On 1 July 2019, Mutt Ltd acquired all the issued shares of Jeff Ltd for $174 800. At this date, the equity of Jeff Ltd consisted of the share capital of $80 000 and retained earnings of $68 800. All the identifiable assets and liabilities of Jeff Ltd were recorded at amounts equal to fair value except for:

CARRYING AMOUNT FAIR VALUE

PATENT $60,000 $72,000

PLANT (COST $80,000) 40,000 48,000

INVENTORIES 21,600 28,000

The patent was considered to have an indefinite life. It was calculated that the plant had a further life of 10 years, and was depreciated on a straight-line basis. All the inventory was sold by 30 June 2020. In June 2020, Jeff Ltd conducted an impairment test on the patent, as it was considered to have an indefinite life and goodwill. As a result, the goodwill was considered to be impaired by $1200. In May 2020, Jeff Ltd transferred $20 000 from the retained earnings on hand on 1 July 2019 to a general reserve. The tax rate is 30%.

Required Prepare the consolidation worksheet adjustments entries at 30 June 2020.

I HAVE AN ANSWER. BUT I NEED A DEEP EXPLANATION FOR EACH ENTRY. please

Worksheet entries at 30 June 2020: Business combination valuation entries: Note: the entries at 1 July 2019 are affected by the: sale of the inventory depreciation of the plant Impairment of the goodwill. Cost of sales Dr 6 400 Income tax expense Cr 1 920 Transfer from business combination Valuation reserve Cr 4 480 Patent Dr 12 000 Deferred tax liability Cr 3 600 Business combination valuation reserve Cr 8 400 Accumulated depreciation - equipment Dr 40 000 Equipment Cr 32 000 Deferred tax liability Cr 2 400 Business combination valuation reserve Cr 5 600 Depreciation expense Dr 800 Accumulated depreciation Cr 800 (10% x $8 000) Deferred tax liability Dr 240 Income tax expense Cr 240 (30% x $1 000) Goodwill Dr 7 520 Business combination valuation reserve Cr 7 520 Impairment loss - goodwill Dr 1 200 Accum. Impairment losses - goodwill Cr 1 200 Pre-acquisition entries: Retained earnings (1/7/19) Dr 68 800 Share capital Dr 80 000 Business combination valuation reserve Dr 26 000 Shares in Jeff Ltd Cr 174 800 General reserve Dr 20 000 Transfer to general reserve Cr 20 000Transfer from business comb. valuation reserve Dr 4 480 Business combination valuation reserve Cr 4 480 The transfer from BCVR to retained earnings occurs when a fair valued asset is sold if the current period: Inventory sold $6 400 x (1-30%) = $4 480 The balance of the BCVR that is eliminated on consolidation relates only to those assets with fair value adjustments that are still on hand plus goodwill: Patent $12 000 x (1-30%) = $8 400 Plant $8 000 x (1-30%) = $5 600 Goodwill $7 520 $21 520 In the books of the subsidiary, the transfer to general reserve: increases general reserve from $0 to $20 000 . Decreases retained earnings from $68 800 to $48 800. "Alternative BCVR entry for Equipment: Accumulated depreciation - equipment Dr 40 000 Equipment Cr 40 000 Equipment Dr 8 000 Deferred tax liability Cr 2 400 Business combination valuation reserve Cr 5 600 The above BCVR entry demonstrates the 2 steps for the recognition of a change in fair value on consolidation. 1. Write back all of the accumulated depreciation for the asset at date of acquisition. 2. Recognise the increase/decrease to the asset's fair value with the tax effect. NB: From these 2 journal entries it is easier to see that the depreciation adjustments then required at the end of each year for consolidation purposes are based on the $8 000 increase to fair value. That is, the additional amount of the asset that needs to be depreciated. In this question....$8,000/ 10years = $800 per year.At 1 July 2019: Net fair value of identifiable assets and liabilities of Jeff Ltd ($80 000 + $68 800) (equity) +$6 400 (1 - 30%) (Inventory) + $12 000 (1 - 30%) (Patent) + $8 000 (1 - 30%) (Plant) $167 280 Consideration transferred $174 800 Goodwill $7 520 Worksheet entries at 1 July 2019: Business combination valuation entries: Inventory Dr 6 400 Deferred tax liability Cr 1 920 Business combination valuation reserve Cr 4 480 Patent Dr 12 000 Deferred tax liability Cr 3 600 Business combination valuation reserve Cr 8 400 *Accumulated depreciation - equipment Dr 40 000 Equipment Cr 32 000 Deferred tax liability Cr 2 400 Business combination valuation reserve Cr 5 600 *Refer to end of solution for an alternative to this journal entry. Goodwill Dr 7 520 Business combination valuation reserve Cr 7 520 Pre-acquisition entries: Retained earnings (1/7/19) Dr 68 800 Share capital Dr 80 000 Business combination valuation reserve Dr 26 000 Shares in Jeff Ltd Cr 174 800