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:

  • Hugh Ltd is to take over all the assets of Jackman Ltd, as well as the accounts payable of Jackman Ltd.
  • Costs of liquidation of $700 are to be paid by Jackman Ltd with funds supplied by Hugh Ltd.
  • 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.
  • 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.
  • 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.
  • All shares issued by Hugh Ltd have a fair value of $1.20 per share.
  • Costs of issuing and registering the shares issued by Hugh Ltd amount to $80 for the preference shares and $200 for the ordinary shares.
  • 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%.



  • Prepare the acquisition analysis in relation to the above acquisition by Hugh Ltd.
  • Prepare the journal entries in the records of Hugh Ltd at the date of acquisition.
  • 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:



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:



The plant and equipment is expected to have a further 4-year life and is depreciated on a straight-line 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%.



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



Case 3: Intragroup transactions

Amber Ltd owns all of the shares of VStone 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%.

  • On 1 January 2018, Amber Ltd sold inventory costing $6000 to VStone Ltd at a transfer price of $9000. On 1 September 2018, VStone Ltd sold half these items of inventory back to Amber Ltd, receiving $3000 from Amber Ltd. Of the remaining inventory kept by VStone Ltd, half was sold in January 2019 to Goanna Ltd at a loss of $200.
  • On 1 January 2019, VStone Ltd sold an item of plant to Amber Ltd for $2000. Immediately before the sale, VStone Ltd had the item of plant on its accounts for $3000. VStone Ltd depreciated items at 5% p.a. on the diminishing balance and Amber Ltd used the straight-line method over 10 years.
  • On 1 July 2018, Amber Ltd sold a motor vehicle to VStone Ltd for $12 000. This had a carrying amount to Amber Ltd of $9600. Both entities depreciate motor vehicles at a rate of 10% p.a. on cost.
  • During the 2017–18 period, Amber Ltd sold inventory to VStone Ltd for $9000, recording a before-tax profit of $1800. Half this inventory was unsold by VStone Ltd at 30 June 2018.
  • VStone Ltd sells second-hand machinery. Amber Ltd sold one of its depreciable assets (original cost $80 000, accumulated depreciation $64 000) to VStone Ltd for $10 000 on 1 January 2019. VStone Ltd had not resold the item by 30 June 2019.
  • On 1 May 2019, VStone Ltd sold inventory costing $300 to Amber Ltd for $380 on credit. On 30 June 2019, only half of these goods had been sold by Amber Ltd, but Amber Ltd had paid $280 back to VStone Ltd.

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