Corporate Accounting: Valuation, Acquisition Analysis, Impairment Test

This document covers topics like valuation, acquisition analysis, and impairment test in corporate accounting. It includes journal entries, fair value adjustments, and computation of net identifiable assets. It also covers impairment testing of intangible and tangible assets.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Author’s Note:

1CORPORATE ACCOUNTING
Table of Contents
Part – I..............................................................................................................................................2
Answer to question 1:..................................................................................................................2
Sub part (a):.............................................................................................................................2
Sub part (b):.............................................................................................................................2
Answer to question 2:..................................................................................................................3
Answer to question 3:..................................................................................................................4
Sub part (a):.............................................................................................................................4
Sub part (b):.............................................................................................................................5
Sub part (c):.............................................................................................................................5
Sub part (d):.............................................................................................................................6
Answer to question 4:..................................................................................................................9
Part –II...........................................................................................................................................10
Sub part 1:..................................................................................................................................10
Sub part 2:..................................................................................................................................10
Sub part 3:..................................................................................................................................11
Sub part 4:..................................................................................................................................11
Sub part 5:..................................................................................................................................11
Sub part 6:..................................................................................................................................11

2CORPORATE ACCOUNTING
References and bibliography:........................................................................................................12
Part – I
Answer to question 1:
Sub part (a):
Ezy Manufacturing Ltd
Journal
Date Particulars Debit Credit
1-Jul-15 Investment in shares of Range Ltd $12,400,000
Cash $ 2,800,000
Share Capital $ 9,600,000
(To record the acquisition of shares
of Range Ltd)
1-Jul-17 Investment in shares of SWL $ 3,600,000
Cash $ 3,600,000
(To record the acquisition of shares
of SWL)
Sub part (b):
Ezy Manufacturing Ltd
Journal
Date Particulars Debit Credit
30-Jun-19 Dividend Receivable-Range Ltd $ 100,000
Dividend Income $ 100,000
(To record the dividend receivables
from Range Ltd)
30-Jun-19 Cash $ 25,000
Dividend Receivable-SWL $ 75,000
Dividend Income $ 100,000
(To record interim dividend
received and dividend declared)

3CORPORATE ACCOUNTING

4CORPORATE ACCOUNTING
Answer to question 2:
Acquisition Analysis for Acquisition of Range Ltd:
Fair Value Adjustments:
Inventory ((600000-100000)*(1-30%)) $ (350,000)
Land ((2000000-1000000)*(1-30%)) $ 700,000
Plant and Equipment ((750000-75000)*(1-30%)) $ (472,500)
Patent (15000*(1-30%)) $ 10,500
Total Fair value adjustment (net of tax) $ (112,000)
Purchase Consideration Transferred:
Fair Value of shares issued $ 9,600,000
Cash $ 2,800,000
Total Purchase Consideration transferred $ 12,400,000
Computation of Fair Value of Net Identifiable Assets:
Ordinary Shares $ 2,000,000
Preference Shares $ 1,000,000
General Reserves $ 1,000,000
Retained Earnings $ 1,500,000
Total Carrying value of net identifiable assets $ 5,500,000
Fair Value Adjustments (net of tax) $ (112,000)
Fair Value of Net Identifiable Assets $ 5,388,000
Value of Goodwill (12400000-5388000) $ 7,012,000
Acquisition Analysis of Swift Works Ltd:
Purchase Consideration Transferred $ 3,600,000
Incidental cost of acquisition $ 100,000
Total Cost of Acquisition $ 3,700,000
Computation of Fair Value of Net Identifiable Assets:
Share Capital $ 2,500,000
General Reserve $ 280,000
Retained Earnings $ 1,100,000
Fair Value of Net Identifiable Assets $ 3,880,000
Gain on Acquisition of SWL (3880000-3700000) $ 180,000

5CORPORATE ACCOUNTING
Answer to question 3:
Sub part (a):
Ezy Manufacturing Ltd
Journal
Date Particulars Debit Credit
Business Combination Valuation Reserve $ 350,000
Deferred tax Assets $ 150,000
Inventory $ 500,000
(To record the fair value adjustment for
Inventory)
Land $ 1,000,000
Business Combination Valuation Reserve $ 700,000
Deferred Tax Liability $ 300,000
(To record the fair value of land)
Business Combination Valuation Reserve $ 472,500
Deferred Tax Assets $ 202,500
Property, Plant and Equipment (750000-
75000) $ 675,000
(To record the fair value of property plant
and equipment)
Patent $ 15,000
Deferred tax liability $ 4,500
Business Combination Valuation Reserve $ 10,500
(To record the unrecorded patent)

6CORPORATE ACCOUNTING
Sub part (b):
Ezy Manufacturing Ltd
Journal
Date Particulars Debit Credit
Ordinary Shares $ 2,000,000
Preference Shares $ 1,000,000
General Reserves $ 1,000,000
Retained Earnings $ 1,500,000
Business Combination Valuation Reserve $ 6,900,000
Investment in Shares of Range Ltd $ 12,400,000
(To eliminate the inter company Investments
in Range Ltd)
Share Capital $ 2,500,000
General Reserve $ 280,000
Retained Earnings $ 1,100,000
Business Combination Valuation Reserve $ 280,000
Investment in shares on SWL $ 3,600,000
(To eliminate intercompany investment in
SWL)
Sub part (c):
Ezy Manufacturing Ltd
Journal
Date Particulars Debit Credit
Goodwill $ 7,012,000
Business Combination Valuation Reserve $ 7,012,000
(To record the goodwill on acquisition of
Range Ltd)
Business Combination Valuation Reserve $ 280,000
Incidental Expenses on Acquisition $ 100,000
Gain on acquisition of business $ 180,000
(To record the gain on acquisition of SWL)

7CORPORATE ACCOUNTING
Sub part (d):
Ezy Manufacturing Ltd
Journal
Date Particulars Debit Credit
Dividend Income $ 25,000
Dividend Paid $ 25,000
(To eliminate the intercompany dividend
paid)
Dividend Receivable $ 175,000
Dividend Payable $ 175,000
(To eliminate the effect of dividend
declared)
Sales Revenue $ 1,000,000
Cost of sales $ 960,000
Inventory (140000*40/140) $ 40,000
(To eliminate the intercompany sales by
Range Ltd to Ezy Ltd)
Current Tax Liability $ 12,000
Income Tax Expense $ 12,000
(To record the tax effect on above)
Sales Revenue $ 200,000
Cost of Sales $ 193,333
Inventory (40000*20/120) $ 6,667
(To eliminate intercompany sales by Ezy Ltd
to SWL)
Current Tax Liability $ 2,000
Income Tax Expense $ 2,000
(To record the tax effect on above)
Retained Earnings (30/06/18) $ 200,000
Inventory (700000*40/140) $ 200,000
(To eliminate unrealized profit in beginning
inventory)
Deferred tax Liability $ 60,000

8CORPORATE ACCOUNTING
Retained Earnings (30/06/18) $ 60,000
(To record tax effect on above)
Accumulated Depreciation $ 250,000
Retained Earnings (30/06/18) (975000-
(1000000-250000)) $ 225,000
Machinery 1 $ 475,000
(To eliminate gain on intercompany sale of
machinery)
Deferred tax Liability $ 67,500
Retained Earnings $ 67,500
(To record tax effect on above)
Accumulated Depreciation (475000/10) $ 47,500
Retained Earnings (30/06/18) $ 47,500
(To adjust the recorded accumulated
depreciation)
Retained Earnings (30/06/18) $ 14,250
Deferred Tax Liability $ 14,250
(To record tax effect on above)
Accumulated Depreciation $ 47,500
Depreciation Expenses $ 47,500
(To adjust the accumulated depreciation in
the current year)
Income Tax Expense $ 14,250
Current tax Liability $ 14,250
(To record tax effect on above)
Accumulated Depreciation $ 200,000
Retained Earnings (1040000-(1000000-
200000)) $ 240,000
Machinery 2 $ 440,000
(To eliminate profit on intercompany sale of
machinery)
Deferred tax Liability $ 72,000
Retained Earnings $ 72,000

9CORPORATE ACCOUNTING
(To Record tax effect on above)
Accumulated Depreciation $ 55,000
Depreciation Expense $ 55,000
(To adjust the accumulated Depreciation in
the current year)
Income Tax Expenses $ 16,500
Current Tax Liability $ 16,500
(To record tax effect on above)
Loan From Ezy Ltd $ 1,000,000
Loan to SWL $ 1,000,000
(To eliminate intercompany loan)

10CORPORATE ACCOUNTING
Answer to question 4:

11CORPORATE ACCOUNTING
Part –II
Sub part 1:
Impairment test is the valuation of intangible and intangible assets. Tangible and
intangible assets are carried on in the books of accounts at its historical costs. After a certain
period of time the value of the assets or the net realizable value of the assets may not be the as it
is being carried forward in the books of accounts. Therefore, to show the actual value of the
assets and the true financial position of the business it is necessary to conduct the impairment test
for assets and revalue those assets to their fair value or the net realizable value (Devalle and
Rizzato 2017).
Sub part 2:
Impairment testing is conducted to ascertain the net realizable value of assets or the fair
value of assets. The fair value of assets so ascertained might be more than the carrying value or it
might be lesser than the carrying value of the respective assets. If the fair value of assets so
determined by the impairment testing is higher than the carrying value of the assets, then, the
difference amount is recognized as a gain on valuation of assets, it affects the income in profit
and loss account, and the value of assets is restated to its fair value in the balance sheet. On the
other hand, if the fair value so ascertained is less than the carrying value of the assets, then the
difference is recognized as a fair value loss and recognized as a loss in the profit and loss
account, and in the same way the value of assets is restated in the balance sheet. Hence, the
impairment testing is having effect in both the profit and loss account and the balance sheet
(Bond Govendir and Wells 2016).

12CORPORATE ACCOUNTING
Sub part 3:
As can be seen from the 2018 annual report of Myer Ltd, the value of goodwill as on 29 th
July 2017 is $492.13 million and it reduced to $465.03 million. It can be observed from the notes
to the consolidated financial statement for intangible assets, the value of goodwill has been
reduced only for the impairment of goodwill, they have amortized the value of goodwill within
the period 29th July 2017 to 28th July 2018. The decrease in value of goodwill might be because
of fall in market share and popularity in the market.
Sub part 4:
In the same accounting period, the brand name and trademarks, software and exchange
differences have been impaired.
Sub part 5:
In conducting the impairment test, the remaining value of assets is considered and a
suitable discount rate is taken for discounting the future profitability of the assets. If the discount
rate increases, then the present value of such assets decreases and the value of assets decreases,
and if the discount rate is decreased then the computed fair value of the assets increases. Hence,
there is a direct impact of change in discount rate on the impairment testing of assets and the fair
value of the assets (Henderson et al 2015).
Sub part 6:
After the impairment testing is conducted the value of assets and the remaining life of the
assets is revised in the books of accounts. IAS136 prohibits reversal of impairment, hence after
the impairment is conducted and the respective effects have been given in the books of accounts,
it cannot be revised (Bond Govendir and Wells 2016).

13CORPORATE ACCOUNTING
References and bibliography:
AASB, C.A.S., 2013. Events after the Reporting Period.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Devalle, A. and Rizzato, F., 2017. IFRS 3, IAS 36 and disclosure: The determinants of the
quality of Disclosure. GSTF Journal on Business Review (GBR), 2(4).
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Standard, I.A., 2015. Presentation of Financial Statements. Balance Sheet, 54, p.80A.