The Subsidiary, Smashed

On 31 December 2016, Parts Palace Limited acquired 60% of the shares in Smashed Limited. On that date, the equity of Smashed Limited comprised:

  $ 000
Share capital 700
Retained earnings 400
Equity $1,100


At acquisition, the book value of the assets and liabilities of Smashed Limited were considered to be at fair value, except for some non-depreciable assets (included under ‘Other non-current assets’ and considered to be part of net identifiable assets) that had a book value of zero and where Parts Palace assessed their fair value to be $170,000. There has been no change to assessed value of these assets since acquisition.

Goodwill impairment

At the most recent balance date (31 December 2019), the returns from Smashed were not as high as expected. The directors of Parts Palace considered that acquired goodwill had been impaired by $200,000.

Tax and Deferred Tax

Assume a tax rate of 30% wherever relevant (i.e., for both Phase 1 and Phase 2).

Breakdown of Cost of Sales figures supplied below for 31 December 2019




  Parts Palace




Opening inventory 450 400
Purchases 1250 550
Closing inventory 300 350
Cost of sales 1400 600



Financial statements

Income statement for year end 31 December & Balance sheet as at 31 December 2019


  Parts Palace




Sales 4,200 1,600
Cost of sales 1,400 600
Gross profit 2,800 1,000
Operating expenses (incl. Interest, Depn & Impairment) 300 400
Other income (icl. Dividends & Interest) 400 100
Operating profit before tax 2,900 700
Income tax 500 300
Net Profit 2,400 400
Opening Retained earnings 1,500 500
  3,900 900
Dividends paid 800 200
Closing retained earnings 3,100 700
Share capital 2,200 700
Total equity 5,300 1,400
Accounts Payable 800 200
Deferred tax 600 130
Other non-current liabilities 700 800
Total liabilities 2,100 1,130
Total liabilities and equity 7,400 2,530
Cash 100 80
Accounts Receivable 200 100
Inventory 300 350
Current assets 600 530
Investment in Smashed (at Cost) 2,000  
Plant (net) 3,700 1,300
Other non-current assets 1,100 700
Non-current assets 6,800 2,000
Total assets 7,400 2,530


Phase 1 Required:

Prepare the consolidated group financial statements for Parts Palace and Smashed as at 31 December 2019, using the ‘Phase 1’ tab on the Excel template provided. Use only information provided above, as Al Bruno wants further detail on inter-group transactions left to be dealt with as ‘Phase 2’.



Now that you have considered the Phase 1 information and completed the relevant template for Al Bruno’s review, he wants you to go on to consider consolidation adjustments for intra-group transactions in more detail. Al wants to ensure you have the basics right before you go on to dealing with the impact of these adjustments on the consolidated financial statements. He tells you that profit on merchandise sales was 60%. for Parts Palace and 70%. for Smashed for all sales transactions including inter-group transactions (” = as a percentage of sales).

He has asked you to provide him with a spreadsheet showing the consolidation adjustments in journal form only for the following intra-group transactions during 2019 (all figures below are in $000s):

  1. Parts Palace sold Smashed merchandise at a price of $300.
  2. Smashed sold Parts Palace merchandise at a price of $400.
  3. $75 remained owing by Parts Palace at 31 December 2019 for the merchandise sold to it by Smashed.
  4. Parts Palace’s inventories included merchandise bought from Smashed of:
    1. $50 at the beginning of 2019, and
    2. $60 at the end of 2019.
  5. Smashed’s 2019 inventories included merchandise bought from Parts Palace of:
    1. Beginning: $30, and
    2. Closing: $35.
  6. The ‘Other non-current assets’ on Parts Palace’s balance sheet includes a long-term loan to Smashed of $800.
  7. The terms of the loan to Smashed require 8% annual interest payments. The loan was made on 1 January 2019 and interest is paid on 31 December each year.

Phase 2 Required:

Prepare the consolidation journal entries only for the above intragroup transactions for the year ended 31 December 2019. Please use the “Phase 2” tab on the Excel template provided and adhere strictly to the following instructions:

  1. You will need to choose the most appropriate accounts to which to post each journal
  2. Post a separate numbered journal entry for each numbered piece of information above i.e., your journal entries should be posted to the corresponding columns for the above numbers 1 — 7. For example, you will need to post a separate journal entry (Dr and Cr) for #3 and a separate journal entry (Dr and Cr) for #4a.
  3. You are only required to prepare journal entries for Phase 2 e., Al does not want you to adjust the Phase 1 figures until he has reviewed and authorised the journal entries.

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