Eagle Ltd acquired all the issued share capital of Rock Ltd on 1 May 20X1.Rock Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}
&\text { 000s} & \
\text { Paid up capital } &\$3000\
\text {General reserve } &\$1000\
\text {
Retained profits } &\$500\
\end{array}$

What was the cost of acquisition incurred by Eagle Ltd, if the bargain purchase gain was $250 000?
A)$4 750 000
B)$3 750 000
C)$3 250 000
D)$4 250 000

Question

Eagle Ltd acquired all the issued share capital of Rock Ltd on 1 May 20X1.Rock Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}
  &\text {  000s} &  \
 \text { Paid up capital } &\$3000\
 \text {General reserve  } &\$1000\
 \text { 
Retained profits } &\$500\
\end{array}$

What was the cost of acquisition incurred by Eagle Ltd, if the bargain purchase gain was $250 000?
A)$4 750 000
B)$3 750 000
C)$3 250 000
D)$4 250 000

Quizplus · Accepted Answer

The cost of acquisition is calculated by subtracting the bargain purchase gain from the total fair value of the acquired company's shareholders' equity. The shareholders' equity is $3000k (Paid up capital) + $1000k (General reserve) + $500k (Retained profits) = $4500k. Subtracting the bargain purchase gain of $250k from $4500k gives $4250k - $250k = $4000k or $4 million, which is not an option provided. The correct calculation should be: The total fair value of the acquired company's shareholders' equity is $3000k + $1000k + $500k = $4500k. Since the bargain purchase gain is $250k, it indicates that Eagle Ltd paid less than the fair value of Rock Ltd's net assets. Therefore, the cost of acquisition would be the fair value of the net assets minus the bargain purchase gain: $4500k - $250k = $4250k. However, there seems to be a misunderstanding in the explanation or the options provided do not accurately reflect the correct calculation based on the given information.

Eagle Ltd Acquired All the Issued Share Capital of Rock