On 1 January 2022, Lemon Ltd acquired all the issued shares in Meringue Ltd. At that date, Meringue Ltd recognised in the notes to its financial statements a contingent liability with regards to a loan guarantee that had a fair value of $30 000. The contingent liability was settled at 31 December 2022 by Meringue Ltd making a payment of $20 000. Ignoring the tax effect, the business combination valuation entries in relation to the contingent liability for the year ended 30 June 2023 will include:
I. Adjustments to expenses recognised on settlement
II. Transfers from business combination valuation reserve to retained earnings
III. Adjustments to the liability account to recognise the fair value adjustment at acquisition date
A) I only.
B) I, II and III only.
C) II, III and IV only.
D) I, II, III and IV.

Question

Quizplus · Accepted Answer

I. Adjustments to expenses recognised on settlement - When the contingent liability is settled, the expenses recognized may need to be adjusted to reflect the actual settlement amount. This adjustment will impact the income statement and will be included in the business combination valuation entries.
II. Transfers from business combination valuation reserve to retained earnings - Any changes in the fair value of contingent liabilities recognized at the acquisition date are initially recognized in the business combination valuation reserve. Once the liability is settled, the fair value adjustment will be transferred from the reserve to retained earnings in the statement of changes in equity.
III. Adjustments to the liability account to recognise the fair value adjustment at acquisition date - The initial recognition of the contingent liability at acquisition date would have been at its fair value. Any changes in the fair value of the liability recognized at acquisition date will impact the liability account and will be included in the business combination valuation entries.

Therefore, the correct choice is B as it includes all the options mentioned above.

On 1 January 2022, Lemon Ltd Acquired All the Issued