The following financial statements of Tom Ltd and its subsidiary Jerry Ltd have been extracted from their
Question:
The following financial statements of Tom Ltd and its subsidiary Jerry Ltd have been extracted from their financial records at 30 June 2020.
Tom Ltd ($000) | Jerry Ltd ($000) | |
Reconciliation of operating profit and closing retained earnings | ||
Sales revenue | 671.4 | 540 |
Cost of goods sold | (464) | (238) |
Gross profit | 207.4 | 302 |
Dividends received from Jerry Ltd | 93 | - |
Management fee revenue | 26.5 | |
Gain on sale of plant | 40 | 35 |
Expenses | ||
Administrative expenses | (30.8) | (38.7) |
Depreciation | (29.5) | (56.8) |
Management fee expense | - | (26.5) |
Other expenses | (101.1) | (72) |
Profit before tax | 205.5 | 143 |
Tax expense | (61.5) | (42.2) |
Profit for the year | 144 | 100.8 |
Retained earnings 30 June 2019 | 319.4 | 239.2 |
463.4 | 340 | |
Dividends paid | (137.4) | (93) |
Retained earnings 30 June 2020 | 326 | 247 |
Tom Ltd ($000) | Jerry Ltd ($000) | |
Statement of financial position | ||
Shareholders’ equity | ||
Retained earnings | 326 | 247 |
Share capital | 350 | 200 |
Current liabilities | ||
Accounts payable | 54.7 | 46.3 |
Tax payable | 41.3 | 25 |
Non-current liabilities | ||
Loans | 173.5 | 116 |
945.5 | 634.3 | |
Current assets | ||
Accounts receivable | 59.4 | 62.3 |
Inventory | 92 | 29 |
Non-current assets | ||
Land and Buildings | 224 | 326 |
Plant – at cost | 299.85 | 355.8 |
Accumulated depreciation | (85.75) | (138.8) |
Investment in Jerry Ltd | 356 | - |
945.5 | 634.3 |
Other information
a) Tom Ltd acquired its 100 per cent interest in Jerry Ltd on 1 July 2015, that is, five years earlier. At that date the capital and reserves of Jerry Ltd were:
Share capital $200,000
Retained earnings 180,000
$380,000
At the date of acquisition all assets were considered to be fairly valued.
b) During the year Tom Ltd made total sales to Jerry Ltd of $60,000.
c) The closing inventory in Tom Ltd includes inventory acquired from Jerry Ltd at a cost of $33,000. This cost Jerry Ltd $28,000 to produce.
d) Jerry Ltd sold $50,000 in inventory to Tom Ltd.
e) The closing inventory of Jerry Ltd includes inventory acquired from Tom Ltd at a cost of $12,000. This cost Tom Ltd $10,000 to produce.
f) The opening inventory in Tom Ltd as at 1 July 2019 included inventory acquired from Jerry Ltd for $40,000 that cost Jerry Ltd $30,000 to produce.
g) On 1 July 2019 Jerry Ltd sold an item of plant to Tom Ltd for $116,000 when its carrying value in Jerry Ltd’s accounts was $81,000 (cost $135,000, accumulated depreciation $54,000). This plant is assessed as having a remaining useful life of six years. The group has a policy of measuring its property, plant and equipment using the cost model. The group uses the straight-line method of depreciation.
h) Jerry Ltd paid $26,500 in management fees to Tom Ltd.
i) Dividends were paid by Jerry Ltd during the year.
j) The tax rate is 30 per cent.
Required:
a) Prepare the acquisition analysis.
b) Prepare the consolidation journal entries for Tom Ltd and its consolidated entity as at 30 June (ignore narrations).
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott