Greenmount Ltd, an ASX listed consumer goods corporation aims to acquire a fashion business to generate…

Greenmount Ltd, an ASX listed consumer goods corporation aims to
acquire a fashion business to generate new growth opportunities.
Following a formal search process, external advisors have
identified the following two businesses as best matching
entitiesfor a potential take-over: Tallows Ltd and Bilgola Ltd.
Only one will be selected. To move forward with the selection
process, the external advisor has estimated that both firms have
the same entity value of $2m based on a Discounted Cash Flow (DCF)
model, i.e. acquisition price of $2 million (excluding advisor
fees), which will be paid as cash consideration. The external
advisor will charge $5,000 finder’s fee and $3,000 legal fees paid
in cash to prepare all required due diligence.
You have been given access to the following information about
the assets, liabilities, and shareholders’ equity for both
potential target firms:
Tallows Ltd:

Historical costs

Carrying amount

Remaining useful life

Cash and cash equivalents

$12,000

$12,000

$           –

Accounts receivable

$21,000

$21,000

$           –

Inventory

$250,000

$220,000

$           –

Property Plant and Equipment (net)

$2,000,000

1,200,000

5 years

Total Assets

$1,453,000

$           –

Accounts Payable

$145,000

$           –

Bank Loans

$200,000

$           –

Shareholder’s Equity

$1,108,000

$           –

Liabilities & shareholders’ equity

$1,453,000

$           –

Additional information for Tallows Ltd: Taking into account
current market information and historical data of the firm, you
determine the following fair values: Accounts receivables: $18,000,
Inventory: $180,000, Property Plant and Equipment: $1,000,000.

Bilgola Ltd:

Historical Costs ($)

Carrying Amount ($)

Remaining useful life

Cash and cash equivalents

6,000

6,000

Accounts receivable

230,000

230,000

Inventory

600,000

600,000

Property Plant and Equivalent (net)

3,500,000

1,000,000

10 years

Total Assets

1,836,000

Accounts Payable

200,000

Bond Payable

360,000

Shareholders’ Equity

1,276,000

Liabilities and shareholders’ equity

1,836,000

Additional information for Bilgola Ltd:
Considering current market prices and further historical
information from the company, you determine the following fair
values: Accounts receivable $200,000, Inventory $500,000, Property
Plant and Equipment $2,000,000.
Nicholas Less, the CFO of Greenmount Ltd has been under pressure
to increase the companies’earnings as soon as possible. He has to
provide a recommendation on which firm to acquire at the next board
of directors meeting in two weeks. In preparation for the meeting,
Nicholas has asked you to prepare a fact sheet that evaluates the
acquisition of the two potential target firms, Tallows Ltd and
Bilgola Ltd from an accounting perspective.
Required:
– calculate the net asset values of both target firms in
accordance with Australian Accounting Standards
– Prepare and explain the potential journal entries that
Greenmount Ltd would need to process for the acquisition costs and
business combination under both scenarios.