Consolidation Case Study: Sky Ltd and River Ltd Sky Ltd acquired 75% of the share capital of River Ltd on 1 July 2012. The following equity balances appeared in the records of River Ltd at the date of acquisition: Share capital (210,000 shares) $210,000 General reserve 6,100 Retained earnings 75,000 Financial information at 30 June 2017 of Sky Ltd and its subsidiary company, River Ltd, is shown below. Sky Ltd River Ltd $ $ Sales revenue 708,000 492,000 Cost of sales (273,000) (178,500) Gross Profit Other revenue: 435,000 313,500 Debenture interest — 10,500 Management fees 10,500 — Dividend from River Ltd 16,800 — 462,300 324,000 Administrative expenses (31,500) (16,800) Distribution expenses (189,000) (126,000) Depreciation on machinery (31,500) (31,500) Finance expenses (27,600) (12,000) Other expenses (29,400) (25,200) Total operating expenses (309,000) (211,500) Profit before tax 153,300 112,500 Income tax expense (52,500) (34,500) Profit after tax 100,800 78,000 Retained earnings (1/7/2016) 105,000 94,500 205,800 172,500 Transfer to general reserve (6,300) — Interim dividend paid (31,500) (21,000) Final dividend declared (37,800) (42,000) (75,600) (63,000) Retained earnings (30/6/2017) 130,200 109,500 General reserve 105,000 36,000 Other components of equity (1/7/2016) 27,300 21,000 Share capital 630,000 210,000 Liabilities: Debentures 255,000 60,000 Deferred tax liability — 14,700 Current tax liability 52,500 35,700 Dividend payable 37,800 42,000 Other current liabilities 189,000 25,200 1,426,800 554,100 Cash and cash equivalents 107,100 6,000 Trade receivables 68,250 40,200 Inventory 189,000 58,500 Debentures in Sky Ltd Shares in River Ltd 270,000 105,000 — Machinery (cost) 252,000 214,200 Accumulated depreciation – machinery (136,500) (115,500) Other depreciable assets 159,600 115,500 Accumulated depreciation (84,000) (52,500) Deferred tax asset 179,250 63,000 Land 422,100 119,700 1,426,800 554,100 Additional information i. At 1 July 2012, all the identifiable assets and liabilities of River Ltd were recorded at fair value except for the following assets: Carrying amount Fair value Land $61,500 $79,500 Machinery (cost 135,000) 105,000 120,000 Receivable 40,000 34,000 The machinery has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2012 was sold on 1 March 2014 for $84,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings. By 30 June 2013, receivables had all been collected. ii. Sky Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2012 was $65,000. iii. Opening inventory of River Ltd includes unrealised profit of $5,000 on inventory sold by Sky Ltd. It was all sold by River Ltd during the year. iv. During the year, intragroup sales by River Ltd to Sky Ltd were $80,000. The mark-up on cost of all sales was 25%. At 30 June 2017, Sky Ltd’s inventory included $35,000 of items acquired from River Ltd. v. On 1 January 2017, River Ltd sold an item of inventory to Sky Ltd for $18,000 at a profit before tax of $3000. Sky Ltd had treated this item as an addition to its machinery and depreciated at 10% p.a. straight-line. vi. On 1 April 2017, Sky Ltd sold $15,000 worth of inventory to River Ltd. The cost of this inventory was $9000. By 30 June 2017, River Ltd had sold 60% of the inventory to outside entities. vii. Some of the items manufactured by River Ltd are used as machinery by Sky Ltd. One of the machinery items held by Sky Ltd at 30 June 2017 was purchased from River Ltd on 1 January 2016. It had cost River Ltd $17,500 to manufacture this item and was sold to Sky Ltd for $25,000. Sky Ltd depreciates such items at 10% p.a. on cost. viii. Management fees derived by Sky Ltd were all from River Ltd and represented charges made for administration. ix. The tax rate is 30%.

Required:

a) Prepare the acquisition analysis at 1 July 2012.

b) Prepare the consolidation journal entries, including: - The business combination valuation entries; - The pre-acquisition entries; - The intra-group entries;

c) Calculate NCI share of equity at following dates and prepare the journal entries: - 1 July 2012; - 1 July 2012 – 30 June 2016; - 1 July 2016 – 30 June 2017.

d) Prepare the consolidation worksheet as at 30 June 2017.