Question

A Co acquired a controlling interest in B Co and entered into the following transactions on acquisition date 1 July 20x3

Cash payment to owners of B Co $4,000,000
Loan payable to banks to finance the acquisition $3,200,000
Fair value of shares issued to owners of B Co $5,000,000
Book value of shares issued to owners of B Co $4,000,000
Cost of Issuing equity $40,000
Deferred consideration, payable at the end of 5 years $8,000,000
Present value of deferred consideration at an interest of 5%pa $6,268,209

Prepare the journal entries that A Co would record to reflect the above transactions on 1 July 20X3. Unamortized discount or premium, where applicable should be shown separately.

Answer 1

A Co acquired a controlling interest in B Co through cash payment, loan, and share issuances. The journal entries to record these transactions include debiting Investment in B Co and crediting Cash, Loan Payable, Share Capital, Share Premium, and Deferred Consideration Payable.

Step-by-step explanation:

On July 1, 20X3, A Co acquired a controlling interest in B Co through a series of transactions:

• A cash payment of $4,000,000 was made to the owners of B Co.
• A loan payable to banks of $3,200,000 was taken by A Co to finance the acquisition.
• Shares worth $5,000,000 were issued to the owners of B Co.
• Shares worth $4,000,000 were issued to the owners of B Co at book value.
• The cost of issuing equity was $40,000.
• A deferred consideration of $8,000,000, payable at the end of 5 years, was agreed upon.
• The present value of the deferred consideration, at an interest of 5% per annum, was calculated to be $6,268,209.

The journal entries that A Co would record on July 1, 20X3, to reflect these transactions are as follows:

• Debit: Investment in B Co (Controlling Interest) - $4,000,000
• Credit: Cash - $4,000,000
• Debit: Investment in B Co (Controlling Interest) - $3,200,000
• Credit: Loan Payable - $3,200,000
• Debit: Investment in B Co (Controlling Interest) - $5,000,000
• Credit: Share Capital - $5,000,000
• Debit: Investment in B Co (Controlling Interest) - $40,000
• Credit: Share Premium - $40,000
• Debit: Investment in B Co (Controlling Interest) - $6,268,209
• Credit: Deferred Consideration Payable - $6,268,209

The unamortized discount or premium should be shown separately in the financial statements.

Answer 2

A Co would debit an aggregate amount of $17,268,209 for the investment in B Co and credit various accounts representing the modes of payment, including cash, shares issued, deferred consideration, and loan payable.

Step-by-step explanation:

The entries include the cash payment, loan payable, fair value of shares issued, cost of issuing equity, and deferred consideration at present value. A Co would need to prepare the following journal entries on 1 July 20X3 for the acquisition of B Co:

1. Debit: Investment in B Co $17,268,209 (Cash $4,000,000 + Fair Value of Shares $5,000,000 + Present Value of Deferred Consideration $6,268,209 + Loan $3,200,000 - Cost of Issuing Equity $40,000)
   Credit: Cash $4,000,000
   Credit: Shares Issued $5,000,000
   Credit: Deferred Consideration $6,268,209
   Credit: Loan Payable $3,200,000
2. Debit: Costs of Issuing Equity $40,000
   Credit: Cash $40,000

Unamortized discount is shown separately as the difference between the actual deferred consideration and its present value.