On 1 July 2013 Mario Ltd acquired 75% of the share capital of Luigi Ltd on a cum div basis for

$260,000. At that date, the relevant balances in the records of Luigi Ltd were:

$

Share capital 200 000

General reserve 30 000

Retained earnings 60 000

At the date of acquisition all assets and liabilities of Luigi Ltd were recorded in the accounting

records at amounts equal to their fair values with the exception of the following assets:

Carrying amount Fair value

$ $

Land 20 000 36 000

Equipment 26 000 46 000

The land held at acquisition date was sold on 5 March 2015. The cost of the equipment was

$42,000 and had a further 5-year life as at the date of acquisition and remains on hand as at

30 June 2016.

At acquisition date Luigi Ltd was involved in a court case that could potentially result in the

company paying damages to a former employee. Luigi Ltd classified this as a contingent

liability in the notes to its financial statement. Mario Ltd estimated the fair value of this liability

to be $12,000. In December 2015 Luigi Ltd was order to pay damages for an amount of

$18,000 in respect of this matter.

Additional information:

a) During the year ending 30 June 2015, Luigi Ltd sold inventory to Mario Ltd for $20,000.

The cost of inventory to Luigi Ltd was $14,000. 60% of this inventory was sold by Mario

Ltd to external parties by 30 June 2015. The balance of the inventory was sold to external

parties in October 2015 for $25,000.

b) During the year ending 30 June 2016, Luigi Ltd purchased inventory from Mario Ltd for

$22,750, at a mark-up of 30% on cost. By 30 June 2016, Luigi Ltd had sold $13,650 of the

transferred inventory for $19,000 to external parties.

c) On 1 January 2014, Mario Ltd purchased an item of equipment from Luigi Ltd for $40,000.

The equipment had a cost of $48,000 and a carrying amount of $32,000 at the date of

transfer. The equipment was estimated to have a further 4 years of useful life at the time

of sale.

d) Luigi Ltd provided $9,000 worth of consulting services to Mario Ltd during the current year.

The fees were paid before the end of financial year.

e) The current year transfer from retained earnings to the general reserve by Luigi Ltd were

from pre-acquisition earnings, all other transfers were from post acquisition.

f) The group uses the full goodwill method. The fair value of NCI as at acquisition date is

$90,000.

g) On realisation of the business combination valuation reserve, a transfer is made to

retained earnings on consolidation.

h) The tax rate is 30%

The financial statements of the two companies at 30 June 2016 are as follows:

Mario Luigi

Revenues 700 000 350 000

Expenses (560 000) (240 000)

Net profit before tax 140 000 110 000

Income tax expense (40 000) (38 000)

Net profit after tax 100 000 72 000

Retained earnings 1 July2015 70 000 50 000

170 000 122 000

Dividend declared (20 000) (15 000)

Transfer to general reserve (10 000) (10 000)

Retained earnings 30 June 2016 140 000 97 000

Share capital 270 000 200 000

General reserve 75 000 48 000

Asset revaluation surplus 20 000

Accounts payable 30 000

Dividend payable 20 000 15 000

Other liabilities 116 000 3 000

TOTAL EQUITY AND LIABILITIES 641 000 393 000

Cash 107 000 120 000

Other receivables 25000 12000

Inventory 50 000 70 000

Land 60 000 40 000

Investment in Luigi Ltd 250 000

Non-current assets 136 000 151 000

TOTAL ASSETS 641 000 393 000

Required:

Prepare the consolidation journal entries (including NCI journals) for the Mario Ltd group for

the year ended 30 June 2016. You must use the 3 Step method to calculate NCI and show all

workings.