Chapter 10 - Business Combinations: Review Questions

Tutorial Week 5 Moodle Questions and Solutions
Chapter 10 Business Combinations

REVIEW QUESTIONS
1.
What is meant by a business combination?
AASB 3 Appendix A:
Business:
an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or
other economic benefits directly to investors or other owners, members or
participants
Business combination:
A transaction or other event in which an acquirer obtains control of one or more
businesses
Consider inputs, processes and outputs
Only in a business combination can goodwill be present.
2.
Discuss the importance of identifying the acquisition date.
Acquisition date is the date on which the acquirer obtains control of the acquiree.
Important because on this date:
the fair values of the identifiable assets acquired and liabilities assumed are
measured.
the fair value of the consideration transferred is measured
the goodwill or gain on bargain purchase is calculated.
7.
Explain the key steps in the acquisition method.
AASB 3 para 5:
1.
2.
3.
4.
identify the acquirer

determine the acquisition date
recognise and measure the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree
recognise and measure goodwill or a gain from a bargain purchase.
8.
How is the consideration transferred calculated?
AASB 3 para 37 states that the consideration transferred shall be

- measured at fair value, determined at acquisition date, and
- calculated as the sum of the fair values of the assets transferred by the acquirer,
the liabilities incurred by the acquirer, and the equity interests issued by the
acquirer.
PRACTICE QUESTIONS
Question 10.1
NEW LTD DAY LTD
Acquisition analysis:
Net fair value of identifiable assets and liabilities acquired:
Land
Plant
Inventory
Cash
$350 000
290 000
85 000
15 000
740 000
Accounts payable
Loans
20 000
80 000
100 000
$640 000
Net assets
Consideration transferred:
100 000 shares at $6.50 each
Goodwill = $650 000 - $640 000
$650 000
$10 000
A. Journal entries: New Ltd, FV of shares = $6.50

Land
Plant
Inventory
Cash
Goodwill
Accounts payable
Loans
Share capital
Dr
Dr
Dr
Dr
Dr
Cr
Cr
Cr
350 000
290 000
85 000
15 000
10 000
20 000
80 000
650 000
B. Journal entries: New Ltd, FV of shares = $6.00

Fair value of acquirees net assets
Consideration transferred: 100 000 x $6
Gain on bargain purchase
Land
Plant
Inventory
Cash
Accounts payable
Loans
Share capital
$640 000
$600 000
$40 000
Dr
Dr
Dr
Dr
Cr
Cr
Cr
Cr
350 000
290 000
85 000
15 000
20 000
80 000
600 000
40 000
QUESTION 10.6
TROUT LTD DORY LTD
A.
Net fair value of identifiable assets and
liabilities of Dory Ltd
Consideration transferred
Goodwill
=
=
=
=
=
$175 000
100 000 shares x $1.90
$190 000
$190 000 - $175 000
$15 000
The journal entries at acquisition date, 1 December 2014 are:

Cash
Furniture & fittings
Accounts receivable
Plant
Goodwill
Accounts payable
Current tax liability
Provision for annual leave
Share capital
(Acquisition of business)
Dr
Dr
Dr
Dr
Dr
Cr
Cr
Cr
Cr
50 000
20 000
5 000
125 000
15 000
15 000
8 000
2 000
190 000
Check disclosures against the following paragraphs from AASB 3 Appendix B:

Paragraph
B64 (a)
B64 (b)
B64 (d)
B64 (e)
B64 (f)
B64 (i)
the names and descriptions of the combining businesses

the acquisition date
primary reasons for the business combination
a qualitative description of the factors making up goodwill
the consideration transferred
Fair value of each major class of consideration, including
for equity instruments issued:
- the number
- the method of determining fair value
amounts recognised for each major class of assets acquired and liabilities
assumed
B.
See paragraphs 45-50 of AASB 3 in relation to initial accounting determined provisionally.
At 31 December 2014, the provisional amounts must be used as per journal entries in (A.) on
the previous page. Note the disclosure required by paragraph B67 of AASB 3.
In 2015 as per paragraph 45, the carrying amount of the plant must be calculated as if its fair
value at the acquisition date had been recognised from that date, with an adjustment to
goodwill.
If the plant had a 5-year life from acquisition date, Dory Ltd would have charged depreciation
for 1 month in 2014. Extra depreciation of $100 is required, calculated as
1/5 x 1/12 x $6 000.
The adjusting entry at 1 March 2015 is:
Plant
Goodwill
(Adjustment for provisional accounting)
Retained earnings (1/1/14)
Accumulated depreciation
(Adjustment to depreciation due to
provisional accounting)
Dr
Cr
6 000
Dr
Cr
100
6 000
100
If depreciation has been calculated monthly for 2015, further adjustments would be required.
C.
Net fair value of identifiable assets and
liabilities of Dory Ltd
Consideration transferred
=
=
=
=
=
$175 000
100 000 shares x $1.70
$170 000
$175 000 - $170 000
$5 000
The journal entries at acquisition date, 1 December 2014 are:
Cash
Furniture & fittings
Accounts receivable
Plant
Accounts payable
Current tax liability
Provision for annual leave
Share capital
(Acquisition of business)
Dr
Dr
Dr
Dr
Cr
Cr
Cr
Cr
Cr
50 000
20 000
5 000
125 000
15 000
8 000
2 000
5 000
170 000
Chapter 11 Impairment of assets
REVIEW QUESTIONS
1.
What is an impairment test?

It is a test to determine if an entitys assets are overstated, that is, whether the carrying
amount of the assets is greater than their recoverable amount.
3.
When should an entity conduct an impairment test?

At each reporting date, an entity must assess whether there is any indication of
impairment. If such an indication exists, the entity shall estimate the recoverable amount
of the asset [AASB 136 para 9]
4.
What are some external indicators of impairment?

AASB 136 para 12:
(a) significant decline in market value
(b) significant changes in the technological, market, economic or legal environment in
which the entity operates
(c) increases in market interest rates
(d) the carrying amount of the entitys assets exceeds the entitys market capitalisation
5.
What are some internal indicators of impairment?

AASB 136 para 12:
(a) evidence of obsolescence or physical damage
(b) assets becoming idle, plans to discontinue operations, plans to dispose of assets
(c) economic performance is worse than expected
6.
What is meant by recoverable amount?

Recoverable amount is the higher of an assets value in use and fair value less costs of
disposal.
7.
How is an impairment loss calculated in relation to a single asset accounted for?

AASB 136 para 60
Under cost model:
- Recognise loss immediately in profit or loss
- Write down asset if depreciable, increase accumulated depreciation and
impairment losses account
Under revaluation model: as for a revaluation decrease under that model, the effect
being dependent on whether there have been past revaluation increments.
PRACTICE QUESTIONS
QUESTION 11.1
TAMBO LTD
If recoverable amount is $510 000, then there is an impairment loss of $30 000.
Assuming the inventory is carried at the lower of costs and net realisable value, the allocation
of the impairment loss is as follows:
Factory
Land
Equipment
(a)
Carrying
Amount
Proportion
Allocation
of Loss
$210 000
150 000
120 000
$480 000
21/48
15/48
12/48
13 125
9 375
7 500
30 000
196 875
140 625
112 500
If the fair value less costs of disposal of the land is $140 000, then the journal entry to
record the impairment loss is:
Impairment loss
Accumulated depreciation and
impairment losses factory
Land
impairment losses equipment
(Allocation of impairment loss)
(b)
Net Carrying
Amount
Dr
30 000
Cr
Cr
13 125
9 375
Cr
7 500
If the fair value less costs of disposal of the land is $145 000, then the land cannot be
written down to an amount below that figure. Hence the maximum impairment loss
allocable to land is $5 000. The extra $4 375 must be allocated to the other assets.
Carrying
Amount
Factory
Equipment
$196 875
112 500
$309 375
Proportion
Allocation
of Loss
196 875/309 375

112 500/309 375
2 784
1 591
4 375
Net Carrying
Amount
194 091
110 909
The journal entry to record the impairment loss is:

Impairment loss
impairment losses factory
Land
impairment losses equipment
Dr
30 000
Cr
Cr
15 909
5 000
Cr
9 091
QUESTION 11.5
HAY LTD
Carrying amount of assets

Allocation of HQ
Recoverable amount
Impairment loss
Hebel
$660 000
15 000
675 000
720 000
_____0
Hawker
$540 000
15 000
555 000
500 000
(55 000)
Hillston
$420 000
15 000
435 000
400 000
(35 000)
675 000
500 000
400 000
Total carrying amounts after

adjusting for impairment loss
The carrying amounts of the divisions add to $1 575 000. Together with the SRC, the total is
$1 591 000. This is less than the total recoverable amount of $1 620 000. Hence there is no
need to write down the assets of the SRC. However, the assets of the Hawker and Hillston
Divisions must be written down:
Hawker Division:
Head Office
Land
Plant
Carrying
Amount
15 000
140 000
210 000
365 000
Proportion
15/365
140/365
210/365
Allocation
of Excess
2 260
21 096
31 644
55 000
Net Carrying
Amount
118 904
178 356
The journal entry is:

Impairment loss
Land
impairment losses plant
Dr
Cr
52 740
21 096
Cr
31 644
Hillston Division:
Head Office
Land
Plant
Carrying
Amount
15 000
80 000
190 000
285 000
Proportion
15/285
80/285
190/285
Allocation
of Excess
1 842
9 825
23 333
35 000
Net Carrying
Amount
70 175
166 667

Impairment loss
Land
Dr
Cr
Cr
33 158
9 825
23 333
The total impairment loss allocated to the head office is $4 102 (i.e. $2 260 + $1 842).
This is allocated across the assets of the head office:
Head Office
Land
Plant
Carrying
Amount
10 000
35 000
45 000
Proportion
10/45
35/45
Allocation
of Excess
912
3 190
4 102
Net Carrying
Amount
9 088
31 810

Impairment loss
Land
Dr
Cr
Cr
4 102
912
3 190

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Tutorial Week 5 Moodle Questions and Solutions