2. Undervalued and unrecorded assets, unrecorded liabilities, pre-acquisition reserves transfers On 1 August 20x3, Erik Ltd acquired 10% of the shares in Finn Ltd for $8000. Erik Ltd used the fair value method to measure this investment with movements in fair value being recognised in prot or loss. At 1 July 20X5, the fair value of this investment was $15 400 including dividend. The original investment in Finn Ltd was due to the fact that Finn Ltd was undertaking research into particular microbiological elements that could inuence the protability of Erik Ltd. With the continuing success of this research, Erik Ltd decided to acquire the remaining shares (cum div.) in Finn Ltd. On 1 July 20X5, Erik Ltd made an offer, on a cum div basis, to buy the remaining shares in Finn Ltd for $151 000 cash. This offer was accepted by the shareholders of Finn Ltd. On 1 July 20X5, immediately after the business combination, the statement of financial position of Finn Ltd was as follows. Erilr ltd Firm Ltd Share capital $130000 8 90 000 General reserve 56 500 12 000 Retained earnings 93 500 36 000 Total equity $200 000 $138 000 Dividend payable 25 {I10 12 800 Other liabilities 1'5 000 25 000 Total liabilies $11!] NO 3 37 000 Total equity and liabilities $300 {110 $175 300 Cash 11 000 20 600 Receivables 25 200 20 000 Other assets 10000 8000 Shares in rm Ltd 153 800 0 Inventories 55 000 42 000 Plant and equipment 210000 107000 Accumulated depreciation {85 000) [22 000) Total assets $380 our] $115 500 On analysing the nancial statements of Firm Ltd, Erik Ltd determined that all the assets and liabilities recorded by Firm Ltd were shown at amounts equal to their fair values except for: Carrying amount Fair value Plant and equipment [cost $46000) $35000 $43000 Inventories 42 000 46011] The plant and equipment is expected to have a further 4-year useful life and is depreciated on a straight-line basis. The inventories were all sold by 30 June 20X6. Finn Ltd had expensed all the outlays on research and development. Erik Ltd considered that an asset was created and placed a fair value of $12 000 on this asset. The research and development is amortised evenly over a 10-year period. Finn Ltd also had reported a contingent liability at 30 June 20X5 in relation to claims by customers for damaged goods Erik Ltd placed a fair value of $3000 on these claims. The claims by customers were settled in May 20X6 for $2800. The tax rate is 30%. Required a. Prepare the acquisition analysis at 1 July 20XS. b. Prepare the consolidation journal entries for Erik Ltd's group at 1 July 20X5