On 1 January 20X5, Blank Ltd acquired 85% of Paul Ltd. The following terms were agreed upon:
- $50,000 cash payment and issue of 25,000 of ordinary shares of Blank Ltd to former shareholders of Paul Ltd. At the time of issue, the shares of Blank Ltd were trading at $7.50 per share while its book value per share was $5.50. $11,200 of transaction costs were incurred to issue the new shares.
- $48,000 cash payment for professional fees incurred for the acquisition exercise.
- Additional payment of $30,000 to former shareholders of Paul Ltd if the profits of Paul Ltd exceed $80,000 for the year 20X5. There is a 60% chance that Paul Ltd’s profits will exceed $80,000.
Required: (Exclude narrations for journal entries.)
a) Provide the journal entry(ies) to record the acquisition costs and related expenses in Blank Ltd’s books.
b) In 20X5, Paul Ltd reported profits of $85,000. Provide the journal entry on the additional payment to be made to the former shareholders of Paul Ltd.
