Module - 5 Business Combinations

Part A - Acquisition Method

Q1) FV of the net identifiable assets and liabilities assumed

Entity A - Acquirer Entity B - Acquiree

Purchase Price 300,000
Acquired shares 90%
FV of assets of Entity B 250,000 excluding equipment
FV of equipment 30,000
CA of equipment 20,000
Contingent Liability 20,000 IFRS 3 has an exception to add contingent libaility
Contingent Asset 15,000 Do not include in the calculation

FV of identifiable assets

FV of other assets 250,000

FV of equipment 30,000
DTL of equipment -3000
Contingent Liability -20,000
DTA of contingent liability 6,000
FV of net identifiable assets 263,000

Q2) Goodwill/bargain purchase using the partial goodwill method

Purchase price 200,000

FV of assets 125,000 excluding equipment
FV of NCI 18,400
FV of equipment 30,000
CA of equipment 20,000
Acquired shares 80%
NCI in acquiree 20%
DTL of equipment -3000
Goodwill using Partial Method

Consideration 200,000
FV of net identifiable assets 152,000
NCI 30,400
Previously held equity 0
Goodwill 78,400
 Part B - Pre-Acquisition Elimination

Q1) After effecting elimination entries

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Issued Capital 200 30 -30 200
Retained Earnings 100 20 -20 100
300 50 300
Investment in Sub Ltd 50 -50 0
Other Net Assets 250 50 300
300 50 300

Assets revalued in Subsidiary's f/s -> Revaluation Surplus

Assets revalued in Consildated f/s -> Business Combination Reserve

Q2) Revaluation of Assets - Pre-acquisition elimination entry

Parent purchased all shares 6,000

Revaluation of plant 5,000
Asset revaluation surplus 3,500
Deferred Tax Liability 1,500

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Issued Capital 200 30 -30 200
Retained Earnings 110 20 -20 110
Asset Revaluation Surplus 3.5 -3.5 0
Deferred Tax Liability 1.5 1.5
310 55 311.5
Investment in Sub Ltd 60 -60 0
Other Net Assets 250 55 305
Goodwill 6.5 6.5
310 55 311.5

Net Assets in Sub after reval. 53.5 deduct the DTL

Goodwill 6.5 Investments in Sub less the net assets

Q3) Revaluation of Assets - Part of Pre-acquisition elimination entry

(Revaluation happened during the acquisition and not reflected in the subsidiary's
financial statement)
Parent purchased all shares 120,000
Revaluation of plant 20,000
Business Combination Reserve 14,000
Deferred Tax Liability 6,000

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Issued Capital 300 40 -40 300
Retained Earnings 250 50 -50 250
Business Combination reserve -14 14 0
Deferred Tax Liability 6 6
550 90 556
Investment in Sub Ltd 120 -120 0
Other Net Assets 430 90 20 540
Goodwill 16 16
550 90 556

Net Assets in Sub after reval. 104.0 deduct the DTL

Goodwill 16.0 Investments in Sub less the net assets

Q3) Pre-acquisition elimination entry at Subsequent Period - Concept 1

Parent purchased all shares 200,000
Revaluation of plant 15,000
Business Combination Reserve 10,500
Deferred Tax Liability 4,500

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Issued Capital 50 90 -90 50
Retained Earnings 400 80 -80 400
Business Combination reserve -10.5 10.5 0
Deferred Tax Liability 4.5 4.5
450 170 454.5
Investment in Sub Ltd 200 -200 0
Plant 80 -15 65
Less: Accumulated Depreciation -30 30 0
Other Net Assets 250 120 370
Goodwill 19.5 19.5
450 170 454.5

CA of the plant 50
After FV revalued, the plant value 65 Add the $15 revaluation
Investment 200
FV of identifiable assets 185
DTL on plant 4.5
Goodwill 19.5

Q3) Pre-acquisition elimination entry at Subsequent Period - Concept 2 (Depreciation Expense)

Parent purchased all shares 80,000
Revaluation of plant 10,000
Business Combination Reserve 7,000
Deferred Tax Liability 3,000
Remaining Useful life 4 years

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Depreciation Expense - 10 2.5 12.5
Profit Before Tax 200 100 297.5
Income Tax Expense 60 30 0.75 89.25
Profit for the Year 140 70 208.25
Retained Earnings - Opening 100 40 -40 100
Retained Earnings - Closing 240 110 308.25
Issued Capital 200 30 -30 200
Business Combination reserve -7 7 0
Deferred Tax Liability -0.75 3 2.25
440 140 510.5
Investment in Sub Ltd 80 -80 0
Plant 50 50
Less: Accumulated Depreciation -20 10 -2.5 -12.5
Other Net Assets 360 110 470
Goodwill 3 3
440 140 510.5

Accum Dep at end of the year 20

Dep at the start of the year (Sub) 10
Accum Dep at start of the year 10

Investment in Sub Ltd 80

Net assets prior to revaluation 70 Retained earnings and Issued capital
Upward revaluation of plant 10
DTL -3
Goodwill 3
n entry
Concept 1

Reducing 80 to 65 by deducting 15
Reversing the Accum dep 30
Concept 2 (Depreciation Expense)

Depreciation Expense for the group 2.5

DTL on Depreciation exp 0.75
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Q1) Sale of Inventory - Scenario 1

Parent sold to Sub 30,000

Profit 5,000
COGS - Parent 25,000
50% inventory sold 20,000

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Sales 30,000 20,000 -30,000 20,000
Less: COGS 25,000 15,000 -27,500 12,500
Gross Profit 5,000 5,000 7,500
Income Tax 1,500 1,500 -750 2,250
Inventory 15,000 -2,500 12,500
Deferred Tax Asset 750 750

COGS to the Group 25,000

Half inventory sold 12,500 should reflect in the consolidation
Eliminate COGS in group 27,500

Half of profit is realised 2,500

DTA on profit realised 750

Q1) Sale of Inventory - Scenario 2 (unrealised profit to next subsequent period)

YEAR - 1
Parent sold to Sub 30,000
Profit 5,000
COGS - Parent 25,000
50% inventory sold 20,000

YEAR - 2
Remaining inventory sold 18,000

Elimination
Answer: Parent Ltd Sub Ltd Consolidation
Debit Credit
Sales 18,000 18,000
Less: COGS 15,000 -2,500 12,500
Gross Profit 3,000 5,500
Income Tax 900 750 1,650
Inventory 0
Opening Retained Earnings 1,750 -1,750
COGS to the Group 25,000
Half inventory sold 12,500 should reflect in the consolidation
Eliminate COGS in group 2,500

Unrealised Profit (50%) 2500

Eliminate unrealised profit 1750
Income tax expense 750
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