Question 1 [100 marks]
Topics 1 & 2: Consolidation: Principles, accounting requirements and intra-group transactions
On 1 July 2015, Peace Ltd acquired all the shares of Sublime Ltd. At this date, the equity and liability sections of Sublime Ltd’s statement of financial position comprised of the following items:
| $ | |
| Share capital (30 000 shares) | 30 000 |
| Retained earnings | 10 500 |
| General reserve | 15 000 |
| Other reserves | 3 000 |
At acquisition date, all the identifiable assets and liabilities of Sublime Ltd were recorded at amounts equal to fair value except for:
| Carrying amount | Fair value | |
| $ | $ | |
| Inventory | 25 000 | 28 000 |
| Equipment (cost $15 000) | 12 000 | 16 000 |
| Machinery (cost $8 500) | 7 500 | 8 000 |
| Land | 9 240 | 12 240 |
The inventory on hand in Sublime Ltd at 1 July 2015 was sold during September 2015.
The machinery which had a further 5-year life on acquisition date was sold on 1 January 2017. The land on hand at acquisition date was sold by 1 March 2016. The equipment was estimated to have a further 8-year life. Valuation adjustments are made on consolidation and, on realisation of a business combination valuation reserve, a transfer is made to retained earnings on consolidation.
On 30 June 2017, the trial balances of Peace Ltd and Sublime Ltd were as follows:
| Debit balances | Peace Ltd | Sublime Ltd |
| $ | $ | |
| Shares in Sublime Ltd | 68 600 | — |
| Inventory | 85 790 | 35 160 |
| Other current assets | 4 310 | 1 550 |
| Deferred tax assets | 8 100 | 3 700 |
| Machinery | 14 000 | 11 000 |
| Land | — | 12 240 |
| Equipment | 17 000 | 18 650 |
| Cost of sales | 32 500 | 26 750 |
| Other expenses | 11 000 | 13 500 |
| Income tax expense | 3 600 | 1 000 |
| Interim dividend paid | 2 000 | 1 000 |
| Final dividend declared | 5 000 | 1 500 |
| Advance to Sublime Ltd | 5 000 | — |
| 256 900 | 126 050 | |
| Credit balances | ||
| Share capital | 85 000 | 33 000 |
| General reserve | 20 500 | 15 000 |
| Retained earnings (1/7/16) | 8 000 | 17 750 |
| Debentures | 60 000 | — |
| Final dividend payable | 5 000 | 1 500 |
| Current tax liabilities | 4 000 | 1 250 |
| Other payables | 17 400 | 5 050 |
| Advance from Peace Ltd | — | 5 000 |
| Sales | 42 500 | 32 500 |
| Other revenue | 9 500 | 10 500 |
| Gains/(losses) on sale of non-current assets | 2 000 | 500 |
| Accumulated depreciation – machinery | 2 000 | 1 000 |
| Accumulated depreciation – equipment | 1 000 | 3 000 |
| 256 900 | 126 050 |
Additional information
(1) A bonus dividend, on the basis of 3 ordinary shares for every 30 ordinary shares held, was paid in January 2017 out of other reserves existing at acquisition date.
(2) On 1 July 2016, Sublime Ltd has on hand inventory worth $6 000 transferred from Peace Ltd in June 2016. The inventory had previously cost Peace Ltd $5 900. Profit in inventory on hand at 30 June 2016 is $100. By 30 June 2017, Sublime Ltd had sold all $6 000 of the inventory to external parties.
(3) On 1 January 2017, Peace Ltd acquired $7 500 worth of inventory for cash from Sublime Ltd. The inventory had previously cost Sublime Ltd $5 500. By 30 June 2017, Peace Ltd had sold $5 625 of the transferred inventory for $8 000 to external entities.
(4) On 1 January 2016, Sublime Ltd sold equipment to Peace Ltd for $4 000. This had originally cost Sublime Ltd $6 000 and had a carrying amount at the time of sale of $3 500. Both entities charge depreciation at a rate of 10% p.a. straight-line.
(5) Peace Ltd sold an item of inventory to Sublime Ltd on 1 January 2017 for use as machinery. This item cost Peace Ltd $2 000 and was sold to Sublime Ltd for $3 000. Sublime Ltd depreciated the item at 10% p.a. straight-line.
(6) On 30 June 2017, half of the goodwill was written off as a result of an impairment test.
(7) All dividends declared by Sublime Ltd have been from post-acquisition profits.
(8) The tax rate is 30%.
Required
(i) Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Peace Ltd and Sublime Ltd.
(ii) Complete a detailed consolidation worksheet for the year ending 30 June 2017.
(iii) Prepare the following financial statements for Peace Ltd at 30 June 2017:
- Consolidated Statement of Profit or Loss and Other Comprehensive Income.
- Consolidated Statement of Changes in Equity.
- Consolidated Statement of Financial Position.
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