Q

Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset.

Home, - Has any goodwill been acquired

Question 1: An asset having a cost of $200 000 and accumulated depreciation of $40 000 is revalued to $240 000 at the beginning of the year. Depreciation for the year is based on the revalued amount and the remaining useful life of eight years. Shareholders' equity, before adjusting for the above revaluation and subsequent depreciation, is as follows:

Share capital

600 000

Revaluation surplus

90 000

Capital profits reserve

170 000

Retained earnings

140 000

Total

1 000 000

Required:
Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset. Which of the equity accounts would be affected directly or indirectly by the revaluation?

ANSWER:

Particulars

Dr (in $)

Cr (in $)

Dr Accumulated depreciation

40000

 

 Cr Asset

 

40000

(to eliminate accumulated depreciation)

 

 

 

 

 

Dr Asset

80000

 

Cr Gain on revaluation (part of OCI)

 

80000

(to recognise the revaluation)

 

 

 

 

 

Dr Gain on revaluation (part of OCI)

80000

 

Cr Revaluation surplus

 

80000

(to transfer the gain to revaluation surplus)

 

 

 

 

 

Dr Depreciation expense

30000

 

Cr Accumulated depreciation

 

30000

(to recognise depreciation expense)

 

 

 

 

 

Dr Revaluation surplus [(240000-160000)/8]

10000

 

Cr Retained earnings

 

10000

(to transfer the excess depreciation to revaluation surplus)

 

 

Due to the revaluation of the asset, two accounts under equity section will be affected namely revaluation surplus and retained earnings. When assets is revalued, revaluation surplus account should be adjusted. At the time of making entry of depreciation, the excess depreciation due to revaluation shall be charged from revaluation surplus and thus retained earnings would be increased by such amount.

Question 2

ABC Ltd acquires 100 per cent of RedCarpet Ltd on 1 July 2021. ABC Ltd pays the shareholders of RedCarpet Ltd the following consideration:

Cash

35 000

Plant and equipment

fair value $125 000; carrying amount in the books of ABC Ltd $85 000

Land

fair value $150 000; carrying amount in the books of ABC Ltd $100 000

There are also legal fees of $95 000 involved in acquiring RedCarpet Ltd.
On 1 July 2021 RedCarpetLtd's statement of financial position shows total assets of $300 000 and liabilities of $150 000. The fair value of the assets is $400 000.

Required:

Has any goodwill been acquired and, if so, how much? And discuss the potential for including associated legal fees into the cost of acquiring RedCarpet using appropriate accounting standard.

ANSWER:

Calculation of Purchase Considerations:

Particulars

 $

Cash

         35,000.00

Plant & Equipment

       125,000.00

Land

       150,000.00

Purchase considerations

       310,000.00

Calculation of fair value of Net Identifiable assets:

Particulars

 $

Fair value of assets

       400,000.00

Less: Fair value of liabilities

       150,000.00

Fair value of Net Identifiable Assets

       250,000.00

Calculation of Goodwill:

Particulars

 $

Purchase considerations

       310,000.00

less: fair value of Net Identifiable assets

       250,000.00

Goodwill

         60,000.00

As per IFRS 3 "Business Combination", cost of acquisition should not include the legal fees and should be expensed in the year in which it is incurred. Also, IFRS 10 "Consolidation" states the same provisions and stand in favour of treating such associated legal fees as an expense and should be charged in the Income Statement in the year in which in it is incurred.


Leave a comment


       
Captcha

Related :-