TUTORIAL 1 BUSINESS COMBINATION

SUBMISSION DATE:
QUESTION 1
On 1 July 2014 Milano Bhd, a home furnishing company, bought 40% of ordinary shares in Aria
Bhd. Seven other shareholders hold the balance of the voting rights. Milano Sdn Bhd has two
representatives in the board of directors of Aria Bhd. It also has the right to appoint, remove and
set the remuneration of key management personnel. However, it has yet to exercise the right. The
other shareholders were independent of each other and did not have any arrangement between
them.
The consideration paid by Milano Bhd involved a cash payment of RM 25,000, issuance of
10,000 unit of Milano Bhd ordinary shares at RM4.00 per share and a cash payment of RM
750,000 to be paid on 1 July 2016 (interest rate : 6% per annum).
On the date of acquisition, the share price of Aria Bhd was fair valued at RM5.00 per share
(issued at RM1.00). Its share capital was RM 1 million and retained earnings were RM 0.5
million.
In September 2014, Milano Bhd sought the opinion of Macarthur Chartered Accountants Bhd on
the status of Aria Bhd. The accountants suggested that Aria Bhd should not be part of the Milano
Group Consolidated Financial Statements.
REQUIRED:
a) Calculate the cost of investment of Aria Bhd by Milano Bhd.
b) Record the acquisition of Aria Bhd by Milano Bhd.

c) Provide your opinion on whether you agree or disagree with the suggestion of Macarthur
Chartered Accountants Bhd on the status of Aria Bhd. You may use the control model in
MFRS 10 Consolidated Financial Statements to support your opinion.
d) Calculate goodwill on acquisition when NCI is measured at proportionate of net assets

QUESTION 2
Scope Bhd acquired a 60% interest in the equity capital of Bue Bhd on 31 December 2014. On
this date, the market price of Blue Bhds ordinary share is RM1.70 per share. In exchange for the
shares in Blue Bhd, Scope Bhd issued 15 million of its ordinary shares valued at RM3.00 each
and paid the balance in cash to the former shareholders of Blue Bhd. The related cost that were
directly attributable to the acquisition totaled RM500,000 and these amount had been paid by
cash. Below are the statement of financial positions of Scope Bhd and Blue Bhd before the
acquisition took place.
Scope Bhd
Blue Bhd
RM000
RM000
Equity And Liabilities
Share capital
120,000
50,000
Revaluation reserves
25,000
3,000
Retained profits
50,000
15,000
Non-current liabilities
35,000
50,000
Account payables
37,500
50,000
Deferred taxation
12,500
Total
280,000
168,000
Assets
Property, plant and equipment
40,000
20,000
Land
25,000
27,500
Other fixed assets, at NBV
125,000
57,500
Inventories
10,000
5,500
Account receivables
37,500
25,000
Cash and bank balances
42,500
32,500
Total
280,000
168,000
At the acquisition date, the freehold land of Blue Bhd was undervalued by RM5,000,000 and
inventories of Blue Bhd were over-valued by RM2,000,000. An adjustment had been made by
Blue Bhd for these value. In addition, Blue Bhd has disclosed in its notes to financial statement a
contingent liability of RM100,000 involving a pending lawsuit in which the lawyer advised that
there was a high probability that a company would lose the case. Scope Bhd uses the fair value
method to measure the non-controlling interest.
REQUIRED:
a) Prepare journal entries to record the acquisition of Blue Bhd.
b) Calculate goodwill on consolidation.
c) Prepare consolidation journal entries of Scope Bhd and Blue Bhd.
d) Prepare the Consolidated Statement of Financial Position of Scope Bhd and Subsidiary as at
31 December 2014.