calculation of cost of acquisition

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


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


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


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

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


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


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


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*


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

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/

calculation of cost of acquisition

Documents