Reference no: EM132618285
Sparrow Limited acquired all the shares in Halos Limited for a 550,000 cash consideration on 1 July 2020. All of the identifiable net assets were recorded at their fair value in the books of Halos Limited, except for a contingent provision for loan guarantee which was, at acquisition date, not recorded in Halos Limited's financial statements. The contingent provision for loan guarantee had a fair value of $20,000. The tax rate is 30%.
During the financial year ending 30 June 2024, the provision for loan guarantee was settled for 12,000 with a cash payment.
Problem 1: The business combination valuation entry at 30 June 2024 for settling the provision of loan guarantee would be:
Select one:
Option a.
Dr Transfer from BCVR $ 14,000
Dr Income tax expense $ 6,000
Cr Loan guarantee expense $ 12,000
Cr Gain on derecognition of loan guarantee $ 8,000
Option b.
Dr Transfer from BCVR $ 14,000
Dr Deferred tax liability $ 6,000
Cr Loan guarantee expense $ 8,000
Cr Gain on derecognition of loan guarantee $ 12,000
Option c.
Dr BCVR $ 14,000
Dr Deferred tax asset $ 6,000
Cr Loan guarantee expense $ 20,000
Option d.
Dr BCVR $ 14,000
Dr Income tax expense $ 8,000
Cr Loan guarantee expense $ 8,000
Cr Gain on derecognition of loan guarantee $ 12,000
Option e. None of the other options.
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