Question: PLease check if my answer is correct? Question 1: (20 marks) King Ltd owns all the shares of Smith Ltd. The shares were acquired on
PLease check if my answer is correct?
Question 1: (20 marks)
King Ltd owns all the shares of Smith Ltd. The shares were acquired on 1 July 2018 by King Ltd at a cost of $750,000. At the acquisition date, the capital of Smith Ltd consisted of 110,000 ordinary shares each fully paid at $3. There were retained earnings of $130,000. All the identifiable assets and liabilities of Smith Ltd were recorded at amounts equal to fair value except for the following:
| Carrying Amount | Fair Value | |
| Patent | $25,000 | $45,000 |
| Land | $150,000 | $160,000 |
| Machinery (cost $200,000) | $160,000 | $170,000 |
Patent and land had both been sold in 2019. Machinery has been depreciated at a rate of 10% a year.
Additional information:
- Intragroup sales of inventory for the year ended 30 June 2020 was $50,000. On 30 June 2020, inventory held by King was purchased from Smith at a profit of $6000. 50% of the stock is on hand.
- On 1 July 2019, inventory held by Smith Ltd, was purchased from King in the previous year at a profit of $4000. 0% of the stock is on hand at 30 June 2020.
- Intragroup machinery on hand on 30 June 2020:
- King Ltd: purchased from Smith Ltd on 1 July 2019 for $30,000 at a profit of $4,000. Depreciation rate is 20% per year.
- Smith Ltd had purchased from King Ltd an item of inventory. The carrying amount in King's records at time of sale (1 Jan 2019) was $10,000 and it was sold at a profit of $5,000. The inventory is still on hand as at 30 June 2020
Required:
Prepare all journal entries required for consolidation of King Group Ltd for the year ended 30 June 2020. Show all calculations necessary. Consolidation worksheet is not required.
Question 1.0 (King Ltd and Smith Ltd)
Acquisition Analysis (1 July 2018)
To determine goodwill arising from the acquisition of Smith Ltd. By King Ltd.
Cost of Investment: $750,000
Net Assets of Smith Ltd. At Acquisition:
Share Capital:110,000 shares * $3 = $330,000
Retained Earnings: $130,000
Total Equity: $330,000 + $130,000 = $460,000
Fair Value Adjustments: (Assets were revalued at acquisition)
Patent: $45,000 (FV) - $25,000 (CA) = $20,000 increase
Land: $160,000 (FV) - $150,000 (CA) = $10,000 increase
Machinery: $170,000 (FV) - $160,000 (CA) = $10,000 increase
Total Fair Value of Net Assets: $460,000 (Equity) + $20,000 (Patent) + $10,000 (Land) + $10,000 (Machinery) = $500,000
Goodwill Calculation:
Goodwill = Cost of Investment - Total Fair Value of Net Assets
Goodwill = $750,000 - $500,000 = $250,000
Consolidation Journal Entries:
These entries are made on the consolidation worksheet to eliminate the investment and adjust the subsidiary's accounts for consolidation purposes.
2.1 Eliminating the Investment in Smith Ltd:
To eliminate King's Ltd.'s investment in Smith Ltd and recognize Smith Ltd.'s equity and goodwill.
| GL | Debit | Credit |
| Share Capital (Smith Ltd.) | $330,000 | |
| Retained Earnings (Smith Ltd.) | 130,000 | |
| Patent | 20,000 | |
| Land | 10,000 | |
| Machinery | 10,000 | |
| Goodwill | 250,000 | |
| Investment (Smith Ltd.) | $750,000 |
| GL | Debit | Credit |
| Retained Earnings (Smith Ltd.) | $2,000 | |
| Cost of Sales | $2,000 |
Explanation:
Eliminate the investment and recognize the net assets and goodwill
Machinery fair value adjustment: $10,000 (FV at acquisition). Annual depreciation of fair value: $10,000 * 10% = $1,000
2.2 Removing Intragroup Sales
Eliminate sales between King Ltd and Smith Ltd.
| GL | Debit | Credit |
| Sales Revenue | $50,000 | |
| Cost of Sales | $50,000 |
2.3 Inventory Adjustment
To adjust for unrealized profit in King Ltd's inventory from purchases from Smith Ltd.
| GL | Debit | Credit |
| Retained Earnings (Smith Ltd.) | $3,000 | |
| Inventory | $3,000 |
$6,000 profit * 50% on hand = $3,000
2.4 Machinery Adjustment
To adjust for the profit on the sale of machinery from Smith Ltd to King Ltd.
Entry 1:
| GL | Debit | Credit |
| Intragroup Profit on Sale of Machinery | $4,000 | |
| Machinery | $4,000 |
Entry 2:
| GL | Debit | Credit |
| Retained Earnings (Smith Ltd.) | $3,200 | |
| Accumulated | 800 | |
| Machinery |
| $4,000 |
Calculation:
Profit = $4,000
Depreciation = $4,000 * 20% = $800
Retained Earnings = $4,000 - $800 = $3,200
2.5 Inventory Adjustment
To adjust for unrealized profit in King Ltd.'s inventory from purchases from Smith Ltd.
| GL | Debit | Credit |
| Retained Earnings | $5,000 | |
| Inventory | $5,000 |
2.6 Depreciation on Machinery
To adjust depreciation expense on the machinery that was sold between companies
| Debit | Credit |
| Depreciation Expense $1,000 | |
| Accumulated Depreciation $1,000 |
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