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X Ltd acquired 60% of the ordinary shares in Y Ltd on 1/1/2019 with cash payment of 800,000$, share exchange of 1 share for every 3 shares acquired in Y Ltd
X Ltd acquired 60% of the ordinary shares in Y Ltd on 1/1/2019 with cash payment of 800,000$, share exchange of 1 share for every 3 shares acquired in Y Ltd. The fair value of X Ltd's shares is 1.50$ on acquistion date. The contingent consideration of 1,100,000$ in the event net profit of Y Ltd increase by 15% or more for the year 2019. Cost of capital is estimated at 10% and total ordinary shars issued by Y Ltd is 500,000 units.
Calculate the consideration transferred for purchase of ordinary shares of Y Ltd.
a. 1,950,000$
b. 2,250,000$
c. 2,050,000$
d. 2,350,000$
Expert Solution
Total ordinary shares of Y Ltd. = 500,000 units
Shares acquired by X Ltd. = 500,000 x 60 % = 300,000 shares
Shares issued by X Ltd. in consideration = 300,000 x 1 share of X Ltd. / 3 shares of Y Ltd. = 100,000 shares of X Ltd.
Consideration paid/ payable by X Ltd. for acquisition:
| Fair Value of Shares of X Ltd. Issued (100,000 x $1.5 per share) | $150,000 |
| Cash paid | $800,000 |
| Contingent Consideration | $1,100,000 |
| Total Consideration | $2,050,000 |
Option "c.$2,050,000" is correct.
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