On 1 July 2018, Bombay Ltd acquired all of the shares of Portobello Ltd, on a cum-div. basis, for $2,700,000. At this date, the equity and liability sections of Portobello Ltd’s statement of financial position showed the following balances:
|Share capital — 400,000 shares||$ 1,200,000|
At 1 July 2018, Portobello Ltd’s assets included $46,000 of recorded goodwill. The dividend payable at acquisition date was subsequently paid in August 2018.
At acquisition date, all the identifiable assets and liabilities of Portobello Ltd were recorded at amounts equal to fair value except for the following:
|Carrying amount||Fair value|
|Plant (cost $300,000)||240,000||280,000|
The inventory on hand in Portobello Ltd at 1 July 2018 was sold in November 2018. The plant was estimated to have a further 5-year life with zero residual value. The land on hand at acquisition date was sold to Victory Ltd in March 2019.
On 30 June 2019, goodwill was impaired by $8,500. The tax rate is 30%.
During the period 1 July 2018 to 30 June 2019, the following intragroup transactions have occurred between Bombay Ltd and Portobello Ltd:
(T1) At 30 June 2019, Bombay Ltd approved and declared a final dividend of $15,000, and Portobello Ltd declared and approved a final dividend of $25,000. The dividends were paid on 25 July 2019.
(T2) Portobello Ltd issued 2,000 5% debentures of $50 at nominal value on 1 April 2019. Bombay Ltd acquired 1,000 of these debentures. Interest is payable on 1 July each year.
(T3) On 1 January 2019, Bombay Ltd provided a $500,000 loan to Portobello Ltd. The interest rate on this loan is 10%, and interest is paid each year on 30 June. At 30 June 2019, no principal repayments have been made on the loan.
(T4) In April 2019, Bombay Ltd sold inventory to Portobello Ltd for $24,000. The inventory had previously cost Bombay Ltd $18,000. By 30 June 2019, three-quarters of this inventory had been sold to London Ltd for $22,000. The remainder of the inventory was sold to Pillars in August 2019 for $7,500.
(T5) On 1 October 2018, Bombay Ltd sold machinery to Portobello Ltd for $120,000. The machinery had a written down value at the time of sale of $90,000. For this type of machinery, both entities charge depreciation at a rate of 20% p.a. straight-line.
a) Prepare the acquisition analysis (using the partial goodwill method) and consolidation worksheet entries at 1 July 2018.
b) Prepare the consolidation worksheet entries at 30 June 2019.
c) Using your journal entries prepared in part b for intragroup transaction T5 only, explain the rationale behind the adjustments to each of the accounts on a line by line basis.
NOTE: Ensure all intragroup transaction adjustments are correctly labelled as T1 — T5. Narrations must be provided. Show all workings.
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