Question 1

Joe Coyle is the managing director of Easter Feast Ltd (“Easter Feast”), a food and beverage chain located in Singapore. The company is looking to expand its business and explore the possibility of acquiring Winter Delight Pte Ltd (“Winter Delight”). The latter had been facing financial difficulties due to reduced sales attributed to the pandemic. The following points were raised in a recent management meeting to discuss the proposed acquisition of Winter Delight:

(a) Easter Feast’s financial controller proposed that the company take a 30% stake in Winter Delight. However, Joe is adamant that Easter Feast needs to buy over 50% of Winter Delight’s issued share capital in order for it to be a subsidiary of Easter Feast. Discuss the validity of Joe’s opinion with reference to the relevant financial reporting
standard(s).

(b) Some members of Easter Feast’s management team noted that Winter Delight has a large bank loan balance owing to KWC Bank (“KWC”). The loan contract has a clause that requires Winter Delight seek approval from KWC for purchases above $1,000 should Winter Delight default on any loan repayments. Joe is worried that this means
KWC has control over Winter Delight even after the acquisition by Easter Feast. Advise
Joe if his concern is warranted and should be addressed.

(c) Summer Ray Ltd (‘Summer Ray’) currently holds 20% of the shares in Winter Delight. In an effort to raise funds for a new project, Winter Delight is issuing convertible bonds that can be converted to ordinary shares at the bondholders’ discretion. Summer Ray has indicated its interest in acquiring a significant number of the bonds. Discuss the possible impact that this may have on Easter Feast’s plan to acquire Winter Delight.

Question 2

The accounting treatment for goodwill has been widely discussed and debated over years. Discuss relevant issues for each of the following with reference to appropriate accounting standards when applicable.

(a) Discuss the arguments for and against the recognition of goodwill as an asset.

(b) Explore the various major ways that goodwill has been accounted for over the years. Discuss the strengths and weaknesses of each method.

(c) How does negative goodwill arise when acquiring a subsidiary? Briefly discuss the appropriate accounting treatment for negative goodwill.

Question 3

Positive Ltd (“Positive”) acquired an 80% stake in Strong Ltd (“Strong”) on 1 January 20×1. The purchase consideration consisted of $2,600,000 cash paid immediately, 500,000 shares in Positive as well as $1,505,200 payable on 31 December 20×1 should Strong increase its sales by 40% in the year ending on the same day. It was estimated that there was a 50% possibility of Strong attaining the required level of sales. The relevant rate of return is 6% per annum. On the acquisition date, Strong had share capital and retained earnings of $2,500,000 and
$1,200,000 respectively. Its net assets were carried at fair value in its financial statements except for the following:

• Building that had a carrying amount of $1,400,000 million was valued at $1,650,000. It had a remaining useful life of 10 years with no residual value.

• Strong has an internally generated brand name that had been valued at $750,000 by market experts and estimated to have a 15-year useful life. This had not been recorded in the company’s financial statements.

At the acquisition date, shares in Positive and Strong were trading at $1.80 and $1.30 per share respectively. Positive group adopts the proportionate share of the fair value of the subsidiaries’ net identifiable assets in measuring any non-controlling interest.

Additional information:

• Positive extended a loan of $200,000 to Strong on 1 April 20×2 with an interest rate of 4% per annum. Interest for the year ended 31 December 20×2 had not been paid but were recorded in the books of both companies appropriately.

• Strong sold some inventory to Positive for $80,000 at a margin of 5%. Half of these goods were still unsold at the end of the year. As at 31 December 20×2, Positive’s records showed that it owed Strong $20,000 but the latter’s financial statements indicated a receivable of $30,000. The difference had been attributed to a payment made by Positive that was still being processed by the bank.

• The following information was extracted from the financial statements of Strong for the years ended 31 December 20×1 and 20×2:

Other comprehensive income arose from Strong’s investment in shares of Grow Ltd (“Grow”) in May 20×1. Strong considers Grow’s business as complementary to its own and regards the shares as a long-term investment. All dividends paid by Strong had been recorded by all parties accordingly in their respective financial statements.

There has been no change in share capital in the companies within the group since the acquisition date. Ignore any tax effects.

Required:

(a) Record the investment in Strong in the books of Positive by preparing the relevant journal entry on the acquisition date.

(b) Prepare the consolidation journal entries for the financial year ended 31 December 20×2. Show all relevant workings to support your answers.

Besides Strong, Positive is exploring the acquisition of the entire share capital of a startup operating in the pharmaceutical industry. One concern that Positive’s management has is that though the start-up has a talented team of researchers and scientists as well as the necessary equipment and materials to manufacture products, it currently does not yet have a viable drug in the market. Positive is unsure if this investment is considered
as acquiring a business.

(c) Advise Positive’s management on the accounting treatment of the proposed investment in the start-up with reference to the relevant financial reporting standard(s).