Question 1: Topic 3 and 4 – Consolidated financial statements, method, acquisition, business combination valuation and intra-group transactions

On 1 July 2017, Old Ltd acquired 100% of the share capital of School Ltd (cum div.) for $920,000. School Ltd’s balance sheet on acquisition date included:

Dividend payable $20,000
Retained earnings 180,000
Share capital 600,000
General reserve 40,000

 

At acquisition date, all of School Ltd’s net assets were recorded at fair value except for:

Carrying amount Fair value
Inventory $32,000 $40,000
Land 62,000 75,000
Contingent liability 8,000
Buildings (Cost $100,000) 69,000 78,000

 

Additional Information:

  1. The dividend payable at acquisition date was subsequently paid in August 2017.
  2. The revalued inventory was sold during the year ended 30 June 2018.
  3. The contingent liability identified on the acquisition of School Ltd still existed at 30 June 2020.
  4. The revalued land was sold during the year ended 30 June 2020 for $52,000.
  5. The revalued buildings were still held at 30 June 2020 being depreciated on the straight-line basis at 15% per year.
  6. In May 2018, goodwill was impaired by $1,500. An additional $2,500 impairment occurred during the year ended 30 June 2020.
  7. Management fee revenues earned by Old Ltd during the year ended 30 June 2020 were collected from School Ltd.
  8. School Ltd’s inventory balance at 1 July 2019 included an item previously purchased from Old Ltd. This inventory had been sold by Old Ltd to School Ltd at a profit of $6,500.
  9. During the year ended 30 June 2020, School Ltd sold a quantity of inventory to Old Ltd for $12,000. This inventory had originally cost School Ltd $8,000 with 30% of this inventory still being held by Old Ltd at 30 June 2020.
  10. All dividends paid/declared by Old Ltd during the year ended 30 June 2020 were from post-acquisition profits.
  11. Financial statements for the year ended 30 June 2020 are reproduced below:
Old Ltd School Ltd
Sales $6,320,000 $3,260,000
Cost of goods sold (3,060,000) (2,710,000)
Gross profit 3,260,000 550,000
Dividend revenue 83,000
Interest revenue 18,000
Management fees revenue 22,000
Other income 30,000
Loss on sale of land (10,000)
Depreciation expense (180,000) (86,000)
Finance costs (91,000) (35,000)
Other expenses (284,000) (33,000)
Profit before income tax 2,840,000 404,000
Income tax expense (202,000) (88,000)
Profit after tax 2,638,000 316,000
Retained earnings at (01/07/19) 695,000 322,000
Interim dividend paid (70,000) (22,000)
Final dividend declared (140,000) (61,000)
Retained earnings at (30/06/20) 3,123,000 555,000
Share capital 800,000 600,000
General reserve 210,000 40,000
Total equity 4,133,000 1,195,000
Trade and other payables 413,000 137,000
Dividend payable 140,000 61,000
Loan from School Ltd (6% per year, interest payable 31 December) 300,000
Mortgage loan 1,453,000 401,000
Deferred tax liabilities 90,000
Total liabilities 2,396,000 599,000
Total liabilities and equity 6,529,000 1,794,000
Cash 194,000 115,000
Trade and other receivables 72,000 35,000
Dividends receivable 61,000
Inventory 750,000 438,000
Land 770,000 250,000
Buildings 1,747,000 770,000
Accumulated depreciation buildings (320,000) (454,000)
Plant and equipment 2,790,000 450,000
Accumulated depreciation plant and equipment (435,000) (110,000)
Investment in School Ltd 900,000
Loan to Old Ltd (6% per year, interest payable 31 December) 300,000
Total assets 6,529,000 1,794,000
     

 

Required:

  1. Determine the gain on bargain purchase or goodwill as at acquisition date.
  2. Prepare the consolidation journal entries for Old Ltd immediately after acquisition on 1 July 2017.
  3. Prepare the consolidation journal entries for Old Ltd as at 30 June 2020.
  4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Old Ltd as at 30 June 2020.

Question 2: Topic 3 and 4 (continued) and Topic 5 – Non-Controlling Interest

On 1 July 2018, Bay Ltd paid $236,400 for 60% of the issued shares of Watch Ltd. At this date, the equity of Watch Ltd consisted of:

Share capital (200,000 shares) $200,000
General reserve 80,000
Retained earnings 40,000

 

A comparison of the carrying amounts and fair values of Watch Ltd’s assets at the acquisition date showed the following:

Carrying amount Fair value
Land $183,000 $200,000
Plant (cost $150,000) 100,000 120,000
Inventories 65,000 90,000
Accounts receivable 40,000 35,000
Goodwill 4,000

 

In relation to the accounts, the following information is available:

  1. At acquisition date, the plant had a further 5-year life but was sold on 1 January 2020.
  2. All the inventories were sold by 30 June 2019.
  3. All the accounts receivable were collected by 30 June 2019.

Any valuation reserves arising on consolidation are transferred on realisation of the asset to retained earnings. The general reserve movement was from pre-acquisition equity. Dividends are recognised on declaration.

The following transactions occurred between 1 July 2018 and 30 June 2020:

2019
Jan. 1 Watch Ltd sold an item of plant to Bay Ltd for $18,000, which included a profit of $6,000. The remaining useful life of the plant was 4 years.
Jan. 7 Watch Ltd transferred $20,000 from general reserve to retained earnings.
Feb. 12 Watch Ltd paid an $8,000 dividend.
March 23 Watch Ltd sold inventories to Bay Ltd for $50,000 recording a before-tax profit of $10,000. The tax rate is 30%.
June. 26 Watch Ltd declared a $15,000 dividend.
30 Watch Ltd recorded a profit after tax of $130,000. One-quarter of the inventories sold by Watch Ltd to Bay Ltd on 23 March 2019 are still on hand with Bay Ltd.

 

Aug. 15 The $15,000 dividend declared by Watch Ltd was paid.
Sept. 21 The remaining inventories in Bay Ltd sold to it by Watch Ltd were sold outside the group.
2020
Jan. 1 Watch Ltd paid a $16,000 dividend.
June 30 Watch Ltd recorded a profit after tax of $150,000.

Required:

  1. Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-Controlling Interest on 1 July 2018 was $150,000.
  2. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method.

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