ExpertMedium2 marksMultiple Choice
ACCA · Question 13 · Financial Reporting
Section A
OrbitComms acquired 80% of the equity shares of SatLink on 1 July 20X6. The consideration consisted of:
- Cash paid immediately of $5,000,000.
- Deferred cash of $2,200,000 payable on 1 July 20X8.
- 1 million shares in OrbitComms to be issued on 1 July 20X7. OrbitComms' share price was $3.00 on 1 July 20X6.
OrbitComms' cost of capital is 10%. (The PV of $1 in 2 years at 10% is 0.826).
What is the total fair value of the consideration transferred for the acquisition of SatLink?
Section A
OrbitComms acquired 80% of the equity shares of SatLink on 1 July 20X6. The consideration consisted of:
- Cash paid immediately of $5,000,000.
- Deferred cash of $2,200,000 payable on 1 July 20X8.
- 1 million shares in OrbitComms to be issued on 1 July 20X7. OrbitComms' share price was $3.00 on 1 July 20X6.
OrbitComms' cost of capital is 10%. (The PV of $1 in 2 years at 10% is 0.826).
What is the total fair value of the consideration transferred for the acquisition of SatLink?
Answer options:
A.
$10,200,000
B.
$9,817,200
C.
$9,544,400
D.
$6,817,200
How to approach this question
Sum the immediate cash, the present value of the deferred cash, and the fair value of the shares at the acquisition date.
Full Answer
B.$9,817,200✓ Correct
Immediate cash = $5,000,000.
Deferred cash must be discounted to present value: $2,200,000 × 0.826 = $1,817,200.
Share consideration is measured at fair value at the acquisition date: 1,000,000 shares × $3.00 = $3,000,000.
Total consideration = $5,000,000 + $1,817,200 + $3,000,000 = $9,817,200.
Common mistakes
Discounting the share consideration or failing to discount the deferred cash.
Practice the full ACCA FR — Financial Reporting Practice Exam 6
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