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|
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.
- 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.
- 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.
- 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.
- 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.
- All transfers from retained earnings to the general reserve by Payne Ltd were from post-acquisition earnings.
- On realisation of the business combination valuation reserve, a transfer is made to retained earnings on consolidation.
- The tax rate is 30%.
The financial statements of the two companies at 30 June 2019 are as follows:
|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|
Prepare the consolidation journal entries for the Gasol Ltd group for the year ended 30 June 2019.
BCVR Journal Entries
Pre-Acquisition Journal Entries
Intra-group Journal Entries
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