Company Accounting: Acquire Smaller Ltd Essay

Question:

Discuss about the Company Accounting for Acquire Smaller Ltd.

Answer:

Introduction

Companies registered in Australia required complying with accounting guidelines cited by AASB for the preparation of financial statements. The objective of these standards is to ensure financial information of entity in a fair manner to assist stakeholders in making viable decisions (Dagwell, Wines and Lambert, 2011). The present study is focused on preparing consolidated financial statements by considering norms described by provisions of AASB 10.

Part A

Purchase Analysis to Acquire Smaller Ltd

Provisions of AASB 3 establish norms for preparation and presentation of consolidated financial statements in a situation where one entity imposed controlling power on other entity or entities through acquisition (Business combinations, 2004). It also considers provisions of section 334 of the Corporations Act 2001. In accordance with provisions of AASB 3, parent entity is required to present consolidated financial statements if they establish control over other entities (Australian Accounting Standards, 2016).

Purchase Analysis to Acquire Smaller Ltd

Value of Net Assets

Assets

Accruals & receivables. $ 25000

Trademarks & patents $ 600000

Inventory $ 60000

Debtors $ 59540

Prepaid expenses $ 2900

Land $ 202000

Vehicles $ 29100

Dividend and int. $ 2880

PPE $ 76560

Liabilities

Contingent liability $ 91500

Dividend payable $ 4000

Creditors $ 13500

Other liabilities $ 10720

Debenture $ 50000

Share capital $ 443400

Cash $ 300000

Net assets $ 448540

Consideration transferred =$3 00 000 + 420,000 * (3/5) * 2.95

=$743,400

Goodwill =$294860

Acquisition of Smaller Ltd had created goodwill of $294860 as consideration provided by the company is higher in comparison to the value of net received through the acquisition process. This shows that Baxter Ltd had paid higher amount because of the market reputation of Smaller Ltd as this acquisition will provide them non-monetary benefits like increase in customer market, synergy advantage, improved productivity and other business advantages (Jones and Ratnatunga, 2012).

Recording of Acquisition in the General Journal as at 30th June 2X16

Accruals & receivables Dr. $ 25000

Trademarks & patents Dr $ 600000

Inventory Dr $ 60000

Debtors Dr $ 59540

Prepaid expenses Dr $ 2900

Land Dr $ 202000

Vehicles Dr $ 29100

Dividend and int. Dr $ 2880

PPE Dr $ 76560

Goodwill Dr $ 294860

Contingent liability Cr $ 91500

Dividend payable Cr $ 4000

Creditors Cr $ 13500

Other liabilities Cr $ 10720

Debenture Cr $ 50000

Share capital Cr $ 443400

Cash Cr $ 300000

Note to the Accounts of Baxter Ltd

In notes to account, Baxter Ltd is required to show entire acquisition facts such as consideration provided by segregating it in cash and equity shares. Further, computation of net assets is required to be shown in a detailed manner (Parker, 2013). The company is also required to show the applicability of AASB 3 to ensure that proper procedure is followed for an accounting of acquisition (Business combinations, 2004). Further, valuation methods of assets are to be stated to provide a brief of acquisition to stakeholders. In a situation where viable disclosures required by the acquisition and other Australian Accounting Standards are not able to meet these objectives than in situation, Baxter Ltd is required to provide disclosure of other additional information which is necessary for the purpose of meeting those objectives (Jones and Ratnatunga, 2012).

Part B

Acquisition of Subby Ltd in the Books of Baxter Ltd

Accounting for consolidation in Baxter Ltd is required to be done by considering provisions of AASB 10 (Australian Accounting Standards, 2016). The holding company has a regulatory requirement to prepare consolidated financial statements in accordance with the standardised accounting policies for financial transactions taking place in similar conditions (Australian Accounting Standards, 2016). On the basis of this provisions consolidation of Baxter and Subby Ltd will be recorded in the following manner:

Net fair value of identifiable assets and liabilities

Share capital + General reserve+ retained profit

=$ 1839970

Share of Baxter Ltd 1839970*.6

=$ 1103982

Consideration transferred = 420,000 * (1/4) * 2.95 +420,000 * (1/4) * 2.5

=$ 572250

Capital reserve =$ 531732

Legal and administration expenses will be reduced from capital reserve, and net amount will be shown in balance sheet of company i.e. 793082. Along with this, minority interest will also be recorded a minority interest in liability portion.

Journal entries

Retained earnings Dr. $ 48170

Share capital Dr. $ 11750000

General reserve Dr. $ 41800

Shares in Subby Ltd. Cr. $ 572250

Business combination valuation reserve Cr. $ 531732

Business combination valuation reserve Dr $ 1300

To legal charges $ 1300

Conclusion

The present study shows compliance of AASB 3 and AASB 10 for an accounting of Baxter Ltd to acquire Smaller Ltd and Subby Ltd in a proper manner. Finance department of the company is required to consider these provisions for preparation of financial statements. Further, proper disclosure is to made in notes to accounts of the annual report of a company to provide a better understanding to stakeholders of the company regarding financial transactions.

References

Books and Journals

Dagwell, R., Wines, G. and Lambert, C., 2011. Corporate Accounting in Australia. Pearson Higher Education.

Jones, S. and Ratnatunga, J., 2012. Contemporary Issues in Sustainability Accounting, Assurance and Reporting. Emerald Group Publishing.

Parker, H. R., 2013. Accounting in Australia (RLE Accounting): Historical Essays. Routledge.

Online

Business combinations. 2004. [Pdf]. Available through < [Accessed on 14th December 2016].

Australian Accounting Standards. 2016. [Online]. Available through < [Accessed on 14th December 2016].

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