Case Study Scarlet Ltd acquired 100% of the shares of Rain Ltd on 1 July 20X3 for $3,500,000. Shareholders' funds of Rain Ltd at the time of acquisition were: 3 Share capital 1,700,000 Retained earnings 1,450,000 3 150 000 All assets of Rain Ltd are recorded at fair value on the acquisition date. During the 20x4 nancial year, Rain Ltd sells inventory to Scarlet Ltd at a sale price of $700,000. The inventory cost Rain Ltd $420,000 to produce. At 30 June 20x4, half of the inventory is still on hand with Scarlet Ltd. The directors believe that there has been an impairment loss on the goodwill of $35,000 for the year ended 30 June 20x4. The tax rate for 20X4 nancial year is 30%. The nancial statements of Scarlet Ltd and Rain Ltd at 30 June 20x4 are as follows: Scarlet Ltd Rain Ltd (30002 ($0002 Reconciliation of opening and closing retained earnings Sales revenue 4,200 700 less Cost of goods sold (1,750) (490) less Other expenses (210) (105) Other revenue 2_4_5 88 Prot 2,485 893 Tax expense (700) (350) Prot after tax 1,785 543 Retained earnings1 July 20x3 8500 L 5,285 1,943 Dividends paid {700) (m) Retained earnings30 June 20X4 w 14% Statement of nancial position Shareholders ' equity Retained earnings 4,585 1,803 Share capital 14,000 1,750 Current liabilities Accounts payable 350 298 Non-current liabilities Loans m M 21,035 M Current assets Cash 875 88 Accounts receivable 525 613 Inventory 2,100 1 ,050 Non-current assets Land 5,040 1,400 Plant 8,645 1,400 Investment in Rain Ltd 3,500 Future income tax benet 350 175 Goodwill 21,035 1,725