On 1 January 2014, Cowboys Ltd acquired all the issued shares in Tate Ltd. At that date, Tate Ltd recognised in the notes to its financial statements a contingent liability with regards to a loan guarantee that had a fair value of $20 000. The contingent liability was settled at 31 December 2014 by Tate Ltd making a payment of $5 000. Ignoring the tax effect, the business combination valuation entries in relation to the contingent liability as at 30 June 2015 will include:
I. Adjustments to the liability account to recognise the fair value adjustment at acquisition date
II. Adjustments to expenses recognised on settlement
III. Adjustments to gains on settlement
IV. Transfers from business combination valuation reserve to retained earnings

Question

Quizplus · Accepted Answer

The contingent liability was settled for less than its fair value, resulting in a gain on settlement. Therefore, adjustments to expenses and gains on settlement are needed, and transfers from the business combination valuation reserve to retained earnings occur when the liability is settled.

On 1 January 2014, Cowboys Ltd Acquired All the Issued