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B407F Week 10 Tutorial solution

B407F Week 10 Tutorial solution - because post-acquisition...

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B407F Week 10 Tutorial Solution – Merger Accounting Question 1 Management might prefer to use merger accounting for the following reasons: - Pre-acquisition profits of the subsidiary are not eliminated, so that there will be greater flexibility in post-acquisition dividend decisions. - Post acquisition profits are likely to be higher than under the acquisition method for: The subsidiary’s assets need not be revalued upwards to the fair value and it means a lower depreciation charge; No share premium created, any value attributed to goodwill on consolidation is correspondingly reduced. On the other hand, management might prefer the acquisition method of accounting
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Unformatted text preview: because post-acquisition profits are kept lower, which would be advantageous when negotiating with employees or government contracts. Question 2 Acquisition Merger $’000 $’000 Net assets 320 320 Goodwill 40-360 320 Share capital 240 240 Share premium 80-Retained earnings 40 80 360 320 Question 3 Acquisition Merger $’000 $’000 $’000 $’000 Non-current assets 2400 2200 1 Current assets 800 700 Current liabilities (380) 420 (380) 320 Goodwill 880-3700 2520 Share capital 1400 1400 Share premium 1200-Retained earnings 1100 1120 3700 2520 2...
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