Section 1: Consolidation Case Study - Galaxy Ltd and Moon Ltd (Total 70 marks)

Galaxy Ltd acquired 80% of the share capital of Moon Ltd on 1 July 2012. The following equity balances appeared in the records of Moon Ltd at the date of acquisition:

Share capital (210,000 shares)

$210,000

General reserve

6,100

Retained earnings

75,000

Financial information at 30 June 2017 of Galaxy Ltd and its subsidiary company, Moon Ltd, is shown below.

Galaxy Ltd

Moon Ltd

$

$

Sales revenue

708,000

492,000

Cost of sales

(273,000)

(178,500)

Gross Profit

435,000

313,500

Other revenue:

Debenture interest

10,500

Management fees

10,500

Dividend from Moon Ltd

16,800

462,300

324,000

Administrative expenses

(31,500)

(16,800)

Distribution expenses

(189,000)

(126,000)

Depreciation on machinery

(31,500)

(31,500)

Finance expenses

(27,600)

(12,000)

Other expenses

(29,400)

(25,200)

Total operating expenses

(309,000)

(211,500)

Profit before tax

153,300

112,500

Income tax expense

(52,500)

(34,500)

Profit after tax

100,800

78,000

Retained earnings (1/7/2016)

105,000

94,500

205,800

172,500

Transfer to general reserve

(6,300)

Interim dividend paid

(31,500)

(21,000)

Final dividend declared

(37,800)

(42,000)

(75,600)

(63,000)

Retained earnings (30/6/2017)

130,200

109,500

General reserve

105,000

36,000

Other components of equity (1/7/2016)

27,300

21,000

Share capital

630,000

210,000

Liabilities:

Debentures

255,000

60,000

Deferred tax liability

14,700

Current tax liability

52,500

35,700

Dividend payable

37,800

42,000

Other current liabilities

189,000

25,200

1,426,800

554,100

Cash and cash equivalents

107,100

6,000

Trade receivables

68,250

40,200

Inventory

189,000

58,500

Debentures in Galaxy Ltd

105,000

Shares in Moon Ltd

270,000

Machinery (cost)

252,000

214,200

Accumulated depreciation - machinery

(136,500)

(115,500)

Other depreciable assets

159,600

115,500

Accumulated depreciation

(84,000)

(52,500)

Deferred tax asset

179,250

63,000

Land

422,100

119,700

1,426,800

554,100

Additional information

i.At 1 July 2012, all the identifiable assets and liabilities of Moon Ltd were recorded at fair value except for the following assets:

Carrying amount

Fair value

Land

$62,000

$80,000

Machinery (cost 135,000)

105,000

120,000

Receivable

42,000

36,000

The machinery has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2012 was sold on 1 March 2014 for $84,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings. By 30 June 2013, receivables had all been collected.

ii.Galaxy Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2012 was $66,000.

iii.Opening inventory of Moon Ltd includes unrealised profit of $5,000 on inventory sold by Galaxy Ltd. It was all sold by Moon Ltd during the year.

iv.During the year, intragroup sales by Moon Ltd to Galaxy Ltd were $80,000.The mark-up on cost of all sales was 25%. At 30 June 2017, Galaxy Ltd's inventory included $35,000 of items acquired from Moon Ltd.

v.On 1 January 2017, Moon Ltd sold an item of inventory to Galaxy Ltd for $18,000 at a profit before tax of $3000. Galaxy Ltd had treated this item as an addition to its machinery and depreciated at 10% p.a. straight-line.

vi.On 1 April 2017, Galaxy Ltd sold $15,000 worth of inventory to Moon Ltd. The cost of this inventory was $9000. By 30 June 2017, Moon Ltd had sold 60% of the inventory to outside entities.

vii.Some of the items manufactured by Moon Ltd are used as machinery by Galaxy Ltd. One of the machinery items held by Galaxy Ltd at 30 June 2017 was purchased from Moon Ltd on 1 January 2016. It had cost Moon Ltd $17,500 to manufacture this item and was sold to Galaxy Ltd for $25,000. Galaxy Ltd depreciates such items at 10% p.a. on cost.

viii.Management fees derived by Galaxy Ltd were all from Moon Ltd and represented charges made for administration.

ix.The tax rate is 30%.

Required:

a)Prepare the acquisition analysis at 1 July 2012. (10 marks)

b)Prepare the consolidation journal entries, including:

-The business combination valuation entries; (6 marks)

-The pre-acquisition entries; (5 marks)

-The intra-group entries (considering the effects on non-controlling interests); (26 marks)

c)Calculate NCI share of equity at following dates and prepare the journal entries (not considering the effects of intra-group transactions):

-1 July 2012; (3 marks)

-1 July 2012 - 30 June 2016; (4.5 marks)

-1 July 2016 - 30 June 2017. (3.5 marks)

d)Show the balance of following accounts presented in the consolidated financial statement

-The balance of Non-Controlling Interests in the consolidated financial statement; (5.5 marks)

-The balance of Business Combination Revaluation Reserve (BCVR) in the consolidated financial statement; (3 marks)

-The balance of Deferred Tax Assets in the consolidated financial statement; (3.5 marks)

(Note: You must show all workings. The calculation figures will be marked.)