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Kanga Pty Ltd is a retailer based in Glen Waverley, VIC
Kanga Pty Ltd is a retailer based in Glen Waverley, VIC. The owner has an intention to sell their business in December 2020. They are inviting potential buyers to file an expression of interest with how much they intend to pay for the business. The highest offer came from an overseas investor offering to acquire the business for $1.5 million. The owner of Kanga Pty. Ltd. has not accepted the offer yet as he is still waiting for a higher offer. Their total net assets is only $500,000 which means there is a potential extra value of $1 million. (6 Marks) Required: (i) Using the definition of the term "asset" per the Conceptual Framework, explain whether the extra value of $1,000,000 can be considered as an asset to Kanga Pty. Ltd. (3 Marks) (ii) The owner thinks that he should include the extra value of $1 million on their balance sheet. Explain if the extra value of $1 million meets the recognition criteria of an asset for Kanga Pty. Ltd. (2 Marks) (iii) Given your answers in part (i) and part (ii), state whether or not the extra value of $1 million can appear on the Kanga's balance sheet. (1 Mark)
Expert Solution
1) Definition of Asset : An Asset is a resource with economic value that an individual,corporation or country owns or controls with the expectation that it will provide a future benefit
Assets are reported on a company's balance sheet and or bought are created to increase firm's value or benefit the firm's operations
An Asset can be thought of as something that in future can generate the cashflow reduce expenses or improve sales regardless of whether it's a manufacturing equipment or patent.
2) As per the definition $ 1 million would not be qualified as an asset therefore he can't show the same in Balance sheet
As it came with the sale of business it should be shown under relisation account and surplus in the realisation should be transfer to shareholders.
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