DECISION ANALYSIS
Selling price and goodwill
The summarised statements of financial position for two business entities are presented below:
|
Framers & Son |
Developers & Co. |
| ASSETS |
|
|
| Cash at bank |
$ 10 000 |
$13,000 |
| Accounts receivable |
12 000 |
19000 |
| Inventory |
15 000 |
17000 |
| Property and plant (net) |
40 000 |
60000 |
| Intangibles |
25 000 |
|
| TOTAL ASSETS |
102 000 |
109000 |
| LIABILITIES |
|
|
| Current liabilities |
11 000 |
16 000 |
| Non-current liabilities |
20 000 |
25 000 |
| TOTAL LIABILITIES |
31 000 |
41 000 |
| NET ASSETS |
$ 71 000 |
$ 68 000 |
| EQUITY |
|
|
| A. Teake, Capital |
$ 40 000 |
|
| S. Teake, Capital |
31 000 |
|
| D. Pitcher, Capital |
|
68 000 |
| TOTAL EQUITY |
$ 71 000 |
$ 68 000 |
Sharp Photographics is considering the possibility of acquiring the businesses of Framers and Son and Developers & Co. and is interested in establishing an appropriate purchase price for making offers to the two entities. An assessment of the fair values of the entities assets is as follows:
|
Fair Value |
|
Framers & Son |
Developers and Co. |
| Receivables |
$12,000 |
$18,000 |
| Inventory |
20000 |
25000 |
| Property and piant (net) |
60000 |
70000 |
| Intangibles |
40000 |
15000 |
The owner of Framers and Son are prepared to sell their firm at a price of 160% of the carrying amount of the entity's net assets, and the owner of Developers & Co. is prepared to sell at 180% of the carrying amount of the net assets of his business.
The owners of Sharp Photographics examined the earnings records and financial positions of the two entities over a number of years, and offered to pay the price required by Framers & Son, but offered to pay only 120% of the fair value of Developers & Co.'s net assets.
Required
A. Calculate the selling price being asked by each business and the purchase price offered by Sharp Photographics. Should each business sell out to Sharp Photographics?
B. The sale between Sharp Photographics and Framers & Son went ahead at the negotiated price; and the eventual sale price of Developers & Co. was $121 300. How much goodwill (if any) should be recognised by Sharp Photographics? Calculate the total valuations for all assets acquired from both businesses. Explain.
Thinking
Accounting for revaluations
On 1 January 2016, Good Ltd acquired a block of land for $100 000 cash, and on the same day Better Ltd purchased the adjacent block, which was virtually identical to the block purchased by Good Ltd, also for $100 000 cash. Both companies intended to construct industrial warehouses on these properties. For the next 2 years, the property market went through a boom period and, by coincidence, on 30 June 2018, both companies obtained independent valuations of $180000 for their blocks of land.
Good Ltd has decided to adopt the revaluation model for land in the accounts on the last day of the year ended 30 June 2018 by following the requirements of IAS 16/AASB 116. Better Ltd decided to use the cost model.
On 30 April 2019, each company sold its block of land for $200 000 cash.
Required
A. In relation to the land, how much profit would each company report for the years ended 30 June 2018 and 30 June 2019?
B. Give reasons for the discrepancy in profit figures between the two companies. Does the existence of the discrepancy make sense? What message is being conveyed to users about the performance of both companies? Discuss fully. How can the discrepancy be avoided?
C. What profit would Good Ltd have made for the year ended 30 June 2019 if the revaluation of land had occurred on 29 April 2019, instead of on 30 June 2018? Compare this with the profit made by Better Ltd in the same year, and explain whether you regard the differences as satisfactory reporting.
Communication and Leadership
Research and development costs
GeneTech Ltd is a biological research company that is developing gene technology in the hope of finding a vaccine for skin cancer. During the last financial year, GeneTech Ltd spent $1.2 million on research. The scientists involved in the project believe they may be on the right track with the research, although many other companies are claiming the same thing and as yet no one has patented a vaccine.
Required
In groups of three or four, discuss the options under IAS 38/AASB 138 Intangible Assets for the accounting treatment of the $1.2 million. What impact will each of these options have on the company's profit? Prepare a one-page letter to the managing director of GeneTech Ltd advising her of your preferred treatment for the research and development costs.
FINANCIAL ANALYSIS
Refer to the consolidated financial statements and their notes in the latest financial report of JB Limited on its website, www.jbhifi.com.au, and answer the following questions.
1. Were any items of property, plant and equipment revalued by the entity during the current finan-cial year? during previous years? If so, give details.
2. Were any items of property, plant and equipment derecognised during the year? If so, how has the entity disclosed any gains or losses made on derecognition of such assets? Provide details of any financial amounts involved.
3. From the latest statement of financial position (balance sheet), provide details of the types and amounts of assets regarded by JB Hi-Fi Limited as 'intangible'. What accounting treatment is adopted in accounting for the acquisition of goodwill?
4. Have there been any instances where the group's non-current assets were revalued upwards/downwards? If so, provide details.
Topic: Selling Price and goodwill (p 919)
Person I My:
What r good will?
Why good will is an intangible asset?
How it is recognized? You cannot evaluate good will for your business urself only other companies can while buying your company....
Discuss why it is so...
Person 2- Sergey:
Why lair value instead of carrying amount?
What is fair value?
What is carrying amount? Difference?
Framework, carrying value changes with time like land
Person 3 Myong:
QA
Person 4 - Ghulam
QB
Conclusion and Executive Summary
Put the report together and submit