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Topic 1 Consolidations: Principles and accounting requirements

On 1 July 2019, Custom Music Ltd acquired 80% of the issued shares of Honey Land Ltd for $630,000. At the date of acquisition, the shareholders equity of Honey Land Ltd consisted of: $ Share capital 300,000 Retained earnings 385,000 At the date of acquisition, all assets were considered to be recorded at fair value, except for inventory that had a fair value $5,000 greater than its carrying amount, and plant that had a carrying amount of $100,000 (net of $60,000 accumulated depreciation) and a fair value of $120,000. The plant had an estimated remaining useful life of four years from the date of acquisition, and an estimated residual value of nil. At 30 June 2020, the plant is still on hand, and the inventory has been sold to external parties. The following intra-group transactions took place during the year ended 30 June 2020: Honey Land Ltd sold $82,000 in inventory to Custom Music Ltd. Honey Land Ltd had recorded a profit of $24,000 before tax on these transactions. At 30 June 2020, half of this inventory is still on hand with Custom Music Ltd. Honey Land Ltd paid dividends of $80,000 during the year, and Custom Music Ltd paid dividends of $140,000 during the year. Additional information: The NCI in Honey Land Ltd was considered to have a fair value of $150,000 at the date of acquisition. Custom Music Ltd uses the full goodwill method. Honey Land Ltd made a profit after tax of $285,000 for the year ended 30 June 2020. The tax rate is 30%. Required: (i) Prepare an acquisition analysis in relation to the acquisition made by Custom Music Ltd. (ii) Prepare the consolidation journal entries, including NCI entries, necessary to prepare the consolidated financial statements for the year ended 30 June 2020. Page 2 of 5 Note: you are not required to prepare a consolidation worksheet, or the consolidated financial statements. Marking criteria for Question 1 Max. marks allocated Acquisition analysis 5 Consolidation entries 20 Total 25