X Company Purchases a (100%) Controlling Interest in Y Company

question 46

Essay

X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000 worth of common shares. An agreement was drawn whereby X Company would pay 10% of any earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On that date, X's shares had a market value of $80 per share.
Required:
a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X) that you feel may be necessary to reflect Y's results under IFRS 3 Business Combinations. Assume that on the acquisition date no provision was made for the contingent consideration.
b) Assuming that the agreement called for Y's shareholders to be compensated with 1,250 shares for any decline in X's share price, what journal entries would be required under IFRS 3, if the market value of X's shares dropped to $64 within the year?

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Definitions:

Market Prices

The amounts at which goods and services can be bought or sold in open markets.

Resource Substitutability

The degree to which different inputs (or resources) can be substituted for one another in the production process.

Economic Resource

Any good or service that can be used to produce other goods and services, including labor, land, capital, and entrepreneurship.

Factory Workers

Individuals employed in industrial production settings, operating machinery or assembling goods.