Topic 1: Consolidation: Principles and accounting requirements
On 1 July 2017, Positive Ltd acquired all the issued shares of Smart Ltd for $123,000. At the date of acquisition, the shareholder’s equity of Smart Ltd was as follows.
Share capital 65,000
General reserve 25,000
Retained earnings 20,250
All the assets and liabilities of Smart Ltd were recorded at amounts equal to their fair values at the acquisition date, except for some assets detailed below.
Carrying amount Fair value
Plant (cost $115,000) 100,000 105,000
Land 50,000 60,000
Inventories 15,000 19,000
- The inventory was all sold by 30 June 2018.
- The land was sold on 1 February 2018 for $75,000.
- The plant was considered to have a further 5-year life. The plant was sold for $77,500 on 1 January 2019.
- At acquisition date Smart Ltd had recorded a dividend payable of $3,500 and goodwill of $2,500 (net of accumulated impairment losses of $6,500).
- Smart Ltd had not recorded some internally generated brands that Positive Ltd considered to have a fair value of $6,000. The brand was considered to have an indefinite life.
- An item not recorded by Smart Ltd was a contingent liability relating to a current court case in which Smart Ltd was involved and a supplier was seeking compensation. Positive Ltd placed a fair value of $7,500 on this liability. This court case was settled in May 2019 at which time Smart Ltd was required to pay damages of $8,000.
- In February 2018, Smart Ltd transferred $7,500 from the general reserve on hand at 1 July 2017 to retained earnings. A further $7,500 was transferred in February 2019.
- Both companies have an equity account entitled ‘Other components of equity’ to which certain gains and losses from financial assets are taken. At 1 July 2018, the balances of these accounts were $15,000 (Positive Ltd) and $7,500 (Smart Ltd).
The financial statements of the two companies at 30 June 2019 contained the following information:
|Positive Ltd||Smart Ltd|
|Gains (losses) on sale of non-current assets||4,000||4,000|
|Profit before tax||32,000||15,000|
|Income tax expense||6,000||2,500|
|Profit for the period||26,000||12,500|
|Retained earnings 1 July 2018||51,500||27,500|
|Transfer from general reserve 15,000||15,000||7,500|
|Retained earnings 30 June 2019||82,500||47,500|
|Other components of equity||12,500||9,000|
|Deferred tax liability||9,000||5,000|
|Other non-current liabilities||125,000||115,000|
|Total equity and liabilities||329,000||256,500|
|Accumulated depreciation – plant||(91,000)||(110,000)|
|Shares in Smart Ltd||123,000||0|
|Accumulated impairment losses||0||(6,500)|
- Prepare the acquisition analysis at 1 July 2017.
- Prepare the consolidation worksheet entries for Positive Ltd’s group at 30 June 2019.
- Prepare the consolidation worksheet for Positive Ltd’s group at 30 June 2019.
Note: you are not required to prepare the consolidation financial statements.
Topic 2: Consolidation: Intra-group transactions
On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders’ equity of Sing Song Ltd consisted of share capital $150,000; general reserve $20,000 and retained earnings $10,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values at the date of acquisition. At 30 June 2019, four years after acquisition, the accounts of the two companies appear as follows:
|Ping Pong Ltd||Sing Song Ltd|
|Cost of sales|
|Opening inventory at 1 July 2018||20,000||5,000|
|Closing inventory 30 June 2019||(25,000)||(15,000)|
|Cost of sales
|Management fee expense||–||7,000|
|Gross profit less total expenses||61,000||12,000|
|Management fee revenue||7,000|
|Total other income||12,000
|Operating profit before tax||73,000||15,000|
|Income tax expense||28,000
|Operating profit after tax||45,000||10,000|
|Retained earnings 1 July 2018||35,000||5,000|
|Available for appropriation||80,000
|Interim dividend paid||10,000||2,000|
|Final dividend proposed
|Dividends paid and proposed||40,000||5,000|
|Retained earnings 30 June 2019||40,000||10,000|
|12% unsecured notes||50,000||–|
|Unsecured notes – Ping Pong Ltd||–||25,000|
|Investment in Sing Song Ltd||200,000||–|
- The directors have decided that goodwill should be written off completely, no writedowns for goodwill impairment losses were made in prior years.
- During the current financial year, Sing Song Ltd paid management fees of $7,000 to Ping Pong Ltd.
- On 1 June 2019, Ping Pong Ltd sold inventory to Sing Song Ltd for $30,000. All of this inventory has been sold by Sing Song Ltd to parties external to the group during June 2019. This intra-group sale was made on credit terms, and $10,000 remains owing to Ping Pong at 30 June 2019.
- Sing Song Ltd holds half of the unsecured notes issued by Ping Pong Ltd. Interest at a rate of 12% has been paid on these notes during the year.
- On 25 January 2019, Sing Song Ltd paid an interim dividend of $2,000 to Ping Pong Ltd.
- Sing Song Ltd declared a final dividend of $3,000 on 20 June 2019. Ping Pong Ltd has recognised this dividend as a receivable at 30 June 2019.
- The tax rate is 30%.
- Prepare an acquisition analysis.
- Prepare the consolidation worksheet entries necessary to prepare the consolidated financial statements for the year ending 30 June 2019 for the group comprising Ping Pong Ltd and Sing Song Ltd.
Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements.
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