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On 1 July 2018, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $2,057,000. At this date, the equity of Son Ltd consisted of: Share capital - 500 000 shares $ 1,000,000 Retained earnings 500,000 Son Ltd also reported a dividend payable of $100,000 and a recorded goodwill of $50,000 at the acquisition date. The dividend payable was subsequently paid in September 2018. At the acquisition date, all the identifiable assets and liabilities of Son Ltd were recorded at amounts equal to fair value except for the following: Inventory Plant (cost $500 000) Carrying amount 40,000 300 000 Fair value 50,000 350,000 of the inventory on hand in Son Ltd at 1 July 2018, 60 percent was sold in August 2018 and the remainder was sold in June 2019. It was estimated that the plant has a further 5-year life with zero residual value. Son Ltd was involved in a court case that could potentially result in the company paying damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this liability to be $50,000, even though Son Ltd had not recorded any provision for damages (liability). On 29 June 2020 Son Ltd reassessed the liability in relation to the court case as the chance of winning the case had improved. The fair value on 29 June 2020 was considered to be $30,000. The company applies the partial goodwill method. The income tax rate is 30%. During the period 1 July 2018 to 30 June 2020, the following intragroup transactions have occurred between Parent Ltd and Son Ltd: (T1) On 1 January 2019, Parent Ltd acquired furniture for $100,000 from Son Ltd. The furniture had originally cost Son Ltd $150,000 and had a carrying amount at the time of sale of $80,000. The sale was made on credit. At 30 June 2019, $60,000 was outstanding. At 30 June 2020, $20,000 was still not paid and outstanding. Both entities apply depreciation on a straight-line basis. At 1 January 2019, the furniture had a further five years of useful life, with zero residual value. (T2) On 1 March 2019, Son Ltd sold inventory costing $12,000 to Parent Ltd for $16,000. On 1 October 2019, Parent Ltd sold half of these inventory items back to Son Ltd for $6,000. Of the remaining inventory kept by Parent Ltd, half was sold in March 2020 to Dingo Ltd at a profit of $400. Required: a) Prepare the acquisition analysis at 1 July 2018. (9 marks) b) Prepare the consolidation worksheet entries at 30 June 2020. Your answer should include: 1. BCVR entries, 2. Pre-acquisition entries, and 3. Intragroup transaction adjustment entries (T1 to 12). (46 marks) c) The adjusting consolidation entries at 30 June 2019 for the last intragroup transaction (T2) is provided below. 16 000 Sales revenue Cost of sales Inventory Dr Cr Cr 12 000 4 000 1 200 Deferred tax asset (30%) Income tax expense Dr Cr 1 200 Explain why the above entries are made for the intragroup transaction (T2) as at 30 June 2019, noting the adjustments to each account separately. (5 marks) On 1 July 2018, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $2,057,000. At this date, the equity of Son Ltd consisted of: Share capital - 500 000 shares $ 1,000,000 Retained earnings 500,000 Son Ltd also reported a dividend payable of $100,000 and a recorded goodwill of $50,000 at the acquisition date. The dividend payable was subsequently paid in September 2018. At the acquisition date, all the identifiable assets and liabilities of Son Ltd were recorded at amounts equal to fair value except for the following: Inventory Plant (cost $500 000) Carrying amount 40,000 300 000 Fair value 50,000 350,000 of the inventory on hand in Son Ltd at 1 July 2018, 60 percent was sold in August 2018 and the remainder was sold in June 2019. It was estimated that the plant has a further 5-year life with zero residual value. Son Ltd was involved in a court case that could potentially result in the company paying damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this liability to be $50,000, even though Son Ltd had not recorded any provision for damages (liability). On 29 June 2020 Son Ltd reassessed the liability in relation to the court case as the chance of winning the case had improved. The fair value on 29 June 2020 was considered to be $30,000. The company applies the partial goodwill method. The income tax rate is 30%. During the period 1 July 2018 to 30 June 2020, the following intragroup transactions have occurred between Parent Ltd and Son Ltd: (T1) On 1 January 2019, Parent Ltd acquired furniture for $100,000 from Son Ltd. The furniture had originally cost Son Ltd $150,000 and had a carrying amount at the time of sale of $80,000. The sale was made on credit. At 30 June 2019, $60,000 was outstanding. At 30 June 2020, $20,000 was still not paid and outstanding. Both entities apply depreciation on a straight-line basis. At 1 January 2019, the furniture had a further five years of useful life, with zero residual value. (T2) On 1 March 2019, Son Ltd sold inventory costing $12,000 to Parent Ltd for $16,000. On 1 October 2019, Parent Ltd sold half of these inventory items back to Son Ltd for $6,000. Of the remaining inventory kept by Parent Ltd, half was sold in March 2020 to Dingo Ltd at a profit of $400. Required: a) Prepare the acquisition analysis at 1 July 2018. (9 marks) b) Prepare the consolidation worksheet entries at 30 June 2020. Your answer should include: 1. BCVR entries, 2. Pre-acquisition entries, and 3. Intragroup transaction adjustment entries (T1 to 12). (46 marks) c) The adjusting consolidation entries at 30 June 2019 for the last intragroup transaction (T2) is provided below. 16 000 Sales revenue Cost of sales Inventory Dr Cr Cr 12 000 4 000 1 200 Deferred tax asset (30%) Income tax expense Dr Cr 1 200 Explain why the above entries are made for the intragroup transaction (T2) as at 30 June 2019, noting the adjustments to each account separately
