Homework Questions 12.5 On 1 July 2018, Murphy Ltd acquired all the issued shares of Walters Ltd. The consideration for the acquisition was $30 000 in cash and 20 000 shares in Murphy Ltd, valued at $3 per share. At this date, the equity of Walters Ltd consisted of $66 000 share capital and $6 000 retained earnings. At 1 July 2018, all the identifiable assets and liabilities of Walters Ltd were recorded at amounts equal to their fair values except for: Fair Value ($) Carrying Amount ($) 120,000 Plant (cost $150,000) 123,000 Patents 90,000 105,000 Inventories 18,000 22,500 The plant was considered to have a further 5-year life. The patents were sold for $120 000 to an external entity on 18 August 2018. The inventories were all sold to external entities by 30 June 2019. Additional information: (1) Murphy Ltd sells certain raw materials to Walters Ltd to be used in its manufacturing process. At 1 July 2021, Walters Ltd held inventories sold to it by Murphy Ltd in the previous year at a profit before tax of $600. During the 2021-22 year, Murphy Ltd sold inventories to Walters Ltd for $21 000. None of the inventories are on hand at 30 June 2022. (ii) Walters Ltd also sells items of inventories to Murphy Ltd. During the 2021-22 year, Walters Ltd sold goods to Murphy Ltd for $4500. At 30 June 2022, inventories which had been sold to Murphy Ltd at a profit before tax of $300 are still on hand in Murphy Ltd's inventories. (iii) On 1 July 2021, Walters Ltd sold an item of plant to Murphy Ltd for $15 000 that had cost Walters Ltd $14 000 on the same date. This plant is depreciated at 10% p.a.. (iv) On 1 January 2021, Murphy Ltd sold inventories to Walters Ltd for $18 000. The inventories had cost Murphy Ltd $16 000. This item was classified by Walters Ltd as plant and depreciated at 20% p.a. (e) On 1 March 2022, Walters Ltd sold an item of plant to Murphy Ltd. Whereas Walters Ltd classified this as plant, Murphy Ltd classified it as inventories. The sales price was $9000, which included a profit before tax to Walters Ltd of $1500. Murphy Ltd sold this asset to an external entity on 31 March 2022 for $9 900. (v) The tax rate is 30%. Murphy Ltd. Walters Ltd. Dr Cr Dr Cr 64,500 78,000 Sales Revenue Cost of Sales 30,900 46,350 4,800 9,000 7,950 4,050 Trading Expenses Office Expenses Depreciation Expenses Proceeds on Sale of Plants Carrying Amount of Plant 1,800 3,900 9,000 15,000 7,500 14,000 Sold Income Tax Expense 11,100 7,300 Share Capital 96,000 66,000 48,000 31,500 Retained Earnings (1/7/21) Current Liabilities 21,100 10,500 Deferred Tax Liability 11,000 15,000 Plant 57,000 107,250 Accumulated Depreciation 18,300 33,450 Plant Intangibles 12,000 11,100 Deferred Tax Assets 8,100 9,450 Shares in Walters Ltd 90,000 0 Inventories 28,500 24,600 Receivables 8,250 12,450 267,900 267,900 249,450 249,450 Required: Part 1: Prepare acquisition analysis at 1 July 2018. Part 2: Prepare consolidation worksheet entries at 1 July 2018. Part 3: Prepare consolidation worksheet entries at 30 June 2022. Part 4: Use the example of the sales revenue account to discuss how to derive the consolidated amount of sales revenue in the consolidated statement of profit or loss. Instructions: Part 1: Please follow the acquisition analysis format and detail your calculations for each step in the acquisition analysis. Part 2: The worksheet entries on the acquisition date should include BCVR entries for fair value adjustments and goodwill recognition and pre-acquisition entries. Part 3: The worksheet entries subsequent to the acquisition date should include BCVR entries, pre-acquisition entries, and the elimination of intragroup transaction entries. There are two methods to record the sale of PPE: Method 1: Method 2: Dr Cash Dr Cash Dr Accumulated Depreciation Cr PPE Cr Proceeds on Sale of PPE Dr Carrying Amount of PPE sold Dr Accumulated Deprecation Cr Plant Cr Gain on Sale It is the second method that the parent and the subsidiary use to record the sale of PPE. The proceeds on sale of PPE is an income account and the carrying amount of PPE sold is an expense account. Part 4: Discuss how to derive a consolidated amount of sales revenue based on the information provided in the question and the worksheet entries you make