Gasoline Limited is a chemical company that produces a wide variety of chemical products. WV Limited is a shipping company that transports oil and other liquid products around the world. WV recently signed an agreement to pay R21 450 000 on 2 October 2017 for a 100% shareholding in Gasoline Limited.
Gasoline Limited Statement of Financial Position as at 30 September 2017 is as follows:
Gasoline Limited uses the Revaluation Model to measure all assets and items are at fair value at year-end. The market interest rate is 6,5% per annum.
Financial year-end for WV Limited and Gasoline Limited is 31 December 2017 and 30 September 2017 respectively.
Required:
Journalise all entries that relate to the Acquisition of Gasoline Limited. (Show all related workings.)
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In order to journalize the entries related to the acquisition of Gasoline Limited, we need to consider the following information:
1. WV Limited agreed to pay R21,450,000 on 2 October 2017 for a 100% shareholding in Gasoline Limited.
2. Gasoline Limited uses the Revaluation Model to measure all assets and items are at fair value at year-end.
3. The market interest rate is 6.5% per annum.
To journalize the entries, we need to consider the following steps:
Step 1: Determine the fair value of identifiable net assets acquired:
- Cash and cash equivalents: R1,278,000.
- Inventory: R4,950,000.
- Land and buildings: R5,035,000.
- Plant and equipment: R9,685,000.
- Total fair value of identifiable net assets acquired: R21,948,000.
Step 2: Calculate the goodwill or bargain purchase gain:
- Purchase consideration: R21,450,000.
- Fair value of identifiable net assets acquired: R21,948,000.
- Goodwill (if purchase consideration > fair value of net assets) or Bargain purchase gain (if purchase consideration < fair value of net assets) = Purchase consideration - Fair value of identifiable net assets acquired.
- Goodwill/Bargain purchase gain = R21,450,000 - R21,948,000 = -R498,000. (This indicates a Bargain Purchase Gain)
Step 3: Journalize the entries:
a) Dr. Intangible Asset (Goodwill) - R498,000
Cr. Cash - R498,000
(To record the bargain purchase gain)
b) Dr. Intangible Asset (Brands) - R6,300,000
Dr. Intangible Asset (Customer relationships) - R3,150,000
Dr. Intangible Asset (Technology) - R2,520,000
Cr. Intangible Liability (Trademarks) - R3,150,000
Cr. Intangible Liability (Customer relationships) - R6,300,000
Cr. Intangible Liability (Technology) - R2,520,000
Cr. Cash - R21,450,000
(To record the purchase of intangible assets and payment for them)
c) Dr. Property, Plant and Equipment (Land and buildings) - R7,245,000
Dr. Property, Plant and Equipment (Plant and equipment) - R14,055,000
Cr. Current Liability (Bank loans) - R21,300,000
(To record the assumption of bank loans for the acquisition of property, plant, and equipment)
d) Dr. Deferred Tax Liability - R1,297,800
Cr. Current Liability (Current tax payable) - R1,297,800
(To record the deferred tax liability on the difference between the fair value and carrying value of the assets)
e) Dr. Retained Earnings - R498,000
Cr. Intangible Liabilty (Goodwill) - R498,000
(To eliminate the goodwill created from the Bargain Purchase Gain)
f) Dr. Current Liability (Trade payables) - R1,850,000
Dr. Current Liability (Accruals) - R2,757,000
Dr. Current Liability (Dividends payable) - R2,520,000
Dr. Current Liability (Current tax payable) - R1,404,000
Cr. Cash - R8,531,000
(To record the payment of trade payables, accruals, dividends, and current taxes)
g) Dr. Equity (Ordinary shares) - R20,800,000
Cr. Equity (Retained earnings) - R20,800,000
(To eliminate the equity accounts of Gasoline Limited)
Note: Please consult with a professional accountant or financial advisor for specific guidance on accounting treatments and any changes in regulations or standards that may affect the correctness of the above entries for your specific situation.