The owners of Framers & Son are prepared to sell their firm at a price of 160 % of me carrying amount of the entity's net assets. and the owner of Developers & Co. is prepared to sell at 180% of the earning 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 flitch goodwill (if any) should be recognised by Sharp Photographics? Calculate the total -valuations for all assets acquired from both businesses. Explain.
Accounting for revaluations
On 1 January 2016, Good Ltd acquired a block of land for $100000 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 $100000 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 $200000 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.