Question 1

 

Topic 1: Consolidation: Principles and accounting requirements

On 1 July 2017, Positive Ltd acquired all the issued shares of Smart Ltd for $123,000. At the date of acquisition, the shareholder’s equity of Smart Ltd was as follows.

 

$

Share capital                               65,000

General reserve                          25,000

Retained earnings                      20,250

Total                                           110,250

 

All the assets and liabilities of Smart Ltd were recorded at amounts equal to their fair values at the acquisition date, except for some assets detailed below.

 

 Carrying amount      Fair value

                                                                                        $                       $

Plant (cost $115,000)                                                   100,000           105,000

Land                                                                             50,000             60,000

Inventories                                                                    15,000             19,000

 

 

Additional information:

 

  1. The inventory was all sold by 30 June 2018.
  1. The land was sold on 1 February 2018 for $75,000.
  1. The plant was considered to have a further 5-year life. The plant was sold for $77,500 on 1 January 2019.
  1. At acquisition date Smart Ltd had recorded a dividend payable of $3,500 and goodwill of $2,500 (net of accumulated impairment losses of $6,500).
  1. Smart Ltd had not recorded some internally generated brands that Positive Ltd considered to have a fair value of $6,000. The brand was considered to have an indefinite life.
  1. An item not recorded by Smart Ltd was a contingent liability relating to a current court case in which Smart Ltd was involved and a supplier was seeking compensation. Positive Ltd placed a fair value of $7,500 on this liability. This court case was settled in May 2019 at which time Smart Ltd was required to pay damages of $8,000.
  1. In February 2018, Smart Ltd transferred $7,500 from the general reserve on hand at 1 July 2017 to retained earnings. A further $7,500 was transferred in February 2019.
  1. Both companies have an equity account entitled ‘Other components of equity’ to which certain gains and losses from financial assets are taken. At 1 July 2018, the balances of these accounts were $15,000 (Positive Ltd) and $7,500 (Smart Ltd).

 

The financial statements of the two companies at 30 June 2019 contained the following information:

 

  Positive Ltd Smart Ltd
  $ $
Revenue 45,000 32,000
Expenses 17,000 21,000
Trading profit 28,000 11,000
Gains (losses) on sale of non-current assets 4,000 4,000
Profit before tax 32,000 15,000
Income tax expense 6,000 2,500
Profit for the period 26,000 12,500
Retained earnings 1 July 2018 51,500 27,500
Transfer from general reserve 15,000 15,000 7,500
  92,500 47,500
Dividend paid 10,000 0
Retained earnings 30 June 2019 82,500 47,500
Share capital 75,000 65,000
General reserve 5,000 10,000
Other components of equity 12,500 9,000
Total equity 175,000 131,500
Accounts payable 20,000 5,000
Deferred tax liability 9,000 5,000
Other non-current liabilities 125,000 115,000
Total liabilities 154,000 125,000
Total equity and liabilities 329,000 256,500
Plant 157,000 233,000
Accumulated depreciation – plant (91,000) (110,000)
Land 10,000 10,000
Brands 40,000 0
Shares in Smart Ltd 123,000 0
Financial assets 55,000 103,500
Cash 5,000 2,500
Inventories 20,000 15,000
Goodwill 10,000 9,000
Accumulated impairment losses 0 (6,500)
Total assets 329,000 256,500

 

Required:

 

  1. Prepare the acquisition analysis at 1 July 2017.
  1. Prepare the consolidation worksheet entries for Positive Ltd’s group at 30 June 2019.
  1. Prepare the consolidation worksheet for Positive Ltd’s group at 30 June 2019.

Note: you are not required to prepare the consolidation financial statements.

 

Question 2

 

Topic 2: Consolidation: Intra-group transactions

On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders’ equity of Sing Song Ltd consisted of share capital $150,000; general reserve $20,000 and retained earnings $10,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values at the date of acquisition. At 30 June 2019, four years after acquisition, the accounts of the two companies appear as follows:

 

  Ping Pong Ltd Sing Song Ltd
  $ $
Sales

 

 340,000 140,000
Cost of sales    
Opening inventory at 1 July 2018 20,000 5,000
Purchases

 

 200,000 73,000
  220,000 78,000
Closing inventory 30 June 2019 (25,000) (15,000)
Cost of sales

 

 195,000 63,000
Gross profit

 

 145,000 77,000
Depreciation expenses 32,000 23,000
Interest expense 9,000 1,000
Management fee expense – 7,000
Other expenses 43,000

 

 34,000
Total expenses

 

 84,000 65,000
Gross profit less total expenses 61,000 12,000
Other income    
Dividend revenue 5,000 –
Interest revenue   3,000
Management fee revenue 7,000  
Total other income 12,000

 

 3,000
Operating profit before tax 73,000 15,000
Income tax expense 28,000

 

 5,000
Operating profit after tax 45,000 10,000
Retained earnings 1 July 2018 35,000 5,000
Available for appropriation 80,000

 

 15,000
Interim dividend paid 10,000 2,000
Final dividend proposed

 

 30,000 3,000
Dividends paid and proposed 40,000 5,000
Retained earnings 30 June 2019 40,000 10,000
Share capital 400,000 150,000
General reserve 20,000 30,000
Accounts payable 40,000 20,000
Dividend payable 30,000 3,000
12% unsecured notes 50,000 –
Other liabilities 16,000

 

 15,000
  596,000

 

 228,000
Assets    
Accounts receivable 50,000 26,000
Inventory 25,000 15,000
Dividend receivable 3,000 –
Unsecured notes – Ping Pong Ltd – 25,000
Investment in Sing Song Ltd 200,000 –
Other assets 318,000

 

 162,000
  596,000 228,000

 

 

 

Additional information:

 

  1. The directors have decided that goodwill should be written off completely, no writedowns for goodwill impairment losses were made in prior years.
  2. During the current financial year, Sing Song Ltd paid management fees of $7,000 to Ping Pong Ltd.
  3. On 1 June 2019, Ping Pong Ltd sold inventory to Sing Song Ltd for $30,000. All of this inventory has been sold by Sing Song Ltd to parties external to the group during June 2019. This intra-group sale was made on credit terms, and $10,000 remains owing to Ping Pong at 30 June 2019.
  4. Sing Song Ltd holds half of the unsecured notes issued by Ping Pong Ltd. Interest at a rate of 12% has been paid on these notes during the year.
  1. On 25 January 2019, Sing Song Ltd paid an interim dividend of $2,000 to Ping Pong Ltd.
  1. Sing Song Ltd declared a final dividend of $3,000 on 20 June 2019. Ping Pong Ltd has recognised this dividend as a receivable at 30 June 2019.
  1. The tax rate is 30%.

 

Required:

 

  1. Prepare an acquisition analysis.
  1. Prepare the consolidation worksheet entries necessary to prepare the consolidated financial statements for the year ending 30 June 2019 for the group comprising Ping Pong Ltd and Sing Song Ltd.

Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements.

 

 

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