Worksheet adjustments-Consolidation
On 1 July 2019, Mutt Ltd acquired all the issued shares of Jeff Ltd for $ XXXXXXXXXXAt this date the equity of Jeff Ltd consisted of share capital of $80 000 and retained earnings of $ XXXXXXXXXXAll the identifiable assets and liabilities of Jeff Ltd were recorded at amounts equal to fair value except for:
The patent was considered to have an indefinite life. It was estimated that the plant had a further life of 10 years, and was depreciated on a straight-line basis. All the inventories were sold by 30 June 2020.
In May 2020, Jeff Ltd transfe
ed $20 000 from the retained earnings on hand at 1 July 2019 to a general reserve. In June 2020, Jeff Ltd conducted an impairment test on the patent and on the goodwill acquired. As a result, the goodwill was considered to be impaired by $1200. The tax rate is 30%.
Required
1. Prepare the acquisition analysis at 1 July 2019.
2. Prepare the consolidation worksheet entries for Mutt Ltd’s group at 1 July 2019.
1. Acquisition analysis at 1 July 2019:
Net fair value of identifiable assets
and liabilities of Jeff Ltd = ($80 000 + $ XXXXXXXXXXequity)
+ ($72 000 – $ XXXXXXXXXX – 30%) (BCVR – patent)
+ ($48 000 – $ XXXXXXXXXX – 30%) (BCVR – plant)
+ ($28 000 – $ XXXXXXXXXX – 30%) (BCVR – inventories)
= $167 280
Consideration transfe
ed = $174 800
Goodwill = $174 800 – $167 280
= $7 520
2. Worksheet entries at 1 July 2019:
(1) Business combination valuation entries:
Patent Dr 12 000
Defe
ed tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
Accumulated depreciation - plant Dr 40 000
Plant Cr 40 000
Plant Dr 8 000
Defe
ed tax liability Cr 2 400
Business combination valuation reserve Cr 5 600
Inventories Dr XXXXXXXXXX
Defe
ed tax liability Cr 1 920
Business combination valuation reserve Cr 4 480
Goodwill Dr 7 520
Business combination valuation reserve Cr 7 520
(2) Pre-acquisition entries:
Retained earnings (1/7/19) Dr 68 800
Share capital Dr 80 000
Business combination valuation reserve Dr 26 000
Shares in Jeff Ltd Cr 174 800
Consolidation- Intra group transactions
Fred Ltd owns all of the share capital of Toby Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2019.
(a) On 1 July 2018, Fred Ltd sold equipment costing $10 000 to Toby Ltd for $ XXXXXXXXXXFred Ltd had not charged any depreciation on the asset before the sale as it just purchased it from an external entity. Both entities depreciate items of equipment at 10% p.a. on cost. The equipment is still held by Toby Ltd at 30 June 2020.
(b) During the period ended 30 June 2019, Toby Ltd paid an interim dividend of $10 000 out of pre-acquisition profits.
(c) On 30 June 2019, Toby Ltd declared a final dividend of $20 000 out of post-acquisition profits.
(d) On 1 May 2019, Fred Ltd sold inventories to Toby Ltd for $10 000, recording a profit of $2000. Half of the inventories were unsold by Toby Ltd at 30 June 2019.
(e) On 10 June 2019, Toby Ltd sold inventories to Fred Ltd for $15 000 in cash. The inventories had previously cost Toby Ltd $ XXXXXXXXXXOne-third of these inventories were unsold by Fred Ltd at 30 June 2019.
Required
In relation to the above intragroup transactions, prepare adjusting journal entries for the consolidation worksheet at 30 June 2019
FRED LTD – TOBY LTD
30 June 2019
(a) Gain on sale of equipment Dr 2 000
Equipment Cr 2 000
Defe
ed tax asset Dr 600
Income tax expense Cr 600
Accumulated depreciation - equipment Dr 200
Depreciation expense Cr 200
Income tax expense Dr 60
Defe
ed tax asset Cr 60
(b) Dividend revenue Dr 10 000
Interim dividend paid Cr 10 000
(c) Dividend revenue Dr 20 000
Dividend declared Cr 20 000
Dividend payable Dr 20 000
Dividend receivable Cr 20 000
(d) Sales revenue Dr 10 000
Inventories Cr 1 000
Cost of sales Cr 9 000
Defe
ed tax asset Dr 300
Income tax expense Cr 300
(e) Sales revenue Dr 15 000
Cost of sales Cr 14 000
Inventories Cr 1 000
Defe
ed tax asset Dr 300
Income tax expense Cr 300
Associates and Joint venture
Brown Ltd acquired a 30% interest in Bandicoot Ltd for $50  000 cash on 1 July 2018. The directors of Brown Ltd believe this investment represents significant influence over the investee. The equity of Bandicoot Ltd at the acquisition date was as follows.
All the identifiable assets and liabilities of Bandicoot Ltd were recorded at fair value. Profits and dividends for the years ended 30 June 2019 to 2021 were as follows.
Prepare journal entries in the records of Brown Ltd for each of the years ended 30 June 2019 to 2020 in relation to its investment in the associate, Bandicoot Ltd. (Assume Brown Ltd does not prepare consolidated financial statements.)
Journal entries in the accounts of Brown Ltd:
1 July 2018
Investment in Bandicoot Ltd
D
50 000
Cash
C
50 000
(Acquisition of shares in Bandicoot Ltd)
2018 – 2019
Cash
D
24 000
Investment in Bandicoot Ltd
C
24 000
(Dividend received from Bandicoot Ltd: 30% x $80 000)
30 June 2019
Investment in Bandicoot Ltd
D
15 000
Share of profit or loss of associates
C
15 000
(Recognition of profit in Bandicoot Ltd:
30% x $50 000)
2019 – 2020
Cash
D
6 000
Investment in Bandicoot Ltd
C
6 000
(Dividend received: 30% x $20 000)
30 June 2020
Investment in Bandicoot Ltd
D
13 500
Share of profit or loss of
associates
C
13 500
(Recognition of profit in Bandicoot Ltd:
30% x $45 000)
Exercise 31.2- Accounting for an associate/joint venture by an investo
On 1 July 2019 Pygmy Ltd issued ordinary shares to acquire a 40% interest in Possum Ltd. On this date, these issued shares had a fair value of $170  000. The directors of Pygmy Ltd believe that they have significant influence over the financial and operating policy decisions of Possum Ltd. The share capital, reserves and retained earnings of Possum Ltd at the acquisition date and at 30 June 2020 were as follows.
At 1 July 2019, all the identifiable assets and liabilities of Possum Ltd were recorded at fair value.
The following is applicable to Possum Ltd for the year to 30 June 2020.
· Profit (after income tax expense of $11  000): $39  000.
· Increase in reserves:
· General (transfe
ed from retained earnings): $15  000.
· Asset revaluation (revaluation of freehold land and buildings at 30 June 2020): $100  000.
· Dividends paid to shareholders: $15  000.
· The tax rate is 30%.
· Pygmy Ltd does not prepare consolidated financial statements.
Required
Prepare the journal entries in the records of Pygmy Ltd for the year ended 30 June 2020 in relation to its investment in the associate, Possum Ltd. (LO4)
PYGMY LTD – POSSUM LTD
40%
Pygmy Ltd Possum Ltd
At 1 July 2019:
Net fair value of identifiable assets
and contingent liabilities of Possum Ltd = $400 000
Net fair value acquired = 40% x $400 000
= $160 000
Cost of investment = $170 000
Goodwill = $10 000
Recorded profit – Possum Ltd $39 000
Investor’s Share – 40% 15 600
Increment in Asset Revaluation Surplus $40 000
(40% x $100 000)
Note: as the general reserve is created as an appropriation from Retained Earnings, there is no need to adjust for movements in general reserve.
The journal entries in the books of Pygmy Ltd for the year ended 30 June 2020 are:
1 July 2019
Investment in Possum Ltd
D
170 000
Share capital
C
170 000
2019– 2020
Cash
D
6 000
Investment in Possum Ltd
C
6 000
(Dividend from associate:
40% x $15 000)
30 June 2020
Investment in Possum Ltd
D
15 600
Share of profit or loss
of associates
C
15 600
(40% x $39 000)
Investment in Possum Ltd
D
40 000
Asset revaluation surplus
C
40 000
(40% x $100 000)
Consolation-NCI
On 1 July 2019, Sugar Ltd acquired 90% of the shares of Glider Ltd for $ XXXXXXXXXXAt this date, the equity of Glider Ltd consisted of share capital of $ XXXXXXXXXXand retained earnings of $ XXXXXXXXXXAll the identifiable assets and liabilities of Glider Ltd were recorded at amounts equal to fair value except for the following.
The land is still on hand with Glider Ltd at 30 June 2020. The plant was considered to have a further 10-year life. All the inventories were sold by 30 June 2020. The tax rate is 30%. Sugar Ltd uses the partial goodwill method.
During the year ended 30 June 2020, Glider Ltd recorded a profit of $30Â 000.
Required
1. Prepare the consolidation worksheet entries for the preparation of the consolidated financial statements of Sugar Ltd at 1 July 2019.
SUGAR LTD – GLIDER LTD
90%
Sugar Ltd Glider Ltd
Sugar Ltd 90%
NCI XXXXXXXXXX%
1. Consolidation worksheet entries at 30 June 2020 (Sugar Ltd uses partial goodwill method):
Acquisition analysis at 1 July 2019:
Net fair value of identifiable assets
and liabilities of Glider Ltd = ($300 000 + $ XXXXXXXXXXequity)
+ ($95 000 – $ XXXXXXXXXX – 30%) (BCVR - land)
+ ($330 000 – $ XXXXXXXXXX – 30%) (BCVR - plant)
+ ($18 000 – $ XXXXXXXXXX – 30%) (BCVR - inventories)
= $453 600
(a) Consideration transfe
ed = $435 240
(b) NCI in Glider Ltd = 10% x $453 600
= $45 360
Aggregate of (a) and (b) = $480 600
Goodwill acquired – parent only = $480 600 - $453 600
= $27 000
(a) Business combination valuation entries:
Land Dr 15 000
Defe
ed tax liability Cr 4 500
Business combination valuation reserve Cr 10 500
Accumulated depreciation - plant Dr 80 000
Plant Cr 50 000
Defe
ed tax liability Cr 9 000
Business combination valuation reserve Cr 21 000
Inventories Dr 3 000
Defe
ed tax liability Cr 900
Business combination valuation reserve Cr 2 100
(b) Pre-acquisition entries:
Retained earnings (1/7/19) Dr 108 000
Share capital Dr 270 000
Business combination valuation reserve Dr 30 240
Goodwill Dr 27 000
Shares in Glider Ltd Cr 435 240
(c) NCI Step 1: NCI share of equity at acquisition date:
Retained earnings (1/7/19) Dr 12 000
Share capital Dr 30 000
Business combination valuation reserve Dr 3 360
NCI Cr 45 360
(10% of the equity of Glider Ltd at acquisition date)
This entry transfers the NCI share of the pre-acquisition equity in Glider Ltd at acquisition date to the NCI equity account.