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Evaluate the Australian requirements for accounting for business combinations

Critically evaluate the Australian requirements for accounting for business combinations. In your discussion you should specifically address the following issues: • Exclusions from the scope of Accounting Standard AASB3 Business Combinations. • The implications of the requirement to use the acquisition method of accounting for business combinations • The identification of an acquirer in a business combination • The determination of fair values of assets in a business combination • The reasons for the choice of fair value to measure assets and liabilities acquired in a business combination • The nature and treatment of goodwill or bargain purchase arising on a business combination. • The two different ways in which a business combination can be accomplished. PART B CASE STUDY Federation Ltd acquired the net assets of an existing business Nigeria Pty Ltd on 1 July 2015. The statement of financial position of Federation Ltd immediately prior to the acquisition is as shown below: Federation Ltd Statement of Financial Position as at 1 July 2015 Assets Cash at bank 40,000 Accounts Receivable 95,000 Inventory 110,000 Shares in Wesfarmer’s Ltd 80,000 Plant and Equipment (net) 550,000 Land and Buildings (net) 650,000 Total Assets 1,525,000 Liabilities Accounts Payable 220,000 Provisions 80,000 Bank Loans 200,000 Total Liabilities 500,000 Shareholder’s Equity Issued Capital 900,000 Retained Earnings 125,000 Total Shareholder’s Equity 1,025,000 1,525,000 The identifiable net assets of Nigeria Pty Ltd acquired by FederationLtd , valued at fair value at date of acquisition comprise the following: Assets acquired: Accounts Receivable 20,000 Inventory 60,000 Motor Vehicles 50,000 Plant and Equipment 150,000 Land and Buildings 300,000 Liabilities assumed: Accounts Payable 105,000 Bank Loan 100,000 In addition Nigeria Pty Ltd has unrecorded contingent liabilities estimated at $65,000 The terms of the acquisition are as follows: - Cash consideration of $120,000 to be paid to Nigeria Pty Ltd on 30 June 2016. This amount is to be raised by a bank loan (Federation Ltd’s incremental borrowing rate is 8%) - The shares in Wesfarmers held by Federation Ltd which have a fair market value of $90,000 at 1 July 2015 are to be transferred to Nigeria Ltd. - Federation Ltd is to issue 50,000 shares to Nigeria Pty Ltd . At 1 July 2015 Federation Ltd’s shares are trading at $4 per share. - Federation Ltd incurred legal expenses of $10,000 and share issue costs of $4,000 in connection with the acquisition - Under the terms of the acquisition Federation Ltd is required to issue further shares to Nigeria Pty Ltd if the value of Federation Ltd’s shares fall below $4 per share by 30 June 2016. It is estimated that there is a 20% likelihood that the share price will fall to $3.50 by 30 June 2016. Required: Prepare the journal entries in the books of Federation Ltd to record the acquisition of Nigeria Pty Ltd and a statement of financial position for Federation Ltd immediately after the acquisition. 1. Maximum length 1500 words (for Part A)

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