Reference no: EM132936496

Harta Harta Ltd (HH) pays $8,000,000 for an 80% holding in Bina Ltd (B).  B owns a small apartment block which has yet to have any tenants in it. B was set up and owned by Abdul Rahman who was given some advice that it would be more tax efficient to have the apartment block owned by the company.

• The block was completed not long prior to the purchase of B by HH. There was no agreement between the two companies or Abdul to construct the property. Abdul is a property developer and simply hoped that he would be able to sell the property at a profit.
• The block has a room in the lower floor for a caretaker, and a number of meters and other devices are held in the room. It would be normal for the occasional services of a caretaker to be provided in this area for this type of property. At the time of sale of B it had no employees other than Abdul as a director. Abdul ceased to be a director on sale of the company.
• While no tenants are currently in the apartment block, Abdul did have expressions of interest from numerous prospective tenants and these names and contact details have been passed to HH as part of the sale.

Required

Problem 1: You are required to explain how HH should account for the purchase of B. Ignore any tax effects.