Carina Ltd has acquired all the shares of Finn Ltd on 1 July 2019 for $ 225 000. The accountant for Carina Ltd, having studied the requirements of AASB 3 Business Combinations, realises that all the identifiable assets and liabilities of Finn Ltd must be recognised in the consolidated financial statements at fair value. Although he is happy about the valuation of these items, he is unsure of a number of other matters including pre-acquisition entries and business combination valuation reserves associated with accounting for these assets and liabilities. He has approached you and asked for your advice.

The financial statements of Finn Ltd showed the equity of Finn Ltd at acquisition date to be:

Share capital 20 000 $5.10 shares$102 000

General reserve 40 000

Retained earnings 60 000

All the assets and liabilities of Finn Ltd were recorded at amounts equal to their fair valuesat that date.

During the year ending 30 June 2020, Finn Ltd undertook the following actions:

On 10 September 2019, paid a dividend of $20 000 from the profits earned prior to 1 July2019.

On 28 June 2020, declared a dividend of $20 000 to be paid on 15 August 2020.

On 1 January 2020, transferred $15 000 from the general reserve existing at 1 July 2019 to retained earnings.

Required

Write a report for the accountant at Carina Ltd advising on the following issues:

1. Should the adjustments to fair value be made in the consolidation worksheet or in the accounts of Finn Ltd?

2.What is the purpose of the pre-acquisition entries in the preparation of consolidated financial statements? Explain.

3.How to prepare the pre-acquisition entries at 1 July 2019.

4.How to prepare the pre-acquisition entries at 30 June 2020.