Question 5 Total 40 marks Financial information for Sydney Ltd and its 100% owned subsidiary, Grey Ltd, for the period ended 30 June 2020 is provided below. Sales revenue Sydney Ltd $283 000 (169 000) 114 000 Grey Ltd $98 000 (57 000) 41 000 Cost of sales 71 500 56 300 7 000 Gross Profit Dividend revenue Other income Gains on sale of non-current assets Total income Admin and other expenses Profit before income tax 4 500 52 500 10 000 251 800 (150 800) 101 000 (20 300) 80 700 315 300 Income tax expense Profit for the year Retained earnings (1/7/19) (30 500) 22 000 (6 600) 15 400 120 000 135 400 (4 500) (9 000) $121 900 396 000 Interim dividend paid Final dividend declared Retained earnings (30/6/20) (10 000) (14 000) $372 000 Sydney Ltd acquired all the issued shares (cum div.) of Grey Ltd on 1 July 2019 for $752,000. At this date the equity of Grey Ltd consisted of: Share capital Retained earnings $420,000 120,000 Grey Ltd had declared prior to the acquisition a dividend payment of $22,000, which was paid late in August 2019. All of the identifiable assets and liabilities of Grey Ltd were recorded at amounts equal to their fair values except for the following: Carrying amount Fair value Inventory Plant (accumulated depreciation of $60,000) $190,000 440,000 $250,000 480,000 Of the inventory on hand on 1 July 2019, only 30% remained unsold by 30 June 2020. The plant or hand at the date of acquisition was expected to have a further useful life of 5 years. The companies in the group use the straight-line method of depreciation. The tax rate is 30%. Question 5 continued During the 20192020 year, the following transactions occurred: (i) Sydney Ltd sold inventory to Grey Ltd for $50,000 at a profit before tax of $8 000. This inventory had originally cost Sydney Ltd $42,000. This inventory was still on hand in the books of Grey Ltd on 30 June 2020. (ii) Sydney Ltd charged Grey Ltd management fees of $25,000. This amount was paid by 30 June 2020. (111) (iv) On 1 January 2020, Sydney Ltd sold machinery to Grey Ltd for $55,000, with a gain on sale of $7,000. The machinery was considered to have a further 5-year life. On 30 June 2020, an impairment test was conducted on Grey Ltd, and this resulted in recognition of an impairment loss on the goodwill on acquisition of $30,000 (this has no tax effect). On 30 June 2020, the directors of Grey Ltd declared a dividend of $9,000. Sydney Ltd records dividend receivable as revenue when dividends are declared. This dividend remained unpaid at the end of the year. (v) Required: a) Prepare the acquisition analysis as of 1 July 2019. (6 marks) b) Prepare the journal entries necessary to prepare consolidated financial statements as of the date of acquisition on 1 July 2019. Show all workings and narrations. (8 marks) c) Prepare the journal entries necessary to prepare consolidated financial statements as of 30 June 2020. Show all workings and narrations. (26 marks) Question 5 Total 40 marks Financial information for Sydney Ltd and its 100% owned subsidiary, Grey Ltd, for the period ended 30 June 2020 is provided below. Sales revenue Sydney Ltd $283 000 (169 000) 114 000 Grey Ltd $98 000 (57 000) 41 000 Cost of sales 71 500 56 300 7 000 Gross Profit Dividend revenue Other income Gains on sale of non-current assets Total income Admin and other expenses Profit before income tax 4 500 52 500 10 000 251 800 (150 800) 101 000 (20 300) 80 700 315 300 Income tax expense Profit for the year Retained earnings (1/7/19) (30 500) 22 000 (6 600) 15 400 120 000 135 400 (4 500) (9 000) $121 900 396 000 Interim dividend paid Final dividend declared Retained earnings (30/6/20) (10 000) (14 000) $372 000 Sydney Ltd acquired all the issued shares (cum div.) of Grey Ltd on 1 July 2019 for $752,000. At this date the equity of Grey Ltd consisted of: Share capital Retained earnings $420,000 120,000 Grey Ltd had declared prior to the acquisition a dividend payment of $22,000, which was paid late in August 2019. All of the identifiable assets and liabilities of Grey Ltd were recorded at amounts equal to their fair values except for the following: Carrying amount Fair value Inventory Plant (accumulated depreciation of $60,000) $190,000 440,000 $250,000 480,000 Of the inventory on hand on 1 July 2019, only 30% remained unsold by 30 June 2020. The plant or hand at the date of acquisition was expected to have a further useful life of 5 years. The companies in the group use the straight-line method of depreciation. The tax rate is 30%. Question 5 continued During the 20192020 year, the following transactions occurred: (i) Sydney Ltd sold inventory to Grey Ltd for $50,000 at a profit before tax of $8 000. This inventory had originally cost Sydney Ltd $42,000. This inventory was still on hand in the books of Grey Ltd on 30 June 2020. (ii) Sydney Ltd charged Grey Ltd management fees of $25,000. This amount was paid by 30 June 2020. (111) (iv) On 1 January 2020, Sydney Ltd sold machinery to Grey Ltd for $55,000, with a gain on sale of $7,000. The machinery was considered to have a further 5-year life. On 30 June 2020, an impairment test was conducted on Grey Ltd, and this resulted in recognition of an impairment loss on the goodwill on acquisition of $30,000 (this has no tax effect). On 30 June 2020, the directors of Grey Ltd declared a dividend of $9,000. Sydney Ltd records dividend receivable as revenue when dividends are declared. This dividend remained unpaid at the end of the year. (v) Required: a) Prepare the acquisition analysis as of 1 July 2019. (6 marks) b) Prepare the journal entries necessary to prepare consolidated financial statements as of the date of acquisition on 1 July 2019. Show all workings and narrations. (8 marks) c) Prepare the journal entries necessary to prepare consolidated financial statements as of 30 June 2020. Show all workings and narrations. (26 marks)