Dear Sun,

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 Petit Ltd so that I can present the 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. The Board of directors and I have limited accounting knowledge, so please limit the use of technical accounting terms.

As you know, we acquired 100% of the issued shares of Petit Ltd on 1 July 2022 for $2,240,000. This was a real bargain purchase and enables us to increase our market share, expand the business, and achieve economies of scale. Our CEO is so pleased that we have improved our financial performance by selling all of our slow moving inventory and old machinery to Petit Ltd during the year to improve profits. How does the acquisition of Petit Ltd impact preparation of financial statements for our company?

Our Chief Accountant has confirmed that at the date of acquisition, Petit had share capital of $1,400,000 and retained earnings of $850,000. All the assets of Petit were recorded at fair value in Petits balance sheet, except for equipment for which the fair value of $110,000 was greater than the carrying amount, this being cost of $120,000 less accumulated depreciation of $20,000. It was also discovered that Petit Ltd had not recorded its internally generated patent, with a fair value of $30,000. Petit Ltd also had reported via note the existence of a contingent liability at 30 June 2022 in relation to an unfair dismissal claim by former employees of Petit Ltd. No monetary amount was disclosed, but the companys lawyers believe that the probable payout is $130,000. One of the liabilities of Petit was a $20,000 dividend payable, but not yet paid. Our Chief Accountant has informed me that the shares were acquired on a cum-div basis. I am not too sure what that means or the implications for the accounts. I have prepared an acquisition analysis for Grande Ltd and calculated a gain on bargain purchase of $10,000 (being $2,240,000 less $2,250,000) and recognised the difference as income. Is this correct? If this is incorrect, can you please explain why and what I need to do?

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. During the year Grande Ltd sold goods to Petit Ltd for $450,000. These goods originally cost Grande Ltd $110,000. At year-end, 95% of these goods remained in Petit Ltds closing inventory. We have recognized profit of $340,000 from the sale which has improved our overall profits and pleased the CEO. Do we need to do anything else? Do I need further journal entries when preparing the groups accounts? If so, please provide me with the journal entries and explanations for these.

2. At the beginning of the current period, Grande Ltd sold some old machinery to Petit for $350,000. The machinery originally cost Grande Ltd $100,000 is four years old and had accumulated depreciation of $80,000 at the date of the sale. The remaining useful life of the machinery was confirmed by independent experts engaged by Petit Ltd to be a further two years. Once again, our CEO is absolutely delighted that we have recognized a gain on sale of $330,000 on sale of the machinery. This will ensure we hit our profit targets and achieve our bonuses this year. The Chief Accountant was mumbling something about reversing these entries and I cant understand why we would want to do that when these are valid legitimate transactions. Please explain what I need to do with the transaction and show any journal entries necessary when preparing the groups accounts.

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,

Rishi Pathak

Managing Director, Grande Ltd

100 Grand St,

Melbourne Vic 3000