26.5: Acquisition Accounting Illustration

26.5 Acquisition Accounting Illustration

a Basic Information

Panna Ltd and Rama Ltd decide to combine. Panna Ltd will issue 6,000 1 shares in exchange for the entire share capital of Rama Ltd. The date of the combination is 30 September 19X3.

The draft financial statements of the two companies are as follows. No entries have yet been made in respect of the combination.

PROFIT AND LOSS ACCOUNT
for the year ended 31 December 19X3
Turnover	22,000	20,000
Cost of sales	(8,000)	(6,000)
Distribution costs	(2,000)	(4,000)
Administrative expenses	(3,000)	(2,000)
Operating profit	9,000	8,000
Taxation	4,500	4,000
Profit after tax	4,500	4,000
Balance brought forward	8,000	5,500
Balance carried forward	12,500	9,500
Balance sheets at 31 December 19X3	Panna	Rama

Tangible fixed assets	16,000	11,000
Net current assets	13,500	9,500
	29,500	20,500
Called-up share capital ( 1 shares)	8,000	8,500
Share premium	4,000	1,500
Revaluation reserve	5,000	1,000
Profit and loss account	12,500	9,500
	29,500	20,500

b Acquisition Accounting Procedures

Assume the combination is accounted for using acquisition accounting.

For this purpose assume that the following additional information is provided:

The shares in Panna Ltd are issued at 5 per share.
At 30.9.X3, the fixed assets of Rama Ltd have a fair value of 15,000.
The balances on share premium account and revaluation reserve are pre-acquisition.
The balance on profit and loss account at 30.9.X3 was 8,500 (estimated by time apportionment).

1 Consolidated balance sheet procedures

Before setting out the working papers, it is necessary to...

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26.5: Acquisition Accounting Illustration