On 1 July 2019, Gilberts Ltd acquired all the issued shares (cum div.) of Potoroo Ltd for $50 000. At this date the equity of Potoroo Ltd consisted of:


Share capital $25 000
Retained earnings 7 500


At this date, Potoroo Ltd had recorded a dividend payable of $7500 which was paid in August 2019. All the identifiable assets and liabilities of Potoroo Ltd were recorded at amounts equal to fair values except for inventory for which the fair value was $1000 greater than carrying amount. Only 10% of the inventory on hand at 1 July 2019 remained unsold by 30 June 2020. The tax rate is 30%.

During the 2019–20 period, the following transactions occurred.

(a) Gilberts Ltd sold inventory to Potoroo Ltd for $30 000 at a profit before tax of $6000. At 30 June 2020, inventory which was sold to Potoroo Ltd for $12 500 at a profit before tax of $2500 was still on hand in the records of Potoroo Ltd.

(b) On 1 January 2020, Gilberts Ltd sold machinery to Potoroo Ltd at a gain of $5000. The machinery was considered to have a further 5-year life.

(c) During the period Potoroo Ltd rented a warehouse from Gilberts Ltd, paying $1250 in rent to Gilberts Ltd.

(d) During the period Gilberts Ltd recorded gains from revaluation of land, which is measured using the fair value method. These gains increased the asset revaluation surplus by $2000 to give a balance of $14 000 at 30 June 2020.

(e) In June 2020, an impairment test was conducted on Potoroo Ltd and resulted in the recognition of impairment losses on goodwill of $8000 (recognised in other expenses)

The following financial information was provided by the companies at 30 June 2020:

Gilberts Ltd Potoroo Ltd
Sales revenue $62 500 $59 000
Dividend revenue 2 500
Other income 2 500 5 000
Gains on sale of non-current assets 2 500 5 000
Total income 70 000 69 000
Cost of sales (52 500) (45 000)
Other expenses (7 500) (2 500)
Total expenses (60 000) (47 500)
Profit before income tax 10 000 21 500
Income tax expense (3 375) (4 875)
Profit for the year 6 625 16 625
Retained earnings (1/7/19) 15 000 7 500
21 625 24 125
Dividend paid (6 250) (2 500)
Retained earnings (30/6/20) $15375 $21 625



(a) Acquisition analysis at 1st July 2019

(b) Prepare consolidation journal entries at 30 June 2020 (Business Combination valuation reserve, pre-acquisition equity and intragroup transactions

(c) Complete a consolidation worksheet (worksheet will be uploaded to Moodle in week 4)

(d) Prepare the consolidated financial statements at 30 June 2020

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