Dear Steve,

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 Precisi Medical

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 $2024.$ 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 Precisi Medical Ltd on $1$

July $2022$ on a cum$-$div basis. Precisi Medical Ltd was established in $2010,$ specialising in the

provision of health advice to customers. The terms of the acquisition were that shareholders of

Precisi Medical Ltd would receive $$1\mathrm{.}10$ cash per share plus one share in Ferengi Ears Ltd for

every four ordinary shares of Precisi Medical 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 statement of financial position of Precisi Medical Ltd as at $1$ July $2022$ included the following

information:

Cash $$20,000$

Accounts receivable $($net$)42,000$

Inventories $5,000$

Property, plant and equipment $($net$)228,000$

Goodwill $10,000$

$$305,000$

Accounts payable $$5,000$

Wages payable $4,000$

Dividend payable $11,000$

Loan payable $100,000$

Share capital $-$ $$1$ share $60,000$

Retained earnings $125,000$

$$305,000$

All the assets of Precisi Medical Ltd were recorded at fair value except for some equipment and

inventories whose carrying amounts were each $$2,100$ less than the fair values. The equipment

consisted of audiomebots used to test for hearing loss. Due to rapid changes in technology, it

was estimated that the useful life of the equipment was only a further three years. It was also

discovered that Precisi Medical Ltd had developed a business magazine containing health advice

for consumers. This magazine was widely sought after. Ferengi Ears Ltd placed a value of

$$5,000$ on the masthead of this magazine. The intangible asset was not recognised by Precisi

Medical Ltd at acquisition date as it was internally generated and was considered to have an

indefinite life. On $1$ June $2022,$ a major competitor sued Precisi Medical Ltd for alleged damaging

Page $3$ Kaplan Business School Assessment $3$ Outline

statements made in the magazine, and the court case was in progress at the date of acquisition.

No monetary amount was disclosed in the financial statements, but the company$$s lawyers

believed that the probable payout to settle the case was $$18,000.$ The case has yet to be settled.

One of the key rules of acquisition is to never spend more for an acquisition than you have to$.$

Our Accounts Clerk prepared an acquisition analysis and determined a gain on bargain purchase

of $$119,000($calculated as $$66,000$ cash paid minus the subsidiary$$s equity acquired of

$$185,000)$ to be reported as income in the accounts. Can you check that this right and help me

with the acquisition analysis? It was a fantastic bargain and we managed to sell all of Precisi

Medical Ltd$$s existing inventories to one of our main customers within the first month of acquiring

the company, resulting in significant profits for our group.

What journal entries $($if any$)$ do I need to make for $30$ June $2024$ 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 as follows:

$1.$ On the $25$th of June $2024,$ we sold some of our older hearing implants from our

Freedom range of stock costing $$30,000$ to Precisi Medical Ltd for $$50,000$ on

credit, recognizing a profit of $$20,000$ from the sale. At year$-$end, $90\%$ of these

goods had been sold by Precisi Medical Ltd to external entities at a $20\%$ markup.

Is there anything else we need to do$?$ Please provide any necessary journal

entries.

$2.$ On $1$ January $2023,$ Ferengi Ears Ltd sold some diagnostic equipment on

favorable terms to Precisi Medical Ltd for $$42,000.$ Ferengi Ears Ltd had originally

paid $$85,000$ for this asset, and at the time of sale had charged accumulated

depreciation of $$37,000.$ This asset is to be depreciated on a straight$-$line basis at

$10\%$ p$.$a$.$ on cost and it is still on hand with Precisi Medical Ltd at $30$ June $2024.$

Please explain what I need to do with this transaction and show any journal entries

necessary for the preparation of Consolidated financial statements.

Please respond by letter $($not email$)$ as I would like to present this to the Board. I look forward to

hearing from you shortly.

Regards,

Anna Sunana