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hi guys. was wandering if you could please give me a hand with this question. I’m just not sure what to do with the contingent liability (the court case) for the acquisition analysis.

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will the FVNIA be share cap + General Reserve+ RE+0.7*(Land FV-CA+Inventory FV-CA+Plant FV-CA)-dividend payable-Goodwill recorded- the FV of court case?

I am confused as indicates that liability isnt recognised in books, but it is identifiable so i would assume it should be subtracted from FVNIA.

As well as this, i am unsure of what the entry would be for when the FV of the court case is reduced

On 1 July 2016, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for

$2,400,000. At this date, the equity of Son Ltd consisted of:

share capital- 500000 shares $1,000,000

General Reserve $500,000

Retained earnings $900,000

At the acquisition date, Son Ltd reported a dividend payable of $25,000 and its assets included $50,000 of recorded goodwill. The dividend payable at acquisition date was subsequently paid in August 2016.

Carrying amount Fair value

Land $500,000 $600,000

Inventory $20,000 $30,000

Plant (cost $300,000) $250,000 $300,000

The land on hand at acquisition date was sold in March 2018. Of the inventory on hand in Son Ltd at 1 July 2016, 70 percent was sold in November 2016 and the remainder was sold in July 2017. The plant was estimated to have a further 5-year life with zero residual value.

Son Ltd was involved in a court case that could potentially result in the company paying damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this liability to be $10,000, even though Son Ltd had not recorded any provision for damages (liability). On 29 June 2018 Son Ltd reassessed the liability in relation to the court case as the chance of winning the case had improved. The fair value on 29 June 2018 was considered to be $4,000.

The company applies the partial goodwill method. The income tax rate is 30%.

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