Question 3: Topic 3 and 4 - Consolidated financial statements, method, acquisition, business combination valuation and intra-group transactions (35 marks)

On 1 July 2017, Old Ltd acquired 100% of the share capital of School Ltd (cumdiv.) for $920,000. School Ltd's balance sheet on acquisition date included:

Dividend payable

$20,000

Retained earnings

180,000

Share capital

600,000

General reserve

40,000

At acquisition date, all of School Ltd's net assets were recorded at fair value except for:

Carrying amount

Fair value

Inventory

$32,000

$40,000

Land

62,000

75,000

Contingent liability

-

8,000

Buildings (Cost $100,000)

69,000

78,000

Additional Information:

1. The dividend payable at acquisition date was subsequently paid in August 2017.
3. The revalued inventory was sold during the year ended 30 June 2018.
5. The contingent liability identified on the acquisition of School Ltd still existed at 30 June 2020.
7. The revalued land was sold during the year ended 30 June 2020 for $52,000.
9. The revalued buildings were still held at 30 June 2020 being depreciated on the straight-line basis at 15% per year.
11. In May 2018, goodwill was impaired by $1,500. An additional $2,500 impairment occurred during the year ended 30 June 2020.
13. Management fee revenues earned by Old Ltd during the year ended 30 June 2020 were collected from School Ltd.
15. School Ltd's inventory balance at 1 July 2019 included an item previously purchased from Old Ltd. This inventory had been sold by Old Ltd to School Ltd at a profit of $6,500.
17. During the year ended 30 June 2020, School Ltd sold a quantity of inventory to Old Ltd for $12,000. This inventory had originally cost School Ltd $8,000 with 30% of this inventory still being held by Old Ltd at 30 June 2020.
19. All dividends paid/declared by Old Ltd during the year ended 30 June 2020 were from post-acquisition profits.
21. Financial statements for the year ended 30 June 2020 are reproduced below:
24. Old Ltd
25. School Ltd
26. Sales
27. $6,320,000
28. $3,260,000
29. Cost of goods sold
30. (3,060,000)
31. (2,710,000)
32. Gross profit
33. 3,260,000
34. 550,000
35. Dividend revenue
36. 83,000
38. Interest revenue
40. 18,000
41. Management fees revenue
42. 22,000
44. Other income
45. 30,000
47. Loss on sale of land
49. (10,000)
50. Depreciation expense
51. (180,000)
52. (86,000)
53. Finance costs
54. (91,000)
55. (35,000)
56. Other expenses
57. (284,000)
58. (33,000)
59. Profit before income tax
60. 2,840,000
61. 404,000
62. Income tax expense
63. (202,000)
64. (88,000)
65. Profit after tax
66. 2,638,000
67. 316,000
68. Retained earnings at (01/07/19)
69. 695,000
70. 322,000
71. Interim dividend paid
72. (70,000)
73. (22,000)
74. Final dividend declared
75. (140,000)
76. (61,000)
77. Retained earnings at (30/06/20)
78. 3,123,000
79. 555,000
80. Share capital
81. 800,000
82. 600,000
83. General reserve
84. 210,000
85. 40,000
86. Total equity
87. 4,133,000
88. 1,195,000
89. Trade and other payables
90. 413,000
91. 137,000
92. Dividend payable
93. 140,000
94. 61,000
95. Loan from School Ltd (6% per year, interest payable 31 December)
96. 300,000
98. Mortgage loan
99. 1,453,000
100. 401,000
101. Deferred tax liabilities
102. 90,000
104. Total liabilities
105. 2,396,000
106. 599,000
107. Total liabilities and equity
108. 6,529,000
109. 1,794,000
110. Cash
111. 194,000
112. 115,000
113. Trade and other receivables
114. 72,000
115. 35,000
116. Dividends receivable
117. 61,000
119. Inventory
120. 750,000
121. 438,000
122. Land
123. 770,000
124. 250,000
125. Buildings
126. 1,747,000
127. 770,000
128. Accumulated depreciation buildings
129. (320,000)
130. (454,000)
131. Plant and equipment
132. 2,790,000
133. 450,000
134. Accumulated depreciation plant and equipment
135. (435,000)
136. (110,000)
137. Investment in School Ltd
138. 900,000
140. Loan to Old Ltd (6% per year, interest payable 31 December)
142. 300,000
143. Total assets
144. 6,529,000
145. 1,794,000

Required:

1. Determine the gain on bargain purchase or goodwill as at acquisition date.(3 marks)
3. Prepare the consolidation journal entries for Old Ltd immediately after acquisition on 1 July 2017.(6marks)
5. Prepare the consolidation journal entries for Old Ltd as at 30 June 2020.(16 marks)
7. Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Old Ltd as at 30 June 2020.(10 marks)

Question 4: Topic 3 and 4 (continued) and Topic 5 - Non-Controlling Interest (35 marks)

On 1 July 2018, Bay Ltd paid $236,400 for 60% of the issued shares of Watch Ltd. At this date, the equity of Watch Ltd consisted of:

Share capital (200,000 shares)

$200,000

General reserve

80,000

Retained earnings

40,000

A comparison of the carrying amounts and fair values of Watch Ltd's assets at the acquisition date showed the following:

Carrying amount

Fair value

Land

$ 183,000

$200,000

Plant (cost $150,000)

100,000

120,000

Inventories

65,000

90,000

Accounts receivable

40,000

35,000

Goodwill

4,000

In relation to the accounts, the following information is available:

1. At acquisition date, the plant had a further 5-year life but was sold on 1 January 2020.
2. All the inventories were sold by 30 June 2019.
3. All the accounts receivable were collected by 30 June 2019.

Any valuation reserves arising on consolidation are transferred on realisation of the asset to retained earnings.The general reserve movement was from pre-acquisition equity. Dividends are recognised on declaration.

The following transactions occurred between 1 July 2018 and 30 June 2020:

2019

Jan.

1

Watch Ltd sold an item of plant to Bay Ltd for $18,000, which included a profit of $6,000. The remaining useful life of the plant was 4 years.

Jan.

7

Watch Ltd transferred $20,000 from general reserve to retained earnings.

Feb.

12

Watch Ltd paid an $8,000 dividend.

March

23

Watch Ltd sold inventories to Bay Ltd for $50,000 recording a before-tax profit of $10,000. The tax rate is 30%.

June.

26

Watch Ltd declared a $15,000 dividend.

30

Watch Ltd recorded a profit after tax of $130,000. One-quarter of the inventories sold by Watch Ltd to Bay Ltd on 23 March 2019 are still on hand with Bay Ltd.

Aug.

15

The $15,000 dividend declared by Watch Ltd was paid.

Sept.

21

The remaining inventories in Bay Ltd sold to it by Watch Ltd were sold outside the group.

2020

Jan.

1

Watch Ltd paid a $16,000 dividend.

June

30

Watch Ltd recorded a profit after tax of $150,000.

Required:

1. Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-Controlling Interest on 1 July 2018 was $150,000.(4 marks)
3. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method.(3 marks)
5. Prepare the consolidation journal entries for Bay Ltd using the partial goodwill method at 30 June 2019.(8 marks)
7. Prepare the consolidation journal entries for Bay Ltd using the partial goodwill method at 30 June 2020.(20 marks)
9. Note:Your consolidation journal entries for Required 4 should be prepared in the following format:
10. (a) Business combination valuation entries at 30 June 2020
11. (b) Pre-acquisition entries at 30 June 2020
12. (c) NCI share of equity at 1 July 2018
13. (d) NCI share of equity changes from 1 July 2018 to 30 June 2019
14. (e) NCI share of equity changes from 1 July 2019 to 30 June 2020
15. (f) Intra-group transaction adjustments required as at 30 June 2020