On 2 January 20x4, P Co purchased from X Co, a controlling interest of 90% interest in Sapphire Co, a company that has an on-going research and development (R&D) project. On 2 January 20x4, P Co entered into the following transactions relating to the acquisition and financing arrangements.

The development expenditures incurred to acquisition date of $350,000 met the conditions for capitalization in International Accounting Standard (IAS) 38 Intangible Assets and was recognized in Sapphire’s balance sheet at acquisition date.
Sapphire Co completed the research and development project on 31 December 20x5 successfully. The estimated economic life of the intangible asset was 10 years. The group and Sapphire Co use the cost model to measure intangible assets.
The financial statements of Sapphire Co for the current year ended 31 December 20x6 are as follows:

Additional information:

(a) Recognize tax effects on fair value adjustments and other adjustments at the tax rate of 20%.

(b) The balance of other comprehensive income as at 1 January 20x6 was $78,000. Other comprehensive income (OCI) arises from items of income that bypass net income in accordance with IAS 1 Presentation of Financial Statements. OCI is built up in separate accounts in equity. (Hint: Where OCI balance at beginning of the year is provided, separate allocation of current and change in post-acquisition OCI in the same way as for profit and post-acquisition retained earnings).

Required:
1. Prepare the journal entries to record the investment in Sapphire, transaction costs, financing transactions and other entries in P Co’s books on 2 January 20x4. Recognize unamortized discount separately for future settlements.
2. In the light of the successful completion of the research and development project by Sapphire, record the following transactions in P Co’s books for the year ended 31 December 20x5 and 20x6:
i. Interest expense on contingent consideration payable; and ii. Adjusting entries and settlement of contingent consideration payable.
3. Prepare consolidation entries for the year ended 31 December 20x6, with narratives (brief headers) and workings in accordance with IFRS 3 and IFRS 10.
4. Perform an analytical check on the balance of non-controlling interests as at 31 December 20x6, showing the workings clearly.

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(1) Number of P Co's shares issued to X Co... Fair value per share of P Co.. (2) Direct costs of issuing shares to X Co.. (3) Transfer of land to X Co... Fair value of land... Carrying amount in P Co's books. (4) Cash transferred to X Co.... (5) Number of shares issued to existing owners of P Co to fund the acquisition (6) Conditional payment made to X Co if R&D project is successful at the end of 3 years from acquisition date Probability of success.. Payment is due at the end of 3 years.. Implicit interest rate charged by X Co.. At the date of acquisition, the shareholders' equity of Sapphire Co was as follows: Share capital.. Retained earnings. 1,300,000 $1.40 $17,800 $1,500,000 $1,350,000 $ 800,000 1,200,000 $1,800,000 70% 31 Dec 20x6 5% p.a. $1,000,000 158,000