Q

Discuss the potential for including associated legal fees into the cost of acquiring Red-X using appropriate accounting

Home, - Provide the journal entries to account for the revaluation

Question 1: ABC Ltd has the following land and buildings in its financial statements as of 30 June 2022:

Residential land, at cost

2,553,800

Factory land, at valuation 2020

2,298,420

Buildings, at valuation 2020

2,043,040

Accumulated depreciation

-255,380

At 30 June 2022, the balance of the revaluation surplus is $1,021,520, of which $766,140 relates to the factory land and $255,380 to the buildings. On this same date, independent valuations of the land and buildings are obtained. In relation to the above assets, the assessed fair values at 30 June 2022 are:

Residential land, previously recorded at cost

2,809,180

Factory land, previously revalued in 2020

1,787,660

Buildings, previously revalued in 2020

2,298,420

Required:
Provide the journal entries to account for the revaluation on 30 June 2022. ABC Ltd classifies the residential land and the factory land as different classes of assets.

ANSWER 1:

Sr. no.

Particulars

Debit

Credit

1

Residential Land Dr

$255,380

 

 

Revaluation suplus Cr

 

$255,380 

 

(Recording revaluation surplus on Residential building)

 

 

 

 

 

 

2

Revaluation surplus Dr

$510,760

 

 

Factory Land Cr

 

$510,760

 

(Recording of revaluation of factory building)

 

 

 

 

 

 

3

Building Dr

$255,380

 

 

Accumulated depreciation Dr

$255,380

 

 

Revaluation surplus Cr

 

$510,760

 

(Recording of revaluation on buildings)

 

 

 

 

 Workings:

 

Revaluation gain/(loss) on residential building = fair value less carrying value

 

=(2,809,180-2,553,800) = $255,380

 

 

 

Revaluation gain/(loss) on factory land = fair value - carrying value

 

=(1,787,660-2,298,420) = $510,760

 

 

 

Revaluation surplus on Building = fair value - carrying value

 

=(2,298,420-2,043,040 - 255,380) = $510,760

 

 

 

ANSWER 2:

Journal Entries

Sr No

Particulars

Amount ($)

Amount ($)

1

Residential land ............................ Dr

To revaluation surplus

(Being surplus of the residential building recorded)

$200000

 

$200000

2

Revaluation surplus ..........................Dr

To Factory Land

(Being revaluation value of factory land recorded)

$400000

 

$400000

3

Building................................................Dr

Accumulated Depreciation...............Dr

To revaluation surplus

(Being amount of revaluation recorded)

$200000

$200000

 

 

$400000

Workings

Revaluation surplus of residential Building

Fair value- Carrying Value= $(2200000-2000000)= $200000.0000

Revaluation Surplus of Factory Land

Fair value - Carrying Value= $(1400000-1800000)= ($400000.0000)

Revaluation Surplus of Building

Fair value - Carrying Value= $(1800000-1400000)= $400000.0000

Question 2

XYZ Ltd acquired 100 per cent of Red-X Ltd on 1 July 2021. XYZ Ltd pays the shareholders of Red-X Ltd the following consideration:

Cash

89,383

Plant and equipment

fair value $319 225; carrying amount in the books of ABC Ltd $217 073

Land

fair value $383 070; carrying amount in the books of ABC Ltd $1 021 520

There are also legal fees of $242611 involved in acquiring Red-X Ltd.
On 1 July 2021, Red-X Ltd's statement of financial position shows total assets of $383 070 and liabilities of $383070. The fair value of the assets is $1 021 520.

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 Red-X using appropriate accounting standards.

ANSWER 1:

Computation of Purchase Consideration:
Cash + Fair Value of Plant and Equipment + Fair Value of Land + Legal Fees
= 89,383 + 319,225 + 383,070 + 242,611
= $1,034,289

Net Asset Value=$1,021,520 - 383,070
= $638,450

Goodwill on acquisition = Purchase Consideration - Net Asset Value
= 1034,289 - 638,450
= $395,839
Yes, Goodwill has been acquired as the Purchase consideration paid is higher than the fair value of Net Assets received.
Goodwill Amount to be recorded in the books of XYZ Ltd is $395,839

Legal expenses includes expenses that are incurred by business entities towards transfer of ownership of assets from one entity to another. Such legal costs are usually included in the cost of acquisition of the business when computing such acquisition cost as per AASB 3. In this case too, legal expenses has been considered in the computation of purchase consideration.

ANSWER 2:

Computation of Purchase Consideration paid by ABC Ltd

Cash

$70000.0000

Fair Value of Plant and Machinery

$250000.0000

Fair value of Land

$300000.0000

Legal Fees

$190000.0000

Purchase consideration

$810000.0000

Computation of Net Asset Value of Red- X

Fair Value of Asset

$800000

Liabilities

-$300000

Net Annual Value

$500000

Computation of Goodwill

=$810000-$500000= $310000

Notes

In the given case, the legal expenses incurred at the time of acquisition are clearly included in the total consideration calculated and are also considered as a part of the acquisition expense. It is so because, without investing in this, it is impossible to transfer assets from one company to another (Gaoet al., 2019).

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