Calculation of Cost of Acquisition
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Transcript of Calculation of Cost of Acquisition
![Page 1: Calculation of Cost of Acquisition](https://reader031.fdocuments.us/reader031/viewer/2022021321/577cc3941a28aba71196706e/html5/thumbnails/1.jpg)
CALCULATE COST OF ACQUISITION AND GOODWILL
Case-1
On 1October 2008, Hedra acquired 72 million shares out of 100 million shares in Salvador for an
immediate cash payment of Rs1!" million Hedra a#reed to pay further consideration on
$0September 200! of Rs%! million if the post acquisition profits of Salvador e&ceeded an a#reed
fi#ure at that date 'he fair value of contin#ent consideration is Rs %0 million at the date of
acquisition 'he fair value of net assets e&cept certain debtors to be received t(o years after the
date of acquisition is Rs 200 million 'he debtors appearin# in the boo)s are Rs 2 million 'he
effective discount rate is 8* 'he fair value of +- at the date of acquisition is Rs ." million
alculate cost of investment and #ood(ill/
Case-2
Hydrate is a public company operatin# in the industrial chemical sector -n order to achieve
economies of scale, it has been advised to enter into business combinations (ith compatible
partner companies s a first step in this strate#y Hydrate acquired all of the ordinary share
capital of Sulphate by (ay of a share e&chan#e on 1pril 2008 Hydrate issued five of its o(n
shares for every four shares in Sulphate 'he mar)et value of Hydrates shares on 1pril 2008 (as
Rs. each 'he issued shares of Sulphate are 20 million 'he boo) value of net asset e&cept
property, plant and equipment is Rs .0 million 'he fair value of property, plant and equipment is
Rs10 million hi#her than its boo) value of Rs %0 million
alculate cost of investment and #ood(ill/
Case-3
Hi#hmoor, a public listed company, acquired 80* of Slo(moors ordinary shares on 1 October
2007 Hi#hmoor paid an immediate Rs2 per share in cash and a#reed to pay a further Rs120
per share after t(o years of its acquisition 'he issued shares of Slo(moor are "0 million of Re 1
each 'he fair value of net assets of Slo(moor is Rs !0 million e&cept the follo(in# provision
(hich has not been reco#nied in the boo)s of Slo(moor 'he fair value of +- is Rs $0 million at
the date of acquisition
Slo(moor has to ma)e a payment of Rs 1" million to its employees if Hi#hmoor acquired
Slo(moor in a period of t(o years in equal installments 'he effective discount rate is 8* pa
alculate cost of investment and #ood(ill/
Case-4
Holdrite purchased 7"* of the issued share capital of Staybrite on 1pril 2008 3etails of the
purchase consideration #iven at the date of purchase are4
share e&chan#e of 2 shares in Holdrite for every $ shares in Staybrite plus an issue to the
shareholders of Staybrite 8* loan notes redeemable at par on $1 5arch, 2010 on the basis of
Rs100 loan note for every 2"0 shares held in Staybrite 'he mar)et value of Holdrite share (as Rs
$ 'he issued shares of Staybrite are 7" million of Re 1 each 'he fair value of net assets of Staybrit
is Rs 1%0 million e&cept a license (hich has not been reco#nied by Staybrite, the mar)et value
of such a license is Rs 20 million Holdrite has a policy of measurin# +- at proportionate share of
net assets at the date of acquisition
alculate cost of investment and #ood(ill/
Case-5
Hapsbur#, a public listed company, acquired the follo(in# investments4
On 1 pril 2008, 2% million out of $0 million shares in Sundial 'his (as by (ay of an immediate
share e&chan#e of t(o shares in Hapsbur# for every three shares in Sundial plus a cash payment
of Re1 per Sundial share payable on 1 pril 2010 'he mar)et price of Hapsbur#s shares on 1
pril 2008 (as Rs2 each 'he effective discount rate is 8*
'he net assets of Sundial before any fair value ad6ustment are Rs 12 million 'he fair value
ad6ustment (ill increase the value of noncurrent assets by Rs % million and decrease the value
of current asset by Rs 1 million Sundial has to implement restructurin# plan if Hapsbur# acquire
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Sundial 'he cost of restructurin# is estimated to be Rs " million Hapsbur# has the policy of
measurin# +- at proportionate share of net assets at the date of acquisition
alculate cost of investment and #ood(ill/
Case-6
Hi#hveldt, a public listed company, acquired 7"* of Samsons ordinary shares on 1pril 2008
Hi#hveldt paid an immediate Rs$"0 per share in cash and a#reed to pay a further amount of
Rs108 million on 1 pril 200! Hi#hveldts cost of capital is 8* per annum 'he issued number of
shares of Samson is 200 million 'he fair value of net assets at the date of acquisition e&cept
property, plant and equipment is Rs"00 million 'he fair value of property, plant and equipment
(as not available and a provisional value of Rs 200 million (as ta)en 9ut on 1 September 2008
the revaluation of property, plant and equipment (as complete (hich confirmed that the fair
value on the date of acquisition should have been Rs 180 million 'he accountin# year end is
:une $0 'he rate of depreciation is 10* of value at the end of the year 'he mar)et value per
share of Samson on the date of acquisition is Rs $ per share
alculate cost of investment and #ood(ill/
Case-7
5;S 9 ompany acquired 80* sta)e in 5;S S9S on :une $0, 20<% 'he issued number of shares
of 5;S S9S (as 1,000,000 5;S 9 ompany dischar#ed the purchase consideration by issuin#
its o(n shares one for each t(o in 5;S S9S 'he mar)et value of 9 (as Rs 2 on acquisition
date 5;S 9 also paid Rs 1,000 to its le#al advisor for completin# the acquisition deal 5;S
9 also a#reed to issue one e&tra share each to the said shareholders if the mar)et price of
9 shares falls belo( Rs 1" (ithin t(o years of the acquisition date -n the year 20<" 5;S 9
issued further shares as per a#reement as the mar)et value has fallen belo( Rs 1" 'he mar)et
value of 9 shares (as Rs 120 at the time (hen additional shares (ere issued, ho(ever the
fair value of contin#ent consideration at the date of acquisition (as Rs 07" per share
alculate cost of acquisition only
Case-8
5;S 9 ompany acquired 80* sta)e in 5;S S9S on :une $0, 20<% 'he issued number of
shares of 5;S S9S (as 1,000,000 divided in to 1000,000 ordinary shares of Re 1 each 5;S 9
ompany dischar#ed the purchase consideration by issuin# "* si& year listed debt securities of
Rs 100 each for every "0 shares in S9S 'he mar)et value of 9 debt instruments (as Rs 102 on
acquisition date 5;S 9 incurred Rs 10,000 for listin# of ne(ly issued debt securities 5;S 9
also a#reed to pay Rs 2 to each shareholder if the mar)et value of debt instrument falls belo(
Rs !" -n the year 20<" 5;S 9 paid Rs 2 to each shareholder as the mar)et value has fallen
belo( Rs !", ho(ever, the fair value at the date of acquisition (as Rs 12" for each share
purchased
alculate cost of acquisition only
Case-9
5;S 9 acquired 1,000,000 ordinary shares of 5;S SSS out of total 1,200,000 shares 5;S 9
issued its one share a#ainst each acquired in 5;S SSS and Rs 2 for each share after t(o years of
the acquisition date 'he mar)et value of 9 shares at the date of acquisition is Rs 120 'he
effective discount rate of 9 is 8*
alculate cost of acquisition only
Case-10
n entity prepares its financial statements for annual periods endin# on $1 3ecember 'he entity
(as the acquirer in a business combination on $0 September 20<1 s part of initial accountin#
for that combination, the entity reco#nied #ood(ill of Rs 100,000 'he carryin# amount of
#ood(ill at $1 3ecember 20<1 (as Rs 100,000
3urin# 20<2, the entity becomes a(are of an error relatin# the amount initially allocated to
property, plant and equipment acquired in a business combination
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i= 'he value of property, plant and equipment should have been Rs 20,000 more than the
value previously allocated to property, plant and equipment (ith remainin# useful life of
four years
ii= 'he value of property, plant and equipment should have been Rs 20,000 less than the
value previously allocated to property, plant and equipment (ith remainin# useful life of
four years >hile additional #ood(ill of Rs 17,000 only on 3ecember $1, 20<1
alculate the effect of each of above errors independently on #ood(ill and depreciation/
Case -11
< ?imited franchises ri#ht to @ ?imited for use of its brand on :une $0, 20<. in the northern area of
the ountry '(o years latter < acquired (hole of share capital of @ by payin# Rs 100,000 @
business has brand ABair value Rs20,000= and other net assets havin# fair value of Rs.0,000 'he
franchise ri#ht contract terms are favorable to < as compared to mar)et by Rs "000
alculate ost of investment and #ood(ill at the date of acquisition/
Case -12
< ?imited acquired @ ?imited on :une $0, 2008 for Rs 1"0,000 and the net assets of @ at that date
(ere Rs200,000, the fair value of noncontrollin# interest at that date (as Rs%2,000
alculate Cood(ill and discuss appropriate treatment
Case-13
< purchases components for consumption in its production process from @ under " year supply
contract at fi&ed rate urrently the fi&ed rates are hi#her as compare to mar)et rates < can
terminate the contract by payin# a penalty of Rs . million (ith three years remainin# < pays Rs
"0 million to acquired @, (hich is the fair value of @ -ncluded in the fair value of @ is Rs 8 million
relatin# to supply contract (ith < 'his Rs 8 million includes Rs $ million for customer list and
sellin# effort at mar)et price and Rs " million relatin# to contract that is unfavorable to < @ has
not reco#nied any asset relatin# to this contract
alculate the cost of investment/