Question 3: Topic 3 and 4 – Consolidated financial statements, method, acquisition, business combination valuation and intra-group transactions (35 marks)
On 1 July 2017, Old Ltd acquired 100% of the share capital of School Ltd (cum div.) for $920,000. School Ltd’s balance sheet on acquisition date included:
| Dividend payable | $20,000 |
| Retained earnings | 180,000 |
| Share capital | 600,000 |
| General reserve | 40,000 |
At acquisition date, all of School Ltd’s net assets were recorded at fair value except for:
| Carrying amount | Fair value | |
| Inventory | $32,000 | $40,000 |
| Land | 62,000 | 75,000 |
| Contingent liability | – | 8,000 |
| Buildings (Cost $100,000) | 69,000 | 78,000 |
Additional Information:
- The dividend payable at acquisition date was subsequently paid in August 2017.
- The revalued inventory was sold during the year ended 30 June 2018.
- The contingent liability identified on the acquisition of School Ltd still existed at 30 June 2020.
- The revalued land was sold during the year ended 30 June 2020 for $52,000.
- The revalued buildings were still held at 30 June 2020 being depreciated on the straight-line basis at 15% per year.
- In May 2018, goodwill was impaired by $1,500. An additional $2,500 impairment occurred during the year ended 30 June 2020.
- Management fee revenues earned by Old Ltd during the year ended 30 June 2020 were collected from School Ltd.
- School Ltd’s inventory balance at 1 July 2019 included an item previously purchased from Old Ltd. This inventory had been sold by Old Ltd to School Ltd at a profit of $6,500.
- During the year ended 30 June 2020, School Ltd sold a quantity of inventory to Old Ltd for $12,000. This inventory had originally cost School Ltd $8,000 with 30% of this inventory still being held by Old Ltd at 30 June 2020.
- All dividends paid/declared by Old Ltd during the year ended 30 June 2020 were from post-acquisition profits.
- Financial statements for the year ended 30 June 2020 are reproduced below:
| Old Ltd | School Ltd | |
| Sales | $6,320,000 | $3,260,000 |
| Cost of goods sold | (3,060,000) | (2,710,000) |
| Gross profit | 3,260,000 | 550,000 |
| Dividend revenue | 83,000 | |
| Interest revenue | 18,000 | |
| Management fees revenue | 22,000 | |
| Other income | 30,000 | |
| Loss on sale of land | (10,000) | |
| Depreciation expense | (180,000) | (86,000) |
| Finance costs | (91,000) | (35,000) |
| Other expenses | (284,000) | (33,000) |
| Profit before income tax | 2,840,000 | 404,000 |
| Income tax expense | (202,000) | (88,000) |
| Profit after tax | 2,638,000 | 316,000 |
| Retained earnings at (01/07/19) | 695,000 | 322,000 |
| Interim dividend paid | (70,000) | (22,000) |
| Final dividend declared | (140,000) | (61,000) |
| Retained earnings at (30/06/20) | 3,123,000 | 555,000 |
| Share capital | 800,000 | 600,000 |
| General reserve | 210,000 | 40,000 |
| Total equity | 4,133,000 | 1,195,000 |
| Trade and other payables | 413,000 | 137,000 |
| Dividend payable | 140,000 | 61,000 |
| Loan from School Ltd (6% per year, interest payable 31 December) | 300,000 | |
| Mortgage loan | 1,453,000 | 401,000 |
| Deferred tax liabilities | 90,000 | |
| Total liabilities | 2,396,000 | 599,000 |
| Total liabilities and equity | 6,529,000 | 1,794,000 |
| Cash | 194,000 | 115,000 |
| Trade and other receivables | 72,000 | 35,000 |
| Dividends receivable | 61,000 | |
| Inventory | 750,000 | 438,000 |
| Land | 770,000 | 250,000 |
| Buildings | 1,747,000 | 770,000 |
| Accumulated depreciation buildings | (320,000) | (454,000) |
| Plant and equipment | 2,790,000 | 450,000 |
| Accumulated depreciation plant and equipment | (435,000) | (110,000) |
| Investment in School Ltd | 900,000 | |
| Loan to Old Ltd (6% per year, interest payable 31 December) | 300,000 | |
| Total assets | 6,529,000 | 1,794,000 |
Required:
- Determine the gain on bargain purchase or goodwill as at acquisition date. (3 marks)
- Prepare the consolidation journal entries for Old Ltd immediately after acquisition on 1 July 2017. (6 marks)
- Prepare the consolidation journal entries for Old Ltd as at 30 June 2020. (16 marks)
- Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Old Ltd as at 30 June 2020. (10 marks)
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