CASE STUDY OF ABC LTD AND XYZ LTD

ABC Ltd made a takeover bid for all the issued voting shares of XYZ Ltd offering three ABC Ltd shares for every two XYZ Ltd shares. The offer from ABC Ltd was accepted by 90% of the shareholders of XYZ Ltd. The date control was obtained by ABC Ltd was deemed to be 1 January 20X7. The following information is available.

(a) Shareholders' equity of XYZ Ltd at balance date on 31 December 20X6:

$000

Share capital (200,000) shares 200

General reserve 300

Retained earnings 150

650

(b) Market value of each entity's shares at 1 January 20X7

ABC Ltd$3.20

XYZ Ltd$4.00

(c) In XYZ Ltd's accounting records, land was stated at $200,000 below its cost to the group. This is to be accounted for as a consolidation adjustment. Statements of comprehensive income and statements of financial position of ABC Ltd and XYZ Ltd for the year ended 31 December 20X8 are as follows:

Statements of Comprehensive Income

ABC LtdXYZ Ltd

$000$000

Sales50002000

Cost of sales25701025

Gross profit2430975

Dividend revenue252-

2682975

Expenses2057300

Operating profit before tax625675

Income tax expense280260

Operating profit after tax345415

ABC LtdXYZ Ltd

$000$000

Retained earnings at 1.1.X8294200

Profit for the year345415

Interim dividend paid(100)(150)

Final dividend declared(160)(200)

Retained earnings at 31.12.X8379265

Statements of Financial Position

ABC LtdXYZ Ltd

$000$000

Assets

Current assets

Other current assets 385395

Total current assets385395

Non-current assets

Property, plant and equipment550750

Investments864-

Total non-current assets1414750

Total assets17991145

Liabilities

Current liabilities

Trade and other payables60180

Provision for final dividend160200

Total current liabilities220380

Total liabilities220380

Net assets1579765

Shareholder's equity

Share capital1200200

General reserve-300

Retained earnings379265

Total equity1579765

Additional information

(a)ABC Ltd records dividend revenue in the accounting period when the cash is received.

(b)The final dividend declared by XYZ Ltd for the 20X7 year was $130,000 and it was paid on 1 March 20X8.

(c)Impairment losses for goodwill arising on acquisition had not been recognised in any of the previous years' consolidated financial statements. The directors of ABC Ltd are of the opinion an impairment loss of $10 000 will be recognised in relation to its investment in XYZ Ltd in the consolidated financial statements for the year ended 31 December 20X8.

(d)Inter-company sales for 20X8

CostSales Price

From ABC and XYZ $300 000$500 000

From XYZ to ABC $200 000$350 000

(e)In relation to the inventory sales in (d) above, inventory held by ABC Ltd and purchased from XYZ Ltd is as follows:

CostSales Price

i.As at 1 Jan 2008$50 000$120 000

ii.As at 31 Dec 2008$75 000$150 000

(f)The rate of company income tax is 30%.

(g)Assume the directors of ABC Ltd have adopted the full goodwill method.

Required:

(a)For the accounting records of ABC Ltd show the general journal entries to record:

i.the acquisition of the shares in XYZ Ltd on 1 January 20X7.

ii.the dividend received from XYZ in 20X8 but proposed by XYZ Ltd in 20X7; and

iii.the interim dividend received from XYZ Ltd in 20X8.

(b)Prepare the consolidated financial statements at 31 December 20X8.

Show all consolidation journal entries and a worksheet and all workings for the calculation of NCI.

The consolidated financial statements should be presented in the same manner your textbook presents them.