Question 4: Topic 3 and 4 (continued) and Topic 5 – Non-Controlling Interest (35 marks)
Consolidated Financial Statements: Method, acquisition and business combination valuation
Consolidated Financial Statements: intragroup transactions
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:
- At acquisition date, the plant had a further 5-year life but was sold on 1 January 2020.
- All the inventories were sold by 30 June 2019.
- 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:
- 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)
- Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method. (3 marks)
- Prepare the consolidation journal entries for Bay Ltd using the partial goodwill method at 30 June 2019. (8 marks)
- Prepare the consolidation journal entries for Bay Ltd using the partial goodwill method at 30 June 2020. (20 marks)
Note:
Your consolidation journal entries for Required 4 should be prepared in the following format:
(a) Business combination valuation entries at 30 June 2020
(b) Pre-acquisition entries at 30 June 2020
(c) NCI share of equity at 1 July 2018
(d) NCI share of equity changes from 1 July 2018 to 30 June 2019
(e) NCI share of equity changes from 1 July 2019 to 30 June 2020
(f) Intra-group transaction adjustments required as at 30 June 2020
Questions adapted from:
Loftus, J., Leo, K., Daniliuc, S., Boys, N., Luke, B., Ang, H., & Byrnes, K. (2020). Financial Reporting. (3rd ed.). John Wiley & Sons Ltd.
Arthur, N., Luff, L., Keet, P., Egan, M., Howieson, B., Ram,. R. (2016). Accounting for corporate combinations and associations (8th ed.). Pearson Education.
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