Smiles Ltd purchased 100% of the shares of Degrees Ltd on 1 July 2019 for $820,000 (
Question:
Smiles Ltd purchased 100% of the shares of Degrees Ltd on 1 July 2019 for $820,000 (cumm div). At that date the financial statements of Degrees Ltd showed the following amounts:
Share Capital | $600,000 |
Retained Earnings | 125,000 |
General Reserve | 30,000 |
Dividend Payable | 20,000 |
On 1 July 2019 all of the identifiable assets of Degrees Ltd were recorded at fair value except for the following:
Carrying Amount | Fair Value | |
Inventory | $50,000 | 60,000 |
Machinery (cost $215,000) | 150,000 | 220,000 |
On 1 July 2019 Degrees Ltd had a contingent liability of $50,000 relating to a lawsuit for damaged goods that had not been recorded in the accounts. This lawsuit was settled in November 2019, and Degrees Ltd was required to pay $44,000 in damages. All of the above inventory was sold by December 2019. The machinery had a further 4-year useful life. Any valuation adjustments are made on consolidation.
Additional information:
i) | During the year, Smiles Ltd sold inventory to Degrees Ltd for $10,000, at a mark-up of 25% on cost. At year end, Degrees Ltd still had 25% of this inventory on hand. |
ii) | On 1 January 2020, Degrees Ltd sold Smiles Ltd an item of plant for $23,000. This plant originally cost Degrees Ltd $25,000 and was written down to $16,000 just before the intragroup sale. Smiles Ltd depreciates the plant at the rate of 25% p.a. on cost. |
iii) | During the year ended 30 June, 2020 Smiles Ltd charged Degrees Ltd management fees of $12,000. On 30 June 2020, Degrees Ltd had not paid these fees. |
iv) | On 30 June 2020, the balance in the Retained Earnings account for Smiles Ltd was $644,350CR and for Degrees Ltd it was $167,400CR. |
v) | On 30 June 2020, Degrees Ltd declared a dividend of $25,000. This dividend was paid in August 2020. |
vi) | The income tax rate is 30%. |
Requirements:
a) | Prepare the acquisition analysis on 1 July 2019. | |
b) | Prepare the journal entries necessary to prepare consolidated financial statements as of 30 June 2020. Show all dates and narrations. | |
c) | Calculate the balance in the Consolidated Retained Earnings account as of 30 June 2020. Show details – descriptions and amounts. |
Expert Answer:
a Prepare the acquisition analysis on 1 July 2019 The acquisition analysis on 1 July 2019 would show ... View the full answer
