Question

QUESTION 4: Total of 18 marks This question consists of 2 parts (Parts A and B). All parts must be attempted. Alice Ltd acquired all the assets, except cash, and assumed all the liabilities of Medicure Ltd on 1 July 2020. Alice Ltd agreed to provide the following consideration on 1 July 2020: (1) Cash payment of $100,000, half of which is paid on the acquisition date, the remaining half of which is to be paid one year after the acquisition on 1 July 2021. (2) Issue 20,000 shares in Alice Ltd to the owners of Medicure Ltd. Alice Ltd's shares were trading at $19.87 per share on 1 July 2020. The cost of the share issue was $7,948. (3) In the event that Alice Ltd's share price falls below $15.00 per share by 1 August 2020, Alice Ltd would provide additional cash payment of $4.87 per share for the 20,000 issued shares. There is a 30% chance for the share price of Alice Ltd to fall below $15.00 by 1 August 2020. (4) Alice also provides an existing patent to Medicure Ltd. The patent is not recognised in Alice Ltd's balance sheet but is estimated to have a fair value of $27,800 on the acquisition date. Alice Ltd incurred $31,740 accounting and legal fees in relation to its acquisition of Medicure Ltd. Alice Ltd's marginal cost of capital is 12% per annum. The corporate tax rate is 30%. On 1 July 2020, the financial position of Medicure Ltd was as follows:

Answer 1

1. Gain On bargain purchase

The Aquisition made by the Alice Ltd is a bargin purchase, we can assume that the Medicure ltd is a promising one, in regard of the cost that Alice Ltd has obtained.

Fair Value of Asset

Particulars	Amount
Accounts Recievables	105000
Land	210000
Equipment	45000
Building	240000
Vehicles	127500
Other investment	60000
Other NCA	270000
Total Value Of Asset	1057500
Less Current Liabilities	(75000)
Net Fair Value of Asset	982500

Purchase Cost

Particulars	Amount
Cash Payment	100000
Issue of shares (20000*19.87)	397400
Cost in Issuing the shares	7948
Cash Payment for the shareholders (20000 * 4.87)	97400
Accounting and Legal Fees	31740
Patent to Medicure Ltd	27800
Total Purchase Cost	663242

Since the Purchase cost < FV of net assets acquired = Bargain purchase (Recognise immediately in P&L)

ie,663242<982500

2. Journal Entries

Dr Accounts Recievables 105000

Dr Land 210000

Dr Equipment 45000

Dr Building   240000

Dr Vehicles 127500

Dr Other Investments 60000

Dr Other Non Current Assets   270000

Cr Accounts recievables 75000

Cr Gain On Bargain Purchases 319258

Cr Share Capital 397400

Cr Other Acquisition Payables   265842

(Journal entries For Acquisition )

Dr Accounting and Legal expense 31740

Cr Cash A/c 31740

(accounting and Legal Expenses Paid )

Dr Share Capital 7948

Cr Cash 7948

(Share Issue Cost )

Dr Payable to Medicure Ltd 100000

Cr Cash   100000

(Payment Of Purchsae Consideration)

Dr Shareholder A/c 97400

Cr Cash A/c 97400

( Additional Payment made on share price drop)

Dr Alice Ltd 27800

Cr Accounts Recievables 27800

(patent Issued )