On 1 July 2015 Gasol Ltd acquired 100% of the share capital (ex div.) of Payne Ltd for $450,000. At that date, the relevant balances in the records of Payne Ltd were:

  $
Share capital 320 000
General reserve 20 000
Retained earnings

Dividend payable

 80 000

10 000

 

At the date of acquisition all assets and liabilities of Payne Ltd were recorded in the accounting records at amounts equal to their fair values with the exception of the following assets:

                                                            Carrying amount                     Fair value

                                                                        $                                            $

Inventory                                           10 000                                 14 000

Equipment                                         47 000                                 62 000

 

All inventory on hand at acquisition date was sold by 30 June 2016. The cost of the equipment was $75,000 and had a further five (5) year life as at the date of acquisition. Payne Ltd disclosed a contingent liability at the date of acquisition in relation to a claim by an employee for a salary dispute. Gasol Ltd estimated a fair value of $16,000 on the claim. This claim was settled in December 2018 for $9,000.

 

Additional information:

 

  1. During the 2017-18 financial year, Gasol Ltd purchased inventory from Payne Ltd for $18,000. The cost of inventory to Payne Ltd was $13,000. Half of this inventory was sold by Gasol Ltd to external parties by 30 June 2018. The balance was sold to external parties in October 2018.
  2. During the 2018-19 financial year, Gasol Ltd sold inventory to Payne Ltd for $28,000 at a mark-up of 40%. By 30 June 2019, Payne Ltd still held inventory that it had bought from Gasol Ltd for $8,400.
  3. On 1 January 2017, Payne Ltd sold an item of machinery to Gasol Ltd for $40,000. The original cost of the equipment to Payne Ltd was $52,000 and had a carrying amount at the time of sale of $32,000. The machinery is considered to have a further five (5) year life as at 1 January 2017.
  4. On 1 January 2019, Gasol Ltd acquired $50,000 of debentures previously issued by Payne Ltd. The debentures were acquired on the open market for $43,000. Interest on debentures is paid half-yearly. Outstanding interest has been paid by Payne Ltd on 30 June 2019.
  5. All transfers from retained earnings to the general reserve by Payne Ltd were from post-acquisition earnings.
  6. On realisation of the business combination valuation reserve, a transfer is made to retained earnings on consolidation.
  7. The tax rate is 30%.

The financial statements of the two companies at 30 June 2019 are as follows:

 

  Gasol

$

 Payne

$
Revenues 850 000 550 000
Expenses (660 000) (420 000)
Net profit before tax 190 000 130 000
Income tax expense (65 000) (48 000)
Net profit after tax 125 000 82 000
Retained earnings 1 July 2018 160 000 120 000
  285 000 202 000
Dividend paid (42 000) (18 000)
Transfer to general reserve (16 000) (12 000)
Retained earnings 30 June 2019 227 000 172 000
Share capital 500 000 320 000
General reserve 82 000 54 000
Accounts payable 45 000 20 000
6% debentures – 90 000
Other liabilities 96 000 6 000
TOTAL EQUITY AND LIABILITIES 950 000 662 000
Cash 100 000 150 000
Accounts receivable 25 000 65 000
Prepayment 30 000 60 000
Inventory 65 000 90 000
Debentures in Payne Ltd 43 000 –
Investment in Payne Ltd 450 000 –
Non-current assets 237 000 297 000
TOTAL ASSETS 950 000 662 000
     

 

Required:

Prepare the consolidation journal entries for the Gasol Ltd group for the year ended 30 June 2019.

Acquisition Analysis

                  
 
 

 

 

BCVR Journal Entries

Account DR CR
     
     
     

Pre-Acquisition Journal Entries

 

Account DR CR
     
     
     

 

Intra-group Journal Entries

                           

Account DR CR
     
     
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