Consolidated financial statements, rationale for adjustments
Lead beaters Ltd acquired all the issued shares (cum div.) of Possum Ltd on 1 July 2014. At this date the shareholders’ equity of Possum Ltd was:
| Share capital – 100 000 shares
General reserve Asset revaluation surplus Retained earnings |
$ | 450 000
45 000 45 000 15 000 |
At 1 July 2014, the accounting records of Possum Ltd contained a dividend payable of $15 000. This dividend was paid in August 2014. All the identifiable assets and liabilities at acquisition date were recorded at amounts equal to their fair values except for:
| Carrying amount | Fair value | |
| Plant (cost $290 000) | $220 000 | $227 500 |
| Inventory | 160 000 | 175 000 |
The plant was considered to have a further 4-year life. It was sold on 1 January 2017 for $118 000. The inventory was all sold by 30 June 2015. Possum Ltd did not record a contingent liability relating to a lawsuit by a customer for faulty goods. Possum Ltd considered this liability had a fair value of $18 000. The lawsuit was settled in May 2015 when Possum Ltd was required to pay damages of $20 000.
Additional information
(a) On 1 July 2015, Lead beaters Ltd sold plant to Possum Ltd at a before-tax profit of $6000. This class of non-current asset is depreciated at 25% p.a. on cost by Lead beaters Ltd while Possum Ltd uses a rate of 10% p.a. on cost.
(b) In June 2016 Possum Ltd sold $50 000 worth of inventory to Lead beaters Ltd at a before-tax profit of $5400. At 30 June 2017, inventory on which Possum Ltd had made a profit of $750 on sale to Lead beaters Ltd was still on hand.
(c) On 10 February 2017, Possum Ltd used the whole of the general reserve existing at 1 July 2014 to pay a bonus dividend of three shares for every ten held.
(d) Both Lead beaters Ltd and Possum Ltd use the valuation method to measure land. In June 2017, Lead beaters Ltd recorded revaluation increases of $15 000 while Possum Ltd recorded increases of $12 000.
(e) The tax rate is 30%.
Financial information provided by the companies at 30 June 2017 was as follows:
| Lead beaters Ltd | Possum Ltd | |
| Plant | $ 558 750 | $ 318 000 |
| Accumulated depreciation – plant | (318 000) | (165 000) |
| Land | 531 300 | 397 500 |
| Shares in Possum Ltd | 580 000 | — |
| Inventory | 280 000 | 240 000 |
| Receivables | 43 500 | 22 500 |
| Cash | 41 500 | 15 000 |
| Total assets | $1 717 050 | $ 828 000 |
| Dividend payable | 15 000 | 6 000 |
| Other current liabilities | 52 050 | 60 000 |
| Loans | 150 000 | 60 000 |
| Total liabilities | $ 217 050 | $ 126 000 |
| Share capital | $1 200 000 | $495 000 |
| Asset revaluation surplus | 225 000 | 120 000 |
| Retained earnings (1/7/16) | 22 500 | 18 000 |
| Revenues | 162 000 | 210 000 |
| Expenses | (48 000) | (80 000) |
| Gains/(losses) on sale of non-current assets | 6 000 | 5 000 |
| Tax expense | (52 500) | (60 000) |
| Dividend declared | (15 000) | (6 000) |
| Total equity | $1 500 000 | $ 702 000 |
Required
Prepare the consolidated financial statements for Lead Beaters Ltd at 30 June 2017.
Show the following
- acquisition analysis,
- consolidation journals
- worksheet entries.
- Explain the rationale of intragroup transactions for (a) and (b) above.
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