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On 1 July 2017, Peach Ltd acquired 75% of the issued shares of Watermelon Ltd at a cost of $35,000. At this date, the equity
On 1 July 2017, Peach Ltd acquired 75% of the issued shares of Watermelon Ltd at a cost of $35,000. At this date, the equity of Watermelon Ltd consisted of:
Share capital ($1 each fully paid) | $30,000 |
Retained earnings | 6,000 |
At 1 July 2017, Watermelon Ltd had not recorded any goodwill, and all the identifiable assets and liabilities of Watermelon Ltd were recorded at fair value, except for:
Carrying amount | Fair value | |
Plant (cost = $15,000) | 10,000 | 14,000 |
The plant was estimated to have a further 5-year life. The trial balances of the two companies as at 30 June 2021 are as follows:
Peach Ltd | Watermelon Ltd | |||
Dr | Cr | Dr | Cr | |
Share capital | $40,000 | $30,000 | ||
Retained earnings (1/7/20) | 26,400 | 14,500 | ||
Other components of equity | - | 5,000 | ||
Current tax liability | 8,500 | 2,900 | ||
Plant | $30,000 | $60,000 | ||
Accumulated depreciation plant | 17,000 | 30,500 | ||
Shares in Watermelon Ltd | 35,000 | - | ||
10% debentures in Watermelon Ltd | 2,500 | - | ||
Inventory | 12,000 | 15,500 | ||
Cash | 14,050 | 500 | ||
Financial assets | - | 11,000 | ||
Deferred tax asset | 2,000 | 5,000 | ||
Sales revenue | 50,000 | 75,000 | ||
Cost of sales | 34,000 | 58,500 | ||
Gain on sale of plant | - | 5,000 | ||
Selling expenses | 4,000 | 6,000 | ||
Other expenses | 1,500 | 1,500 | ||
Financial expenses | 1,500 | 2,000 | ||
Income tax expense | 5,000 | 5,500 | ||
Interest received from debentures | 250 | - | ||
Dividend revenue | 1,800 | - | ||
Dividend paid | - | 2,400 | ||
10% debentures | 2,400 | 5,000 | ||
143,950 | 143,950 | 167,900 | 167,900 |
Additional information
- On 1 January 2021, Watermelon Ltd sold plant to Peach Ltd for $7,000. The plant had a carrying amount of $2,000 in the records of Watermelon Ltd at time of sale. The asset was classified as inventory by Peach Ltd. It remained unsold at 30 June 2021.
- Unrealised profits on inventory held at 30 June 2020: Inventory held by Peach Ltd purchased from Watermelon Ltd at a profit before tax of $800. This inventory was sold by 30 June 2021.
- Intragroup sales of inventories for the year ended 30 June 2021 from Watermelon Ltd to Peach Ltd: $19,000. Unrealised profits on inventories held at 30 June 2021: inventories held by Peach Ltd purchased from Watermelon Ltd at a profit before tax of $1,200.
- Peach Ltd issued debentures to Watermelon Ltd on 1 July 2020 with a 10% interest rate, payable on 30 June 2021.
- The Other Components of Equity account relates to financial assets held by Watermelon Ltd. The balance of this account at 1 July 2020 was $4,000.
- The tax rate is 30%.
Required:
- Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method. (3 marks)
- Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-Controlling Interest on 1 July 2017 was $10,000. (4 marks)
- Prepare the consolidation journal entries using the full-goodwill method at 1 July 2017. (6 marks)
- Prepare the consolidation journal entries using the full-goodwill method at 30 June 2021. These consolidation journal entries should be prepared in the following format:
- Business combination valuation entries at 30 June 2021
- Pre-acquisition entries at 30 June 2021
- NCI share of equity at 1 July 2017
- NCI share of equity changes from 1 July 2017 to 30 June 2020
- NCI share of equity changes from 1 July 2020 to 30 June 2021
- Intra-group transaction adjustments required as at 30 June 2021 (22 marks)
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