Share capital $25 000

All the identifiable assets and liabilities of Joel Ltd were recorded at amounts equal to their
fair values except for the following.
Carrying amount Fair value

Inventories $ 6 000 $ 8 000
Plant (cost $35 000) 25 000 26 000
Of the inventories on hand at 1 January 2022, 90% was sold by 30 June 2022. The remainder
was sold by 30 June 2023. The plant was considered to have a further 2-year useful life with
benefits to be received equally in each of those years. The tax rate is 30%.
Required
1. Prepare the acquisition analysis at 1 January 2022.
2. Prepare the consolidation worksheet entries for Billy Ltd’s group at 30 June 2022.
(LO3, LO4 and LO5)
1. Acquisition analysis at 1 January 2022:
Fair value of identifiable assets

and liabilities of Joel Ltd = $25 000 + $6 250 + $2 500 (equity)
+ ($8 000 – $6 000) (1 – 30%) (BCVR – inventories)
+ ($26 000 – $25 000) (1 – 30%) (BCVR – plant)
= $35 850
Consideration transferred = $36 000
Goodwill = $150
2. Worksheet entries at 30 June 2022:
The entries are affected by the following events that took place during the period from
acquisition to 30 June 2022:
 the sale of 90% of the inventories during the current period ended 30 June 2022
 the depreciation of the plant during the current period ended 30 June 2022.
The BCVR entry for the inventory unsold during the current period will be the same as the
BCVR entry for inventory at acquisition date, but only for the 10%. The BCVR entry for
goodwill is repeated as prepared at acquisition date.
Cost of sales Dr 1 800

Income tax expense Cr 540
Transfer from BCVR Cr 1 260
This entry relates to the 90% of the inventories that has been sold by 30 June 2022.
Inventories Dr 200
Deferred tax liability Cr 60
Business combination valuation reserve Cr 140
This entry relates to the 10% of the inventories still on hand at 30 June 2022.
Accumulated depreciation - plant Dr 10 000

Plant Cr 9 000
Depreciation expense Dr 250

Accumulated depreciation - plant Cr 250
(1/2 x $500 p.a.)
Deferred tax liability Dr 75

(30% x $250)
Goodwill Dr 150
The first pre-acquisition entry is the same as the one at 1 January 2022. The other pre-
acquisition entry needs to reverse:
 the current period transfer from business combination valuation reserve due to the sale of
90% of the inventories.

Reserves Dr 6 250
Shares in Joel Ltd Cr 36 000
Transfer from BCVR Dr 1 260

 the sale of the remaining 10% of inventories during the current period ended 30 June
2023
 the depreciation of the plant during the previous period ended 30 June 2022 and current
period ended 30 June 2023.
The BCVR entries will not need to consider adjustments for the sale of inventories in the
previous period because those inventories were not in the business at the beginning of the
current period. The BCVR entry for goodwill is repeated as prepared at acquisition date.
Cost of sales Dr 200

Transfer from BCVR Cr 140
Accumulated depreciation - plant Dr 10 000

Plant Cr 9 000
Depreciation expense Dr 500

Retained earnings (1/7/22) Dr 250
Accumulated depreciation - plant Cr 750
Deferred tax liability Dr 225

Retained earnings (1/7/22) Cr 75
(30% x amounts in above depreciation entry)
Goodwill Dr 150
The first pre-acquisition entry is the combination of the ones at 30 June 2022, knowing that
“Transfer from business combination valuation reserve” is now “Retained earnings”. Another
method to prepare it is to consider the entry at acquisition date and adjust it for all the pre-
acquisition equity transfers up to the beginning of the current period.
The other pre-acquisition entry needs to reverse:
 the current period transfer from business combination valuation reserve due to the sale of
inventories.

Business combination valuation reserve Dr 990
Transfer from BCVR Dr 140

 the depreciation of the plant for the previous periods up to 30 June 2023 and the current
period ended 30 June 2024
 the de-recognition of the plant in the current period as a result of it being fully
depreciated.
The BCVR entries will not need to consider adjustments for the sale on inventories is the
previous periods because those inventories were not in the business at the beginning of the
current period. The BCVR entry for goodwill is repeated as prepared at acquisition date.
*Depreciation expense Dr 250

Retained earnings (1/7/23) Dr 525
Transfer from BCVR Cr 700
*As the plant is now fully depreciated, it is not recognised anymore in the subsidiary’s
accounts, so no adjustments are needed on consolidation to the plant account or the related
accumulated depreciation account. The only adjustments needed are to the current period
depreciation and its tax effect and also to the previous periods’ depreciations which are
recorded in the “Retained Earnings (1/7/23)”. Also, the BCVR recorded at acquisition date
for plant is now transferred to retained earnings by using the “Transfer from business
combination valuation reserve” account.
Goodwill Dr 150
The first pre-acquisition entry is the combination of the ones at 30 June 2023, knowing that
“Transfer from business combination valuation reserve” is now “Retained earnings”. Another
method to prepare it is to consider the entry at acquisition date and adjust it for all the pre-
acquisition equity transfers up to the beginning of the current period.
The other pre-acquisition entry needs to reverse:

 The current period transfer from business combination valuation reserve due to de-
recognition of the plant.
Retained earnings (1/7/23)* Dr 3 900

Business combination valuation reserve Dr 850
* 2 500 + $2 000 (1 - 30%) or $3 760 + $140
Transfer from BCVR Dr 700


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TUTORIAL 5

Share capital $50 000

Net fair value of identifiable assets

Shares in Andrew Ltd Dr 160 000

Acquisition expenses Dr 12 500

3. Consolidation worksheet entries at 1 July 2022:

BCVR entry at 1 July 2022:

Pre-acquisition entry at 1 July 2022:

Retained earnings (1/7/22) Dr 75 000

Retained earnings (1/7/22) Dr 75 000

Net fair value of identifiable assets

2. Consolidation worksheet entries at 1 July 2022 if the equipment is not revalued in

BCVR entries at 1 July 2022:

Accumulated depreciation – equipment Dr 80 000

Deferred tax asset Dr 12 000

Pre-acquisition entry at 1 July 2022:

Retained earnings (1/7/22) Dr 250 000

3. Consolidation worksheet entries at 1 July 2022 if the equipment is revalued in subsidiary’s

BCVR entries at 1 July 2022:

Deferred tax asset Dr 12 000

Pre-acquisition entry at 1 July 2022:

Retained earnings (1/7/22) Dr 250 000

Pre-acquisition dividends, previously recorded goodwill

Share capital $ 300 000

1. Acquisition analysis at 1 January 2023:

Net fair value of identifiable assets

2. Consolidation worksheet entries at 1 January 2023:

Business combination valuation entries:

Retained earnings (1/1/23) Dr 120 000

Dividend payable Dr 20 000

3. Consolidation worksheet entries at 30 June 2023:

Net fair value of identifiable assets

Business combination valuation entries:

Business combination valuation reserve Dr 10 000

Retained earnings (1/1/23) Dr 120 000

Dividend payable Dr 20 000

Share capital $25 000

Carrying amount Fair value

1. Acquisition analysis at 1 January 2022:

Fair value of identifiable assets

2. Worksheet entries at 30 June 2022:

Business combination valuation entries:

Cost of sales Dr 1 800

Accumulated depreciation - plant Dr 10 000

Depreciation expense Dr 250

Deferred tax liability Dr 75

Retained earnings (1/1/22) Dr 2 500

Transfer from BCVR Dr 1 260

3. Worksheet entries at 30 June 2023:

Business combination valuation entries:

Cost of sales Dr 200

Accumulated depreciation - plant Dr 10 000

Depreciation expense Dr 500

Deferred tax liability Dr 225

Retained earnings (1/7/22) Dr 3 760

Transfer from BCVR Dr 140

4. Worksheet entries at 30 June 2024:

Business combination valuation entries:

*Depreciation expense Dr 250

The other pre-acquisition entry needs to reverse:

Retained earnings (1/7/23)* Dr 3 900

Transfer from BCVR Dr 700