Question
On 1 July 2013, Rock Ltd acquired ( ex div .) all of the issued capital of Wallaby Ltd. The recorded equity of Wallaby Ltd
On 1 July 2013, Rock Ltd acquired (ex div.) all of the issued capital of Wallaby Ltd. The recorded equity of Wallaby Ltd at this date consisted of:
Share capital | $120 000 |
General reserve | 25 000 |
Retained earnings | 55 000 |
At 1 July 2013, all the identifiable assets and liabilities of Wallaby Ltd were recorded at fair value except for the following assets:
Carrying amount | Fair value | |
Land | $100 000 | $130 000 |
Inventory | 78 500 | 86 100 |
Machinery (cost $86 000) | 52 000 | 56 000 |
Vehicles (cost $58 000) | 47 000 | 53 000 |
Additionally, Wallaby Ltds records showed a dividend payable at 1 July 2013 of $8000. This dividend was paid on 31 October 2013. The assets of Wallaby Ltd at acquisition date included goodwill recorded at $15 000 arising from a business combination transaction in 2009. At 1 July 2013, Wallaby Ltd owned but had not recorded an internally generated brand name.
This brand name was considered by Rock Ltd to have a fair value of $29 000 and an indefinite useful life. An impairment test conducted with respect to the brand name on 30 June 2016 concluded that its recoverable amount at that date was $2000 less than its carrying amount.
Adjustments for the differences between carrying amounts and fair values of assets and liabilities on hand at acquisition date are recognised on consolidation. When assets are sold or derecognised, any related valuation reserves are transferred to retained earnings. In June 2015, Wallaby Ltd paid a share dividend worth $20 000 from the general reserve on hand at 1 July 2013. The trial balances of both companies at 30 June 2016 showed the following balances:
The vehicles and machinery were expected to have a further useful life of 6 and 8 years respectively, with benefits to be received evenly over those periods. Inventory on hand at 1 July 2013 was all sold by 31 January 2014. The land owned at 1 July 2013 was sold in September 2014 for $150 000. The machinery on hand at 1 July 2013 was sold on 1 January 2016 for $38 000.
Debit balances | Rock Ltd | Wallaby Ltd |
Cash | $ 2 500 | $ 1 250 |
Receivables | 27 000 | 13 000 |
Inventory | 39 700 | 24 500 |
Other current assets | 15 200 | 8 200 |
Deferred tax assets | 7 500 | 3 500 |
Vehicles | 88 000 | 158 000 |
Equipment | 42 000 | |
Land | 140 000 | 180 000 |
Financial assets | 68 000 | 14 800 |
Goodwill | 28 000 | 15 000 |
Shares in Wallaby Ltd | 250 000 | |
Debentures in Rock Ltd | 25 000 | |
Dividend paid | 10 000 | 5 000 |
Dividend declared | 20 000 | 12 000 |
Transfer to general reserve | 10 000 | 5 000 |
Cost of sales | 210 000 | 192 550 |
Income tax expense | 30 000 | 32 000 |
Depreciation and other expenses | 39 000 | 36 000 |
Carrying amount of machinery sold | 30 500 | |
Carrying amount of equipment sold | 21 000 | |
$1 005 900 | $798 300 | |
Credit balances | Rock Ltd | Wallaby Ltd |
Share capital | $ 200 000 | $ 140 000 |
General reserve | 35 000 | 10 000 |
Retained earnings (1/7/15) | 51 300 | 67 500 |
Accounts payable | 69 500 | 36 000 |
Loan payable (due 30/6/20) | 25 000 | 15 000 |
Dividend payable | 20 000 | 12 000 |
Provisions | 12 500 | 9 300 |
Current tax liability | 43 000 | 34 000 |
Deferred tax liability | 11 800 | 5 000 |
Accumulated depreciation vehicles | 16 400 | 60 000 |
Accumulated depreciation equipment | 34 500 | |
8% Debentures (matures 30/6/19) | 25 000 | |
Sales revenue | 450 000 | 320 000 |
Dividend revenue | 17 000 | |
Other income | 11 400 | 17 000 |
Proceeds on sale of equipment | 18 000 | |
Proceeds on sale of machinery |
| 38 000 |
$1 005 900 | $798 300 |
Additional information
Dividends may be declared by either company without shareholder approval.
The tax rate is 30%.
On 1 January 2016, Rock Ltd sold an item of equipment to Wallaby Ltd for $18 000. The equipment had a carrying amount at the date of sale of $21 000. Both companies depreciate equipment at 20% p.a. on a straight-line basis.
On 1 May 2015, Wallaby Ltd sold a machine to Rock Ltd for $7800. The machine had a carrying amount of $7000 at the date of sale. Rock Ltd recorded the machine as inventory. The inventory item was sold to an external party in November 2015 for $8200
All interest on the 8% debentures has been paid and brought to account in the records of both companies.
During the 201516 financial year, Rock Ltd sold inventory to Wallaby Ltd for $75 000. The cost of this inventory to Wallaby Ltd was $70 000. Of this inventory, 25% is still on hand at 30 June 2016.
The transfer to general reserve recorded by Wallaby Ltd in the current year was from retained earnings recorded at 1 July 2013.
Required
Prepare the consolidation worksheet journal entries for the preparation of the consolidated financial statements of Rock Ltd at 30 June 2016.
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