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CONSOLIDATION (20 MARKS) On 1 July 2011, Zako Ltd acquired all the issued ordinary shares (cum div.) and gained control of Sauvaz Ltd for a consideration of $528,000. At that date the shareholders' equity of Sauvaz Ltd was: Share Capital General Reserve Retained Earnings $310,000 38,000 68,000 At acquisition date, all the identifiable assets and liabilities of Sauvaz Ltd were recorded at amounts equal to fair value except for: Carrying Fair Amount Value Goodwill 40,000 82,000 Inventory $100,000 $120,000 Land 80,000 120,000 Machinery (cost $30,000) 23,000 25,000 Plant & Equipment (cost $460,000) 280,000 286,000 Trademark (cost $225,000) 150,000 180,000 In addition at the date of acquisition, Sauvaz Ltd had a provision for dividend of $20,000 and other provisions of $254,000. The dividend liability was paid on 1 September 2011. It also had a contingent liability of $13,000 that Zako Ltd considered to have a fair value of $11,000. This liability was settled in July 2015. The machinery, which was estimated to have a further ten year life at acquisition date, was sold on 1 January 2016. The plant and equipment had a further six year life at acquisition date and was expected to be used evenly over that time. The trademark had a further ten year life. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. During the year ended 30 June 2012, all inventories on hand at acquisition date were sold, and the land was sold on 1 June 2016. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed. Goodwill was tested annually for impairment. For the year ended 30 June 2015, an impairment loss on goodwill of $2,500 was recorded. On 30 June 2015, Sauvaz Ltd transferred $10,000 from the general reserve (pre-acquisition) to retained earnings. Additional information: (i) On 4 May 2015, Zako Ltd sold some land to Sauvaz Ltd. The land had originally cost Zako Ltd $40,000, but was sold to Sauvaz Ltd for $46,000. To help Sauvaz Ltd pay for the land, Zako Ltd gave Sauvaz Ltd an interest-free loan of $18,000. Sauvaz Ltd has as yet made any repayments on the loan. (ii) On 1 July 2015, Sauvaz Ltd has on hand inventory worth $23,000, being transferred from Zako Ltd in May 2015. The inventory had previously cost Zako Ltd $15,000. All this inventory was sold in the following four months. (iii) On 1 January 2016, Zako Ltd sold furniture to Sauvaz Ltd for $12,000. This had originally cost Zako Ltd $26,000 and had a carrying amount at the time of sale of $14,000. Both entities charge depreciation at a rate of 10% p.a. (iv) On 3 February 2016, interim dividend was paid by Sauvaz Ltd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends. (v) On 1 April 2016, Sauvaz Ltd transferred an item of plant with a carrying amount of $21,000 to Zako Ltd for $29,000. Zako Ltd treated this item as inventory. The item was still on hand at the end of the year. Sauvaz Ltd applied a 20% depreciation rate to this plant. (vi) On 4 May 2016, Sauvaz Ltd acquired $19,000 inventory from Zako Ltd. This inventory originally cost Zako Ltd $13,000. The profit in inventory at hand at 30 June 2016 was $2,000. (vii) During the year ending 30 June 2016, Sauvaz Ltd sold inventory costing $24,000 to Zako Ltd for $36,000. One quarter of this was sold to external parties for $13,500. (viii) The tax rate is 30%. On 30 June 2016 the trial balances of Zako Ltd and Sauvaz Ltd were as follows: Zako Ltd Sauvaz Ltd Cost of sales Other expenses Income tax expense Interim dividend paid Final dividend declared Cash Dividend receivable Other receivables Inventory Deferred tax assets Machinery Plant & equipment Land Furniture Shares in Sauvaz Ltd Trademark Goodwill Loan to Sauvaz Ltd $282,000 66,000 43,000 21,000 22,000 10,000 10,000 88,000 120,000 27,000 68,000 540,000 108,000 20,000 508,000 62,000 18,000 2,013,000 $256,000 60,000 39,000 9,000 10,000 87,000 42,000 110,000 60,000 490,000 46,000 25,000 325,000 40,000 1,599,000 Sales Other income Share capital General reserve Retained earnings (1/7/15) Final dividend payable Current tax liabilities Other provisions Loan from Zako Ltd Accumulated depreciation - P & E Accumulated depreciation - Machinery Accumulated depreciation - Furniture Accumulated amortisation - trademark 400,000 62,000 728,000 70,000 409,000 22,000 7,000 80,000 216,000 13,000 6,000 2,013,000 364,000 56,000 310,000 100,000 190,000 10,000 5,000 40,000 18,000 320,000 33,000 33,000 120,000 1,599,000 Required a) Prepare the acquisition analysis at 1 July 2011. (3 Marks). Consequential errors will be penalised. b) Prepare the BVCR and pre-acquisition worksheet entries ONLY at 1 July 2011. (4 marks) Journal entry - 1 tick for each correct line entry - i.e. correct account description AND amount (NO TICK for correct description only or correct amount only.) Consequential errors will not be penalised. c) Prepare the consolidation worksheet entries (BCVR, pre-acquisition and intra-group adjustment entries) at 30 June 2016. (13 marks) Journal entry - 1 tick for each correct line entry - ie correct account description AND amount (NO TICK for correct description only or correct amount only.) Consequential errors will not be penalised. On 1 July 2015, Roxy Ltd acquired 70% of the shares of VidaLtd for $526,000 on a cum div. basis. Roxy Ltd had acquired 30% of the shares of VidaLtd two years earlier for $180,000. This investment, classified as an available-for-sale investment, was recorded at a fair value on 1 July 2015 of $226,000. At 1 July 2015, the equity and liability sections of VidaLtd's statement of financial position showed the following balances: Share Capital General Reserve Retained Earnings Other liabilities Dividend payable 460,000 50,000 100,000 100,000 30,000 At acquisition date, all the identifiable assets and liabilities of VidaLtd were recorded at amounts equal to fair value except for: Land Vehicle (@ cost 40,000) Equipment (@ cost 420,000) Inventory Carrying Amount 95,000 35,000 294,000 98,000 Fair Value 100,000 39,000 309,000 101,000 The Vehicle, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2018. The equipment had a further five year life at acquisition date and was expected to be used evenly over that time. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. VidaLtd had not recorded an internally developed patent. Roxy Ltd valued this patent at $90,000 and was assumed to have a ten year life. In May 2017, Vidasold this patent to an external party for $100,000. It also had a contingent liability of $19,000 that Roxy Ltd considered to have a fair value of $15,000. This liability was settled in July 2017. The dividend liability was paid on 1 September 2015. All inventories on hand at acquisition date were sold by June 2016. The land was sold on 1 June 2018 to Peters Ltd. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed. On 30 May 2017, VidaLtd transferred $8,000 from the general reserve (pre-acquisition) to retained earnings. A bonus dividend of $10,000 was paid in December 2017 out of pre-acquisition profits. Goodwill was tested annually for impairment. For the year ended 30 June 2017, an impairment loss on goodwill of $4,000 was recorded. Additional information: (i) VidaLtd sold a warehouse with a carrying amount of $82,000 to Roxy Ltd for $100,000. The transaction took place on 1 January 2017. Roxy Ltd charges depreciation at 5% p.a. on a straight-line basis. (ii) On 31 March 2017, Roxy Ltd sold some land to VidaLtd. The land had originally cost Roxy Ltd $64,000, but was sold to VidaLtd for $63,000. To help VidaLtd pay for the land, Roxy Ltd gave VidaLtd an interest-free loan of $29,000. VidaLtd has as yet made no repayments on the loan. (iii) In April 2017, Roxy Ltd sold inventory to VidaLtd for $12,000, at a mark-up of 20% on cost. One quarter of this inventory was unsold by VidaLtd at 30 June 2017. The remaining inventory was sold in the following three months. (iv) On 1 October 2017, Roxy Ltd issued 1,000 15% debentures of $100 at nominal value. VidaLtd acquired 400 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities' accounts. (v) On 18 February 2018, interim dividend was paid by VidaLtd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends. (vi) On 1 April 2018, VidaLtd transferred an item of plant with a carrying amount of $32,000 to Roxy Ltd for $41,000. Roxy Ltd treated this item as inventory. The item was still on hand at the end of the year. VidaLtd applied a 20% depreciation rate to this plant. (vii) During the year ending 30 June 2018, VidaLtd sold inventory to Roxy Ltd for $60,000, recording a before-tax profit of $16,000. One quarter of this inventory was unsold by Roxy Ltd at 30 June 2018. (viii) The tax rate is 30%. On 30 June 2018 the trial balances of Roxy Ltd and VidaLtd were as follows: Cost of sales Other expenses Income tax expense Interim dividend paid Final dividend declared Cash Dividend receivable Other receivables Inventory Deferred tax assets Vehicles Plant & equipment Land Warehouses Debentures in Roxy Ltd Shares in VidaLtd Goodwill Loan to VidaLtd Sales Other revenue & income Share capital Share options General reserve Retained earnings (1/7/2017) Final dividend payable Current tax liabilities Other liabilities Debentures Loan from Roxy Ltd Accumulated depreciation - P & E Accumulated depreciation - Vehicle Accumulated depreciation - Warehouses Roxy Ltd 338,000 80,000 41,000 21,000 22,000 181,000 20,000 206,000 244,000 35,000 82,000 648,000 130,000 180,000 722,000 74,000 29,000 3,053,000 VidaLtd 307,000 72,000 40,000 14,000 15,000 90,000 227,000 132,000 72,000 380,000 123,000 90,000 40,000 30,000 1,647,000 480,000 79,000 874,000 80,000 84,000 490,000 22,000 8,000 96,000 400,000 388,000 25,000 27,000 3,053,000 437,000 56,000 470,000 72,000 228,000 20,000 7,000 60,000 29,000 228,000 22,000 18,000 1,647,000 Required a) Prepare the acquisition analysis as at 1 July 2015. (3 Marks). Marking guide: total of 12 ticks / 4 = 3 marks. Consequential errors will be penalised. b) Prepare the BVCR and pre-acquisition worksheet entries ONLY as at 30 June 2016. (5 marks) Marking guide: total of 41 ticks / 8.2 = 5 marks. Journal entry - 1 tick for each correct line entry - i.e. correct account description AND amount (NO TICK for correct description only or correct amount only.) Consequential errors will not be penalised. c) Prepare full consolidation worksheet entriesas at 30 June 2018. (12 marks) Marking guide: total of 82 ticks / 6.83 = 12 marks. Journal entry - 1 tick for each correct line entry - ie correct account description AND amount (NO TICK for correct description only or correct amount only.) Consequential errors will not be penalised. Assignment - marking guide ROXYLTD - VIDA LTD a) At 1 July 2015: Net fair value of identifiable assets, liabilities and contingent liabilities ofVida Ltd = ($460,000 + $50,000 +100,000) (equity) + $5,000 (1 - 30%) (land) + $4,000 (1 -30%) (Vehicle) + $15,000 (1 - 30%) (equipment) + $3,000 (1 - 30%) (inventory) + $90,000 (1 - 30%) (patent) - $15,000 (1 - 30%) (contingent liability) - $30,000 (goodwill) Net fair value acquired = $651,400 Consideration transferred = 722,000 Goodwill acquired = 722,000-651,400 = $70,600 Unrecorded goodwill acquired = $70,600 - $30,000 = $40,600 Marking Guide 12 ticks / 4 = 3 marks (round to 1 decimal place). Consequential errors will be penalised. b) Business combination valuation entries at 30 June 2016 Land Dr 5,000 1,500 3,500 Accumulated Depreciation -Vehicle Truck Deferred Tax Liability Cr Business Combination Val'n Reserve Cr Dr Cr 5,000 Depreciation Expense - Vehicle Accumulated Depreciation Dr Cr Deferred Tax Liability Cr Business Combination Val'n Reserve Cr Deferred Tax Liability Income Tax Expense 1,200 2,800 Dr 1,000 1,000 300 Cr Accumulated Depreciation - Equip Equipment Deferred Tax Liability Cr Business Combination Val'n Reserve Cr Dr Cr Depreciation Expense - Equip Accumulated Depreciation Dr Cr Deferred Tax Liability Income Tax Expense 1,000 Dr 300 126,000 111,000 4,500 10,500 3,000 3,000 900 Cr 900 Cost of sales Income Tax Expense Transfer from BVCR Dr Cr Cr 3,000 Patent Dr 90,000 27,000 63,000 Dr Cr 9,000 Deferred Tax Liability Cr Business Combination Val'n Reserve Cr Amortisation Expense - patent Accumulated Amortisation Expense Deferred Tax Liability Income Tax Expense Dr 900 2,100 9,000 2,700 Cr 2,700 Business Combination Val'n Reserve Dr Deferred Tax Asset Provision -Contingent Liability 10,500 Dr 4,500 Cr 15,000 Goodwill Business Combination Val'n Reserve Cr Dr 40,600 40,600 Pre-acquisition entry 30 June 2016 Share Capital General Reserve Retained Earnings Business Combination Valuation Reserve Shares in Vida Ltd Transfer from BVCR BVCR Dr Dr Dr Dr 460,000 50,000 100,000 112,000 722,000 Dr Cr 2,100 Cr 2,100 Marking Guide 41 ticks / 8.2 = 5 marks (round to 1 decimal place). Journal entry - 1 tick for each correct line entry - ie correct account description AND amount (NO TICK for correct description only or correct amount only - please note no half tick.) Do not penalise consequential errors. c)Business combination valuation entries at 30 June 2018 Depreciation Expense - Vehicle Gain on sale of Vehicle (CA of Vehicle Sold ) Retained Earnings (1/7/17) Income Tax Expense Transfer from BCVR Dr Dr Dr Cr Cr 500 1,500 1,400 Accumulated Depreciation - Equip Equipment Deferred Tax Liability Cr Business Combination Val'n Reserve Cr Dr Cr 126,000 111,000 4,500 10,500 Depreciation Expense - Equip Retained earnings (1/7/17) Accum. Depreciation - Equip ($15,000 / 5) Dr Dr Cr 3,000 6,000 Deferred Tax Liability Income Tax Expense Retained Earnings (1/7/17) Dr 600 2,800 9,000 2,700 Cr Cr 900 1,800 Transfer from Business Val'n Reserve Income Tax Expense Expense Dr Dr Cr 10,500 4,500 Gain on sale of land (CA of Land sold) Income Tax Expense Transfer from BCVR Dr Cr Cr 5,000 Goodwill Business Combination Val'n Reserve Cr Dr 40,600 40,600 Retained Earnings (1/7/17) Accum Impairment losses Dr Cr 4,000 Dr Dr Dr Dr 460,000 42,000 173,100 46,900 722,000 15,000 1,500 3,500 4,000 2. Pre-acquisition entry 30/6/18 Share Capital General Reserve Retained Earnings (1/7/17)* Business Combination Valuation Reserve Shares in Vida Ltd Cr * 100,000 + 2,100 (Inventory) + 8,000 (General Reserve) + 63,000 (Patent) Transfer from Business Combination Valuation Reserve (Land) Business Combination Val'n Reserve Dr Cr 3,500 3,500 Transfer from Business Combination Valuation Reserve (Vehicle) Business Combination Val'n Reserve Dr 2,800 2,800 Business Combination Val'n reserve Transfer from Business Combination Val'n Reserve (Contingent Liability) Cr Dr 10,500 Shares Capital Bonus dividend (Retained Earnings) Dr Cr 10,000 Dr Dr Cr 12,600 5,400 Accumulated Depreciation - Warehouse Depreciation Expense Retained Earnings (1/7/17) Dr Cr Cr 1,350 Income Tax Expense Retained Earnings (1/7/17) Deferred Tax Asset Dr Dr Cr 270 135 Dr Cr 1,000 Dr 300 300 Dr Cr Cr 1,000 Dr Cr 29,000 Cr 10,500 10,000 3. Sale of Warehouse - Previous year Retained Earnings (1/7/17) Deferred Tax Asset Warehouse 18,000 4. Depreciation - Warehouse 900 450 405 5. Sale of Land - Previous year Land Retained Earnings (1/7/17) Retained Earnings (1/7/17) Deferred Tax Liability OR Land Retained Earnings (1/7/17) Deferred Tax Asset Loan from RoxyLtd Loan to Vida Ltd Cr 1,000 700 300 29,000 6. Inter-entity sales of inventory: Profit in opening inventory Retained Earnings (1/7/2017) Income Tax Expense Cost of Goods Sold Dr Dr Cr 350 150 500 7. Issues of Debentures - 400 acquired by Vida Ltd Debentures Debentures in RoxyLtd Dr Cr 40,000 Interest Revenue Interest Expense (15% x $40,000 x ) Dr Cr 4,500 Interest Payable Interest Receivable (15% x $40,000 x ) Dr Cr 1,500 Dr Cr 14,000 Dividend Payable Final Dividend Declared Dr Cr 15,000 Dividend Revenue Dividend Receivable Dr Cr 15,000 Proceeds on Sale of Plant Carrying Amount of Plant Sold Inventory Dr Cr Cr 41,000 Gain on sale of plant Inventory Dr Cr 9,000 Deferred Tax Asset Income Tax Expense Dr Cr 2,700 40,000 4,500 1,500 8. Interim Dividend Paid Dividend Revenue Interim Dividend Paid 14,000 9. Final Dividend Declared 15,000 15,000 10. Transfer of plant to inventory: Vida Ltd to RoxyLtd 32,000 9,000 Or 9,000 2,700 11. Inter-entity sales of inventory: Profit in ending inventory Sales Cost of Goods Sold Inventory Deferred Tax Asset Income Tax Expense Dr Cr Cr 60, 000 Dr Cr 1,200 56,000 4,000 1,200 Marking Guide 78 ticks / 6.5 = 12 marks (round to 1 decimal place). Journal entry - 1 tick for each correct line entry - ie correct account description AND amount (NO TICK for correct description only or correct amount only - please note no half tick.) Do not penalise consequential errors