Reference no: EM133553307
Question 1 Business Combinations Lang Limited (LL) operates a retail chain across Australia. The company is taking steps to vertically integrate its supply chain, starting with homewares and they entered into a contract to purchase all the assets, except cash, of Kawi Pty Ltd (KPL). Under the terms of the contract they will only acquire (assume) the accounts payable liability of KPL. However, they have agreed to provide enough funds to KPL to cover all other liabilities and accrued expenses. After the transfer of assets and funds, KPL will liquidate. LL has also agreed to cover the liquidation costs as part of the contract arrangements. The acquisition date was 1 July 2023, and settlement occurred on that day. The assets and liabilities of KPL Pty Ltd as at 1 July 2023 are as follows. Assets Current assets Cash 54,000 Accounts receivable 26,450 Inventory 44,440 Total current assets 124,890 Non-current assets Land 800,000 Buildings 600,000 Accumulated depreciation - building -120,000 480,000 Furniture 300,000 Accumulated depreciation - furniture -75,000 225,000 Plant and equipment 170,000 Accumulated depreciation - plant and equipment -110,000 60,000 Goodwill 11,800 Total non-current assets 1,565,000 Total assets 1,689,890 Liabilities Current liabilities Accrued expenses 8,570 Accounts payable 32,600 Loan payments due in current year 74,000 Employee Provisions 12,400 127,570 Non-current liabilities Employee Provisions 31,000 Loans 866,000 Total non-current liabilities 897,000 Total Liabilities 1,024,570 Net assets 665,320 Equity Share capital (200,000 shares) 200,000 Retained earnings 465,320 Total equity 665,320 3 | P a g e LL determined that the assets of KPL were recorded at fair values except for land, plant, and accounts receivable. The fair value of those assets were agreed to be: $ Land 820,000 Building 530,000 Plant 75,000 Accounts receivable 25,400 Additional information. LL also gave the previous KPL shareholders 1 LL Ltd share for every 4 KPL shares. The market value of LL shares at 1 July was $15.00. LL incurred $11,600 in legal costs, and the cost to issue the above shares was $3,200. KPL's liquidation costs were $5,400.
Required: (a) Critically assess if Lang Ltd's purchase of assets in Kawi Pty Ltd is treated as a business combination.
(b) Determine if the business combination results in goodwill or gain on bargain purchase.
(c) Prepare the journal entries to record the business combination in the records of Lang Ltd on 1 July 2023.
(d) Prepare the disclosure note for the acquisition.