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Case 1: Accounting by the acquirer

The trial balance of Jackman Ltd at 1 January 2019 was as follows:


Debit Credit
Share capital
Preference – 15 000 fully paid shares 15000
Ordinary – 70 000 fully paid shares 70000
Retained earnings 43000
Equipment 84000
Accumulated depreciation – equipment 20000
Inventories 36000
Accounts receivable 33000
Investments 12000
Patents 7000
Debentures 8000
Accounts payable 16000
172000 172000


At this date, all the assets and liabilities of Jackman Ltd are sold to Hugh Ltd, with Jackman Ltd going into voluntary liquidation. The terms of acquisition are:

  1. Hugh Ltd is to take over all the assets of Jackman Ltd, as well as the accounts payable of Jackman Ltd.
  2. Costs of liquidation of $700 are to be paid by Jackman Ltd with funds supplied by Hugh Ltd.
  3. Preference shares in Jackman Ltd are to receive two fully paid shares in Hugh Ltd for every three shares held, or alternatively, $0.80 per share in cash payable at the acquisition date.
  4. Ordinary shareholders of Jackman Ltd are to receive two fully paid ordinary shares in Hugh Ltd for every share held or, alternatively, $2.50 in cash payable half at the acquisition date and half in one year’s time.
  5. Debenture holders of Jackman Ltd are to be paid in cash out of funds provided by Hugh Ltd. The debentures have a fair value of $102 per $100 debenture.
  6. All shares issued by Hugh Ltd have a fair value of $1.20 per share.
  7. Costs of issuing and registering the shares issued by Hugh Ltd amount to $80 for the preference shares and $200 for the ordinary shares.
  8. Legal and accounting costs associated with the acquisition of Jackman Ltd amount to $2000.


The two parties agree on the terms of the arrangement, and holders of 6 000 preference shares and 10 000 ordinary shares elect to receive cash.


Hugh Ltd assesses the fair values of the identifiable assets and liabilities of Jackman Ltd to be as follows:

Equipment 72000
Inventories 40000
Accounts receivable 29000
Patents 8000
Investments 12000
Accounts payable 16000

Hugh Ltd has an incremental borrowing rate of 10%.



  1. Prepare the acquisition analysis in relation to the above acquisition by Hugh Ltd.
  2. Prepare the journal entries in the records of Hugh Ltd at the date of acquisition.
  3. Prepare the journal entry for the payment of the deferred consideration in one year’s time.


Case 2: Consolidation worksheet, previously held investment in subsidiary

On 1 August 2018, Eco Ltd acquired 10% of the shares in Fico Ltd for $8000. Eco Ltd used the fair value method to measure this investment with movements in fair value being recognised in profit or loss. At 1 July 2017, the fair value of this investment was $15 400. The original investment in Fico Ltd was due to the fact that Fico Ltd was undertaking research into particular microbiological elements that could influence the profitability of Eco Ltd. With the continuing success of this research, Eco Ltd decided to acquire the remaining shares (cum div.) in Fico Ltd.

On 1 July 2017, Eco Ltd made an offer to buy the remaining shares in Fico Ltd for $151 000 cash. This offer was accepted by the shareholders of Fico Ltd. On 1 July 2017, immediately after the business combination, the statement of financial position of Fico Ltd was as follows:


Eco Ltd Fico Ltd
Share capital 130,000 90,000
General reserve 56,500 12,000
Retained earnings 93,500 36,000
Total equity 280,000 138,000
Dividend payable 25,000 12,600
Other liabilities 75,000 25,000
Total liabilities 100,000 37,600
Total equity and liabilities 380,000 175,600
Cash 11,000 20,600
Receivables 25,200 20,000
Other assets 10,000 8,000
Shares in Fico Ltd 153,800
Inventories 55,000 42,000
Plan and equipment 210,000 107,000
Accumulated depreciation -85,000 -22,000
Total assets 380,000 175,600


On analysing the financial statements of Fico Ltd, Eco Ltd determined that all the assets and liabilities recorded by Fico Ltd were shown at amounts equal to their fair values except for:

Carrying Amount Fair Value
Plant and equipment (cost $46000)                   35,000     43,000
Inventories                   42,000     46,000

The plant and equipment is expected to have a further 4-year life and is depreciated on a straightline basis. The inventory was all sold by 30 June 2018.

Fico Ltd had expensed all the outlays on research and development. Eco Ltd placed a fair value of $12 000 on this asset. Fico Ltd also had reported a contingent liability at 30 June 2017 in relation to claims by customers for damaged goods. Eco Ltd placed a fair value of $3000 on these claims. The research and development is amortised evenly over a 10-year period. The claims by customers were settled in May 2018 for $2800.

The company tax rate is 30%.



  1. Prepare the consolidated financial statements of Eco Ltd at 1 July 2017, immediately after the business combination.
  2. Prepare the consolidation worksheet entries at 30 June 2018.


Case 3: Intragroup transactions

Kingco Ltd owns all of the shares of Bombee Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2019. Assume an income tax rate of 30%.

  1. On 1 January 2018, Kingco Ltd sold inventory costing $6000 to Bombee Ltd at a transfer price of $8000. On 1 September 2018, Bombee Ltd sold half these items of inventory back to Kingco Ltd, receiving $3000 from Kingco Ltd. Of the remaining inventory kept by Bombee Ltd, half was sold in January 2019 to Goanna Ltd at a loss of $200.
  2. On 1 January 2019, Bombee Ltd sold an item of plant to Kingco Ltd for $2000. Immediately before the sale, Bombee Ltd had the item of plant on its accounts for $3000. Bombee Ltd depreciated items at 5% p.a. on the diminishing balance and Kingco Ltd used the straight-line method over 10 years.
  3. On 1 July 2018, Kingco Ltd sold a motor vehicle to Bombee Ltd for $12 000. This had a carrying amount to Kingco Ltd of $9600. Both entities depreciate motor vehicles at a rate of 10% p.a. on cost.
  4. During the 2017–18 period, Kingco Ltd sold inventory to Bombee Ltd for $9000, recording a before-tax profit of $1800. Half this inventory was unsold by Bombee Ltd at 30 June 2018.
  5. Bombee Ltd sells second-hand machinery. Kingco Ltd sold one of its depreciable assets (original cost $80 000, accumulated depreciation $64 000) to Bombee Ltd for $10 000 on 1 January 2019. Bombee Ltd had not resold the item by 30 June 2019.
  6. On 1 May 2019, Bombee Ltd sold inventory costing $300 to Kingco Ltd for $360 on credit. On 30 June 2019, only half of these goods had been sold by Kingco Ltd, but Kingco Ltd had paid $280 back to Bombee Ltd.

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