Question
On 1 July 2018, A Ltd acquired all of the issued shares (cum div.) of B Ltd for $200,000. At this date, the equity of
On 1 July 2018, A Ltd acquired all of the issued shares (cum div.) of B Ltd for $200,000. At this date, the equity of B Ltd consisted of: Share capital $120,000; General reserve $24,000; Retained earnings $16,000. At 1 July 2018, one of the liabilities of B Ltd was a dividend payable of $10,000. This was paid on 1 September 2018. One of the assets recorded by B Ltd was goodwill of $5,000. At 1 July 2018, all the identifiable assets and liabilities of B Ltd were recorded at amounts equal to their fair values except for:
Carrying amount and Fair value
Plant (cost $100,000) $80,000; $88,000
Land 60,000; 80,000
Inventories 40,000; 52,000
In relation to these assets:
1. The plant had an expected useful life of 4 years.
2. At 1 July 2018, subsequent to the acquisition of shares by A Ltd, B Ltd adopts the fair value basis of measurement for land. The land on hand at 1 July 2018 was sold by B Ltd on 8 February 2020. On sale any related asset revaluation surplus is transferred to retained earnings.
3. The inventory was all sold by 30 June 2019.
Additional information
1. In June 2019, B Ltd transferred $8,000 from the general reserve existing at 1 July 2018 to retained earnings. There were no other transfers relating to the general reserve in 201819.
2. At 30 June 2019, B Ltd recognised gains on revaluation of land of $6,000 in other comprehensive income for the period.
3. In June 2019, B Ltd sold inventory to A Ltd for $7000. This had originally cost B Ltd $5,000. 20% of this inventory remained unsold by A Ltd at 30 June 2019.
4. During the 201920 period, B Ltd inventory to A Ltd for $120,000. At 30 June 2020, A Ltd holds inventory sold to it by B Ltd for $20,000 which had cost B Ltd $15,000.
5. On 1 January 2019, B Ltd sold an item of inventory to A Ltd at a before tax profit of $5,000. This asset was classified as plant by A Ltd and depreciated over a 5-year period.
6. The tax rate is 30%.
7. Financial information provided by the companies at 30 June 2020 was as follows:
A Ltd | B Ltd | |
Sales revenue | 910,000 | 624,000 |
Other revenue | 60,000 | 65,600 |
Total revenue | 970,000 | 689,600 |
Cost of sales | 625,000 | 464,000 |
Other expense | 225,000 | 129,600 |
Total expense | 850,000 | 593,600 |
Profit before tax | 120,000 | 96,000 |
Tax expense | 30,000 | 32,000 |
Profit for the period | 90,000 | 64,000 |
Retained earnings at 1 July 2019 | 100,000 | 48,000 |
Transfer from asset revaluation surplus | 0 | 14,000 |
Transfer to general reserve | 0 | 12,000 |
Dividend paid | 20,000 | 12,000 |
Dividend declared | 30,000 | 16,000 |
Retained earnings at 30 June 2020 | 140,000 | 86,000 |
Share capital | 400,000 | 120,000 |
General reserve | 0 | 28,000 |
Asset revaluation surplus | 0 | 10,000 |
Total equity | 540,000 | 244,000 |
Provisions | 40,000 | 30,000 |
Payables | 30,000 | 40,000 |
Deferred tax liabilities | 12,000 | 15,000 |
Non current liabilities | 78,000 | 75,000 |
Total liabilities | 160,000 | 160,000 |
Total equity and liabilities | 700,000 | 404,000 |
Shares in B Ltd | 153,400 | 0 |
Plant | 800,000 | 320,000 |
Accumulated depreciation-plant | -544,000 | -120,000 |
Land | 60,000 | 90,000 |
Intangibles | 75,000 | 60,000 |
Deferred tax assets | 15,000 | 8,000 |
Cash | 20,000 | 5,000 |
Receivables | 40,600 | 6,000 |
Inventories | 66,000 | 30,000 |
Goodwill | 14,000 | 5,000 |
Total assets | 700,000 | 404000 |
Prepare acquisition analysis, business combination valuation entries, and pre-acquisition entries at 30 June 2020.
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