QUESTION FOUR(30 MARKS)
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.)
To journalize the entries related to the acquisition of Gasoline Limited by WV Limited, we need to consider the following:
1. Calculation of Goodwill:
The goodwill is calculated as the difference between the consideration paid and the net assets acquired. Net assets acquired can be calculated as the fair value of the identifiable assets and liabilities acquired from Gasoline Limited as at the acquisition date.
Consideration paid by WV Limited to acquire Gasoline Limited: R21,450,000
Fair value of identifiable assets acquired:
- Property, plant, and equipment: R12,500,000
- Inventories: R5,200,000
- Trade and other receivables: R3,400,000
Total identifiable assets acquired: R21,100,000
The net assets acquired (excluding goodwill) is R21,100,000, and as the consideration paid is R21,450,000, the goodwill will be R21,450,000 - R21,100,000 = R350,000.
2. Journal entries:
a. Entry to record the acquisition of Gasoline Limited:
Date: 2 October 2017
Dr. Property, plant, and equipment (Fair value): R12,500,000
Dr. Inventories (Fair value): R5,200,000
Dr. Trade and other receivables (Fair value): R3,400,000
Cr. Cash (Consideration paid): R21,450,000
Cr. Goodwill: R350,000
b. Entry to adjust the fair value of assets to their revalued amounts:
Date: 31 December 2017 (WV Limited year-end)
Dr. Property, plant, and equipment (Revaluation surplus): [Fair value - Net Book Value(=Cost - Accumulated Depreciation)]
Cr. Revaluation surplus
c. Entry to recognize the amortization of goodwill:
Date: 31 December 2017 (WV Limited year-end)
Dr. Amortization of goodwill
Cr. Accumulated amortization of goodwill
d. Entry to record interest expense on the deferred consideration:
Date: 31 December 2017 (WV Limited year-end)
Dr. Interest expense
Cr. Deferred consideration interest payable
Note: Without the specific fair value information for Property, plant, and equipment, inventories, and trade and other receivables, the entries mentioned in points b, c, and d cannot be accurately determined.
We would need additional information regarding the fair value of Property, plant, and equipment, inventories, and trade and other receivables as of 31 December 2017 to accurately calculate the journal entries mentioned above.