Case Study on Business Combination Valuation

The case study involves the acquisition of Troy Limited by Lotus Limited, where the fair value of identifiable net assets is calculated as $74,870. The consideration transferred is $34,000, resulting in unrecorded goodwill of $40,870. Pre-acquisition entries are also made to business combination valuation reserves and deferred tax liabilities. The consolidated statement for Lotus and Troy Limited shows revenue, expenses, income tax expense, and retained earnings.

CASE STUDY

Table of Contents
READING LOG..............................................................................................................................1
Q1: Acquisition analysis as on 1 January, 2018........................................................................1
Q2: Business combination valuation entries...............................................................................1
Q3: Consolidated statement for Lotus and Troy Limited...........................................................2

QUESTIONS
Q1: Acquisition analysis as on 1 January, 2018
Fair value of identifiable Net assets = Share capital + retained earnings + Business
combination valuation reserve (1-30%)+ BCVR for Machinery (1-30%)+Business combination
reserve inventory (1-30%) – BCVR Accounts receivables (1-30%)- provision for legal expenses
(1-30%)- Existing goodwill prior to acquisition.
= 40000+6000+ 40000(0.7) +4000(1-30%)+ 800-3900 (1-30%)
= 20000+6000+28000+2800+800-2730
= $74870.
Consideration transferred = Share in Troy limited – Dividend payable
= $40000-$6000
= $ 34000.
Goodwill: Consideration transferred – Fair value of identified net assets
: $34000- 74870
: ($40870). Unrecorded goodwill.
Q2: Business combination valuation entries
Date Item Debit Credit
1 January,
2018
Inventory a/c…...Dr
To Business valuation reserve inventory a/c
To Deferred tax liability
4000
2800
1200
1 January,
2018
Business combination valuation reserve......... Dr.
Deferred tax liability........................................Dr.
To Accounts receivables
28000
12000
40000
Pre-acquisition entries
Date Particulars Debit Credit
1 January, 2018 Share capital...................................................... Dr.
Retained earnings.............................................. Dr.
Business combination valuation reserve........... Dr.
BCVR for Machinery....................................... Dr.
40000
6000
28000
2800
1

Business combination reserve inventory.......... Dr.
To Shares acquired and charges
800
77600
1 January, 2018 Dividend payable.............................................Dr.
To Dividend receivable
6000
6000
Q3: Consolidated statement for Lotus and Troy Limited
Particulars Debit Credit
Revenue 97200
Dividend revenue 8000
Gain on sale of property, plant or equipment 6000
Other income 6000
Total Income 117200
Cost of Sales 78000
Other Expenses 8000
Total Expenses 86000
Profit Before Income Tax 31200
Income Tax Expense 6600
Profit for the Period 24600
Retained earnings 6000
Dividend Paid 6000
Business combination valuation reserve 28000
Business combination reserve inventory 800
2