Question 1:
Eastern Management Ltd acquired all the assets and liabilities of King Ltd on 30 June 2017. The
carrying amount and estimated fair value of assets and liabilities of King Ltd to be taken over are as follows: Carrying amount Fair value Accounts Receivable $760,000 $720,000 Inventory $1,300,000 $1,440,000 Property, plants and equipment $1,680,000 $1,560,000 Accounts payables $680,000 $680,000 Note payable $90,000 $100,000
In addition to these assets and liabilities, due diligence identified the existence of brand names
that were valued by an expert at $500,000. The due diligence process also uncovered contingent
liabilities that were reliably measured at $150,000.
The price paid was $4.8 million Required:
Calculate the amount of goodwill that would be recorded in the books of Eastern Management
Ltd following the acquisition of King Ltd. Show all workings Solution
Fair value of assets acquired Account receivables = 720,000 Inventory = 1,440,000
Properly , plant and equipment = 1,560,000 Brand = $500,000
Total fair value of assets = $4,220,000
Fair value of liabilities acquired Account payables = 680,000
Reliable estimate for liability = 150,000 Note payable = 100,000
Total fair value of liabilities = 930,000
Fair value of net assets acquired
= $4,220,000 - $930,000 = $3,290,000
Goodwill = $4,800,000 - $3,290,000 = $1,510,000 Question 2:
Global-Innovator Ltd included the following information concerning the research and
development activities in its company accounting records over recent years. Global-Innovator
complied with IAS 38, has used the cost method to account for intangible assets and calculated
amortisation on a straight-line basis.
Project 1 – Product Rosehip: the carrying amount of the project development asset at 30
June 20x7 was $1,600,000. Further development costs of $1,100,000 were capitalised between July
and December 20x7. Production of Product Rosehip commenced on 1 January 20x8. Profitable
sales were expected for a total of six years commencing on 1 January 20x8.
Project 2 – Research: research costs for 20x6/20x7 and 20x7/20x8 were $500,000 and
$400,000, respectively. At 30 June 20x8, the project manager advised that further research should
allow development of the final product to commence in 20x9.
Project 3 – Product Jasmine: research costs of $300,000 were expensed in 20x5/20x6.
Applied research costs incurred in 20x6/20x7 were $400,000. During the 20x7/20x8 year,
development costs of $600,000 were capitalised. Product Jasmine is expected to generate high profits
over 10 years after commercial production commences in December 20x8.
Project 4 – Product Apple: research costs of $900,000 were incurred in the 20x6/20x7 year
and development commenced in the 20x7/20x8 year. On 30 May 20x8, when total development
costs were $500,000, Project Apple was abandoned following a change in economic conditions. Required:
1. Calculate the total amount of research and development costs, including any
amortisation, which would be recognised in Global-Innovator Ltd’s 20x7/20x8 statement of comprehensive income. Solution: Project 1
Development cost 30/6/20x7 – capitalised $1,600,000
Development cost 7-12/20x7 – capitalised $1,100,000
Production commenced 1 Jan 20x8 – expected benefit 6 years => amortisation of development cost = $2,700,000 / 6 = $450,000 Project 2: Research
Cost 20x6/20x7 – expensed $500,000
Cost 20x7/20x8 – expensed $400,000 Project 3: Jasmine
Research costs 20x5/20x6 – expensed $300,000
Appled research costs incurred 20x6/20x7 – expensed $400,000
Development cost 20x7/20x8 – capitalised $600,000
No amortisation in 20x7/20x8 as production not commenced Project 4: Apple
Research costs 20x6/20x7 – expenses $900,000 Development costs 20x7/20x8 $500,000
May 2018 – project abandoned – write-off development costs