Apple Ltd acquired 100% of the issued shares of Orange Ltd, for $290,000 paid in cash. At the date of acquisition, 1 July 2018, the reported shareholder’s equity of Orange Ltd was:
Ordinary shares $180,000
Retained earnings $120,000
$300,000
The Apple Group adopted the cost model to measure property, plant and equipment and identifiable intangible assets. The carrying amounts and fair values of the recorded assets and liabilities of Orange Ltd at 1 July 2018 were as shown below:
| Carrying amount | Fair value | |
| Assets | ||
| Cash at bank | $25,000 | $25,000 |
| Trade debtors | $26,000 | $26,000 |
| Inventories | $40,000 | $45,000 |
| Equipment | $1,620,000 | $1,350,000 |
| Less Accumulated depreciation | -$450,000 | |
| Land | $50,000 | $64,000 |
| Less Liabilities | ||
| Current liabilities | $42,000 | $42,000 |
| Deferred tax liability | $13,000 | $13,000 |
| Net assets | $1,256,000 |
Other information:
- Apple borrowed $27,000 from Orange during the financial year. Interest is $2,700 per annum of which Apple has paid $1,200 before 30 June 2020.
- At the acquisition, Orange Ltd has disclosed information on its contingent liabilities of $25,000 in the notes to its financial statement. Orange Ltd is not permitted to recognise a contingent liability on its statement of financial position as according to AASB 137 par. 27
- At the date of acquisition, the equipment owned by Orange Ltd was three years old and has a remaining useful life of six years. The Group decides to depreciate the equipment over five years. The depreciation method used in both companies is assumed is to be on straight-line basis. The revaluation is made on consolidation.
- The Apple Group sold all of Orange Ltd’s land to an external party for $220,000 on 30 November 2019.
- Inventory on hand at 1 July 2018 was sold within six months of acquisition.
- Orange Ltd developed a new product during the two years before 1 July 2018. The product is selling profitably under its current brand name and is expected to generate profits for at least 15 years after 1 July 2018. The fair value of the brand name was reliably measured at $150,000
- Apple Ltd sold inventory of $134,000 to Orange Ltd on 1 July 2019. The original cost of this inventory to Apple Ltd was $112,500. Orange Ltd has 60% of this inventory on hand at 30 June 2020.
- Apple Ltd transferred its plant to Orange Ltd on 31 December 2018. The proceeds on the sale were $750,000. At the date of the transfer the plant had a carrying amount to Apple Ltd of $500,000 (cost of $1,350,000 and accumulated depreciation of $850,000) and a remaining useful life of 4 years.
- The annual impairment test assessed the recoverable amounts of Orange’s goodwill at $30,000 on 30 June 2019. The directors of Apple Ltd believe that the goodwill relating to the acquisition of Orange Ltd has been impaired by a further $6,000, during the year ended 30 June 2020.
- The company income tax rate over the relevant period was 30%
Provide all journal entries necessary to consolidate the Apple Group for the year ended 30 June 2020 based on available information in the above question. Complete the following consolidation worksheet.
| Apple Ltd | Orange Ltd | |
| Sales | 756000 | 570000 |
| Cost of sales | ||
| Inventory 1/7/2019 | 65000 | 92000 |
| Purchase | 400000 | 110000 |
| 465000 | 202000 | |
| Inventory 30/6/2020 | 70000 | 2000 |
| 395000 | 200000 | |
| Gross profit | 361000 | 370000 |
| Expense | ||
| Selling and administrative | 3000 | |
| Interest on debentures | 7000 | |
| Depreciation – plant | 85000 | 44700 |
| Other expenses | 23000 | 10000 |
| Total expenses | 118000 | 54700 |
| 243000 | 315300 | |
| Gain on sale: land | $50,000 | |
| Dividend revenue | 7000 | 5000 |
| Other revenues | 4000 | 30000 |
| 11000 | 85000 | |
| Income tax expense | 27260 | 11800 |
| Operating profit: | 226740 | 388500 |
| Retained profits 1/7/2019 | $154,000 | $180,000 |
| 380740 | 568500 | |
| Dividend paid | 10000 | |
| Proposed final dividend | 25000 | 10000 |
| 25000 | 20000 | |
| Retained profits 30/6/2020 | 355740 | 548500 |
| Share capital | 950000 | $180,000 |
| Fair value adjustment | ||
| 14% Debentures | 60000 | |
| Other non-current liabilities | 188500 | |
| Provision for dividend | 25000 | 10000 |
| Other current liabilities | 21260 | 330000 |
| 1412000 | 1257000 | |
| Investment in Orange Ltd | $290,000 | |
| Land | $146,000 | 82500 |
| Plant and machinery | 560000 | $1,620,000 |
| Accumulated depreciation – Plants | -149000 | -$517,500 |
| Brand Name | ||
| – Accumulated amortisation | ||
| Other non-current assets | 200000 | 27000 |
| Inventory | 185000 | $15,000 |
| Prepaid expenses | 60000 | |
| Other current assets | $120,000 | 30000 |
| Goodwill (on consolidation) | ||
| $1,412,000 | $1,257,000 |
Required:
- Prepare the acquisition analysis as at 30 June 2020.
- Provide all journal entries (as shown below) necessary to consolidate the Apple Group for the year ended 30 June 2020.
- journal to eliminate the investment in subsidiary at 30 June 2020
- journal to record Business Combination Valuation Reserve or fair value adjustment
- consolidation worksheet journal entries to eliminate the effects of intragroup transactions at 30 June 2020
- Complete the consolidation worksheet for the preparation of the consolidated financial statements for the period ended 30 June 2020.
- Prepare the consolidated statement of profit or loss and the consolidated Statement of Financial Position for Apple Limited and its subsidiary, at 30 June 2020.
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