Prepare the disclosure note for the acquisition

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Reference no: EM133541788

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

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:

Critically assess if Lang Ltd's purchase of assets in Kawi Pty Ltd is treated as a business combination.

Determine if the business combination results in goodwill or gain on bargain purchase.

Prepare the journal entries to record the business combination in the records of Lang Ltd on 1 July 2023.

Prepare the disclosure note for the acquisition.

Reference no: EM133541788

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