BFA301 Advanced Financial Accounting

Independent Study Task Solutions

Week 1, Semester 2, 2018
Question 1
The term business is defined in Appendix A of AASB 3 as 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. The
purpose of defining a business is to distinguish between the acquisition of a business and the acquisition of
a set of assets (which is covered by AASB 116 Property, Plant and Equipment).

Question 2
A business combination is also defined in Appendix A of AASB 3 as a transaction or other event in which
an acquirer obtains control of one or more businesses. The provisions of AASB 3 are therefore applied in
situations where one entity purchases all or part of the business of another entity so as to obtain ‘control’
of that business or part thereof. In addition, AASB 3 is also applied in situations where one entity acquires
control of another entity through the purchase of shares.

Question 3
The steps required in accounting for a business combination are contained in paragraph 4 of AASB 3.
These steps are: 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; and
recognise and measure goodwill or gain on bargain purchase.

Question 4
The paragraph of AASB 3 that is most relevant to this question is paragraph 32. This paragraph states:

The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b)
below:
(a) The aggregate of:
i. the consideration transferred measured in accordance with this Standard, which generally
requires acquisition-date fair value;
ii. the amount of any non-controlling interest in the acquiree measured in accordance with
this standard; and
iii. in a business combination achieved in stages, the acquisition-date fair value of the
acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed measured in accordance with this Standard.
See paragraph 34 for an explanation of how a bargain purchase can arise.
Question 5
a. Acquisition costs are expensed in the periods in which the costs are incurred according to AASB 3
paragraph 53. Therefore, wages, general and other expenses for an acquisitions department would be
expensed as incurred and not considered to be part of the cost of the business combination.
b. The consideration transferred should be determined as at the acquisition date – the date when the risks
and rights to future benefits of the investment in Tigers Ltd pass to Kangaroos Ltd. The acquisition
date is therefore not when the agreement was signed on 1 April 20X9, but on 30 June 20X9 when the
terms of the agreement are fulfilled. The consideration transferred is therefore calculated as 200 000
shares x $6.00 = $1 200 000. The general journal entry would be:

Net investment in Tiger* 1,200,000

Share capital 1,200,000
Issue of shares to acquire the
investment
*No details on assets/liabilities
acquired
Acquisition expenses 5,000
Cash at bank 5,000
Acquisition costs incurred
Question 6
a. The consideration transferred would be measured at the acquisition date of 1 January 20X0 as:
Cash $400 000
Shares 50 000 x 4.50 $225 000
$625 000
b. The fair value of the assets acquired and the liabilities assumed are:

Trade receivables 95 000

Inventory 200 000
Land and buildings 700 000
Bank overdraft (30 000)
Trade payables and loans (400 000)
Fair value of identifiable net assets $565 000

The goodwill purchased can now be measured in accordance with AASB 3 paragraph 32 as:

Consideration transferred 625 000

Fair value of identifiable net assets 565 000
Goodwill 60 000

c. General journal entries:

1 Jan 20X0 Trade receivables 100 000

Inventory 200 000
Land and buildings 700 000
Goodwill 60 000
Provision for doubtful debts 5 000
Bank overdraft 30 000
Trade payables and loans 400 000
Consideration payable 625 000
Acquisition of business

Consideration payable 625 000

Cash at bank 400 000
Share capital 225 000
Settlement of consideration

Question 7
a. The consideration transferred would be measured at the acquisition date of 1 January 20X0 as:
Cash $ 20 000
Shares 20 000 x 1.10 $ 22 000
$ 42 000
b. The fair value of the assets acquired and the liabilities assumed are:

Accounts receivable 3 000

Land 20 000
Vehicles 8 000
Equipment 15 000
Accounts payable (10 000)
Fair value of identifiable net assets $36 000

The goodwill purchased can now be measured in accordance with AASB 3 paragraph 32 as:

Consideration transferred 42 000

 Fair value of identifiable net assets 36 000
Goodwill 6 000

c. General journal entries:

1 Jan 20X0 Accounts receivable 10 000

Land 20 000
Vehicles 8 000
Equipment 15 000
Goodwill 6 000
Provision for doubtful debts 7 000
Accounts payable 10 000
Consideration payable 42 000
Acquisition of business

Consideration payable 42 000

Cash at bank 20 000
Share capital 22 000
Settlement of consideration