The financial information for Master Ltd and its 100% owned subsidiary, Chef Ltd, for the period ended 31 December 2022 is as follows:
|Master Ltd||Chef Ltd|
|Sales revenue||$||70 000||$||67 000|
|Dividend revenue||13 000||0|
|Gain on sale of property, plant and equipment||13 000||15 000|
|Other income||14 000||16 000|
|Total income||110 000||98 000|
|Cost of sales||30 000||26 000|
|Other expenses||11 000||7 000|
|Total expenses||41 000||33 000|
|Profit before income tax||69 000||65 000|
|Income tax expense||10 200||7 200|
|Profit for the period||58 800||
|Retained earnings (1/1/22)||22 000||15 000|
|80 800||72 800|
|Interim dividend paid||14 000||9 000|
|Retained earnings (31/12/22)||66 800||63 800|
Master Ltd acquired its shares in Chef Ltd at 1 January 2022 for $90 000 on a cum div. basis. At that date, Chef Ltd recorded share capital of $40 000. Chef Ltd had declared prior to the acquisition a dividend of $9 000 that was paid in April 2022.
At 1 January 2022, all identifiable assets and liabilities of Chef Ltd were recorded at fair value except for inventories, for which the carrying amount was $800 less than fair value. There was a fall in sales due to some negative google reviews and hence, 10% of inventories was still on hand at 31 December 2022. Inventories on hand in Chef Ltd at 31 December 2022 also includes some items acquired from Master Ltd during the period ended 31 December 2022. These were sold by Master Ltd for $16 000, at a profit before tax of $6 000.
Half of the goodwill on acquisition of Chef Ltd by Master Ltd was written off as the result of an impairment test on 31 December 2022.
During March 2022, Master Ltd provided some management services to Chef Ltd at a fee of $8 500 paid by 31 December 2022.
On 1 July 2022, Chef Ltd sold equipment to Master Ltd for a gain of $14 000. This equipment had a carrying amount to Chef Ltd of $70 000, and was considered by Master Ltd to have a 5-year life. By 31 December 2022, the financial assets acquired by Master Ltd and Chef Ltd from external entities increased in value by $6 000 and $2 000 respectively with gains and losses being recognised in other comprehensive income.
The income tax rate is 30%.
You are required to:
- Prepare the acquisition analysis at 1 January 2022.
- Prepare the business combination valuation entries and pre-acquisition entries at 1 January 2022.
- Prepare the business combination valuation entries and pre-acquisition entries at 31 December 2022.
- Prepare the consolidation worksheet journal entries to eliminate the effects of intragroup transactions at 31 December 2022.
- Discuss the concept of ‘realisation’ using the intragroup transactions in this question to illustrate the concept.
- Prepare the consolidation worksheet for the preparation of the consolidated financial statements for the period ended 31 December 2022.
- Prepare the consolidated Statement of Profit or Loss and Other Comprehensive Income for Master Ltd and its subsidiary, Chef Ltd, at 31 December 2022.
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