CASE STUDY

Federation Ltd acquired the net assets of an existing business Nigeria Pty Ltd on 1 July 2015. The statement of financial position of Federation Ltd immediately prior to the acquisition is as shown below:

                                           Federation Ltd

                     Statement of Financial Position as at 1 July 2015

Assets             

Cash at bank                             40,000

Accounts Receivable                   95,000

Inventory                                  110,000

Shares in Wesfarmer's Ltd            80,000

Plant and Equipment (net)           550,000

Land and Buildings (net)              650,000

Total Assets                                                                  1,525,000

Liabilities

Accounts Payable                      220,000

Provisions                                 80,000

Bank Loans                               200,000

Total Liabilities                                                               500,000

Shareholder's Equity

Issued Capital                            900,000

Retained Earnings                       125,000

Total Shareholder's Equity                                           1,025,000 

                                                                              1,525,000    

The identifiable net assets of Nigeria Pty Ltd acquired by FederationLtd , valued at fair value at date of acquisition comprise the following:

Assets acquired:

Accounts Receivable                        20,000

Inventory                                      60,000

Motor Vehicles                               50,000

Plant and Equipment                       150,000 

Land and Buildings                          300,000

Liabilities assumed:

Accounts Payable                           105,000

Bank Loan                                     100,000

In addition Nigeria Pty Ltd has unrecorded contingent liabilities estimated at $65,000

The terms of the acquisition are as follows:

- Cash consideration of $120,000 to be paid to Nigeria Pty Ltd on 30 June 2016. This amount is to be raised by a bank loan  (Federation Ltd's incremental borrowing rate is 8%)

- The shares in Wesfarmers held by Federation Ltd which have a fair market value of  $90,000 at 1 July 2015 are to be transferred to Nigeria Ltd.

- Federation Ltd is to issue 50,000 shares to Nigeria Pty Ltd . At 1 July 2015 Federation Ltd's shares are trading at $4 per share.

- Federation Ltd incurred legal expenses of $10,000 and share issue costs of $4,000 in connection with the acquisition

- Under the terms of the acquisition Federation Ltd is required to issue further shares to Nigeria Pty Ltd if the value of Federation Ltd's shares fall below $4 per share by 30 June 2016. It is estimated that there is a 20% likelihood that the share price will fall to $3.50 by 30 June 2016.  

Required:

Prepare the journal entries in the books of  Federation  Ltd to record the acquisition of  Nigeria Pty Ltd and a Trail balance with adjusted entries then a statement of financial position for Federation  Ltd immediately after the acquisition.

Example for trail balance with adjusted

                                    Trail balance