Assist in the creation of a detailed statement of advice to answer key accounting issues in regard to an acquisition analysis of a wholly owned subsidiary and various inter-company transactions.

Assume that you are a graduate accountant working for White Wolff, a public accounting firm situated at 370 Docklands Drive, Melbourne, VIC 3008. The Manager of your firm, Ms. Tara Holloway, has asked you to prepare a statement of advice in response to an email received from a client, Mr. Jim Goode, the Managing Director of Garak's Goods Ltd, raising several accounting issues. Please refer to the email on the next page.

The maximum length for the body of the letter is 1,500 words. You should address all the technical issues and discussion in your advice, followed by a Reference List.

Part A: Technical component 20% - This mark covers the technical content of your advice and the explanation of each of the issues, the calculations and journal entries (where applicable).

Part B: Communication Skills 10% - This mark covers the generic skills of writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling, and punctuation throughout the whole assignment. It also includes referencing.

Case Study

Garak's Goods Ltd is a public company listed on the ASX with shares trading at $1.10 each on 1 July 2022. It is a discount variety store chain that sells a range of goods such as food, snacks, cleaning supplies, storage, kitchenware, homewares and seasonal items in its 200 store locations across Australia. Over the past year, it has seen a significant increase in sales and profitability as their range of products appeal to bargain hunters and consumers on tight budgets. Under the new CEO, the company has commenced an aggressive growth strategy to acquire additional stores. The incremental borrowing rate for Garak's Goods Ltd is 8%. The corporate tax rate is 30%.

Draft a business letter in reply and make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant sources. See the email below.

Re: Accounting Issues for year ended 30 June 2023

From: Jim Goode

Sent: 12 August 2023

To: Tara Holloway

Dear Tara,

I am reaching out to you for assistance as our Chief Accountant is currently on long service leave. I need to understand the accounting implications of our recent takeover of Kleen Ltd so that I can present the consolidated financial statements to the Board of directors and respond to any further questions they may have concerning the accounts for the year ended 30 June 2023. As I do not have any accounting experience, please explain the principles and concepts for me in simple language.

As you know, we have recently acquired 100% of the issued shares of Kleen Ltd on 1 July 2022 on a cum-div basis. Kleen was established in 2015, specialising in cleaning supplies. With Kleen's strong marketing and sales networks, this has resulted in significantly increased sales revenues and profits over the past year for our business. The terms of the acquisition were that shareholders of Kleen Ltd would receive $1.40 cash plus two shares in Garak's Goods for every ordinary share of Kleen Ltd. The cash would be payable to shareholders in two instalments, with half payable at the date of acquisition and the balance payable on 1 July 2023.

The financial statements of Kleen Ltd as at 1 July 2022 showed the following information:

Cash $20,000

Accounts receivable (net) 42,000

Inventories 75,000

Property, plant and equipment (net) 228,000

Goodwill 22,000

Total assets $387,000

Accounts payable $5,000

Dividend payable 10,000

Loan payable 100,000

Share capital - $1 share 80,000

Retained earnings 192,000

Total equity and liabilities $387,000

All the assets of Kleen Ltd were recorded at fair value in Kleen Ltd's balance sheet, except for the inventories which had a fair value of $95,000. It was also discovered that Kleen Ltd had reported via note the existence of a contingent liability at 30 June 2022, in relation to a court case brought about for unfair dismissal by a former employee. No monetary amount was disclosed, but the company's lawyers believe that the probable payout to settle the case is $30,000.

Our Accounts Clerk prepared an acquisition analysis and calculated a gain on bargain purchase of $160,000 (being $112,000 cash paid less the subsidiary's equity acquired of $272,000) to be reported as income in the accounts. Is this correct? It was a fantastic bargain and we were able to sell 90% of the existing inventories of Kleen from the acquisition to one of our major customer's. This generated huge profits for the group over the past year. What journal entries (if any) do I need to make for 30 June 2023 to prepare the consolidated financial statements? Please show all workings and explain each journal entry, as I need to be able to respond to questions from the Board of Directors.

Prior to going on long service leave, The Chief Accountant identified two inter-company transactions for further consideration when preparing the consolidated accounts. Specific details of these transactions are shown below:

1. On the 23rd June 2023, Garak's Goods Ltd sold some slow moving inventories costing $40,000 to Kleen Ltd for $70,000 on credit. At year-end, only 40% of these goods had been sold by Kleen Ltd to external entities at cost plus 50% markup. Kleen Ltd paid the balance owing to Garak's Goods Ltd on 12th July 2023. We have recognized a profit of $30,000 from the sale. Is there anything else we need to do? Please provide any necessary journal entries.

2. On the 1 January 2023, Garak's Goods Ltd sold some plant to Kleen Ltd for $82,000. Garak's Goods Ltd had originally paid $120,000 for this asset, and by the time of sale had charged accumulated depreciation of $48,000. This asset is used differently in Kleen Ltd from how it was used in Garak's Goods Ltd. Depreciation charged on plant by Garak's Goods Ltd was 10% p.a. using the straight line method, while Kleen Ltd applies a rate of 7% p.a. The Chief Accountant was unsure of which amount the depreciation rate should be applied to and which depreciation rate should be used when preparing the consolidated accounts. Please explain what I need to do with the transaction and show any journal entries necessary.