Leather Limited acquired 100% of the share capital of Vinyl Limited for $235 000. Vinyl had total shareholder's equity of $200 000. The book values of Vinyl Limited's assets were: buildings $150 000, machinery $80 000. The fair values of these assets were: buildings $180 000, machinery $90 000. Also, Vinyl Limited has not previously recorded an internally generated trademark with a fair value of $40 000 and a contingent liability related to a warranty with a fair value of $10 000. The tax rate is 30%. The acquisition analysis will determine:

Question

Quizplus · Accepted Answer

The acquisition cost of $235 000 is greater than the fair value of net identifiable assets, which are calculated as follows:

Fair value of Buildings = $180 000
Fair value of Machinery = $90 000
Fair value of Trademark = $40 000
Fair value of Warranty liability = $10 000
Total fair value of identifiable net assets = $320 000

Thus, there is a gain on bargain purchase of $85 000 ($320 000 - $235 000). This gain is recognized in the profit or loss of Leather Limited. There is no goodwill in this scenario because the acquisition cost is less than the fair value of identifiable net assets. Therefore, the correct answer is D) a gain on bargain purchase of $14 000 after considering tax implications (i.e. $85 000 gain x 70% (1 – 30%)).

Leather Limited Acquired 100% of the Share Capital of Vinyl