On 1 October 2017, Kayla Ltd acquired 90% of the issued shares of Chubb Ltd on an ex- div. basis for $3,200,000. On the acquisition date, the accounts of Chubb Ltd included the following balances: Share capital - ordinary shares ($1 share) General reserve Retained earnings Goodwill recorded by subsidiary $ 2,400,000 200,000 930,000 50 000 At the acquisition date, all the identifiable assets and liabilities of Chubb Ltd were recorded at amounts equal to fair value except for: Carrying amount $220,320 Fair value $ 420,320 1 BCVR items Leasehold Land (Accumulated amortisation = $22,032) Inventories Court case 80,000 2 3 220,000 130,000 leasehold land is expected to have a further useful life of 90 years. In relation the inventories held at the acquisition date, 60% was sold in the financial period ended 30 June 2018. The remaining 40% of the inventories were written off at 30 June 2020. Kayla Ltd also recognised a contingent liability relating to an impending court case which was disclosed in the most recent audited accounts of Chubb Ltd. The fair value of this contingent liability was estimated to be $130,000 at the acquisition date. An extract of the financial information of Kayla Ltd and Chubb Ltd for the financial year ended 30 June 2020 showed the following financial information: Kayla Ltd Chubb Ltd Share capital - ordinary shares $5,200,000 $ 2,400,000 Share capital - preference shares 400,000 Retained earnings (at 1 July 2019) 3,850,000 1,920,000 Asset revaluation reserve 1,500,000 700,000 General reserve 850,000 260,000 Development reserve 500,000 Interim dividends paid 350,000 240,000 Profit for the year 3,889,000 1,490,000 Investment in Chubb Ltd 3,200,000 Goodwill 50,000 Fair value of non-controlling interest (at 1/10/17) 380,000 Accounting policies (extracts) The tax rate is 30%. Kayla Ltd uses the full goodwill method to prepare its consolidated financial statements in compliance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements. Any adjustments for differences between carrying amounts at the acquisition date and fair values are made on consolidation. Business combination valuation reserve (BCVR) created on fair value adjustments at Group level are transferred on consolidation to retained earnings when assets are sold or fully consumed. The full effects of intragroup transactions are eliminated upon consolidation. Additional information for the financial year ended 30 June 2020: . The movement of pre-acquisition reserves was as follows: Chubb Ltd transferred $180,000 from pre-acquisition retained earnings at 1 October 2017 to general reserve ($80,000) and to development reserve ($100,000). The opening inventories of Kayla Ltd on 1 July 2019 included items purchased from Chubb Ltd for $380,000, that had cost Chubb Ltd $280,000 to produce. This was still on hand in Kayla Ltd at 30 June 2019 and 80% of these inventories was sold to external parties by 30 June 2020. During the current year, Kayla Ltd charged Chubb Ltd $35,000 in technical and services fees. Chubb Ltd still owed Kayla Ltd 33% of these as at year end. On 1 January 2019, Kayla Ltd purchased loan stock issued by Chubb Ltd amounted to $650,000. These loan stocks were payable over 4 years with an interest rate of 7.0% per annum. Interest on the loan stock is paid yearly the 31 March. Both companies accrue interest amounts at the 31 March of every year. Chubb Ltd has redeemed an amount of $100,000 on the loan stock on 1 April 2020. On 1 May 2020, Chubb Ltd sold inventories to Kayla Ltd for $350,000, at a cost plus 30% pricing. Half of these inventories were still on hand as at year end. . On 15 June 2020, Kayla Ltd sold inventories to Chubb Ltd for $30,000. It originally cost Kayla Ltd $50,000 and it remained on hand on 30 June 2020. On 1 February 2019, Chubb Ltd sold an item of plant to Kayla Ltd for $350,000 at a before tax loss of $200,000. The plant has a further useful life of 5 years and is depreciated using the straight-line method by both companies. Goodwill is tested on an annual basis for impairment. The directors of the Group have decided that 10% of the goodwill of subsidiary purchased in the acquisition of Chubb Ltd has been impaired in the financial year ended 30 June 2019. It was decided that a further 10% of the goodwill of subsidiary has been impaired in the financial year ended 30 June 2020. The constitution of Kayla Ltd and Chubb Ltd allows directors to declare a dividend at any time and this is not subject to any further approval, authorization, or discretion. Required: (a) Prepare the acquisition analysis of the Investment in Chubb Ltd as at 1 October 2017. (5 marks) (b) Prepare consolidation worksheet journal entries necessary to consolidate Kayla Ltd and its subsidiary for the financial year ended 30 June 2020, in accordance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements: BCVR entries Pre-acquisition entries Elimination of intragroup transactions NCI adjustments . . Show all workings. Narrations are not required. (30 marks) (Question 2 = 5 + 30 = 35 marks) Acronyms to be allowed to be used: BCVR = Business combination valuation reserve FV = Fair value DTA = Deferred tax assets DTL = Deferred tax liabilities ITE = Income tax expense ORE = Retained earnings b/f Acc. = Accumulated NCI = Non-controlling interest FVINA = Fair value of identifiable net assets BVINA = Book value of identifiable net assets FVC = Fair value of consideration Depn = Depreciation On 1 October 2017, Kayla Ltd acquired 90% of the issued shares of Chubb Ltd on an ex- div. basis for $3,200,000. On the acquisition date, the accounts of Chubb Ltd included the following balances: Share capital - ordinary shares ($1 share) General reserve Retained earnings Goodwill recorded by subsidiary $ 2,400,000 200,000 930,000 50 000 At the acquisition date, all the identifiable assets and liabilities of Chubb Ltd were recorded at amounts equal to fair value except for: Carrying amount $220,320 Fair value $ 420,320 1 BCVR items Leasehold Land (Accumulated amortisation = $22,032) Inventories Court case 80,000 2 3 220,000 130,000 leasehold land is expected to have a further useful life of 90 years. In relation the inventories held at the acquisition date, 60% was sold in the financial period ended 30 June 2018. The remaining 40% of the inventories were written off at 30 June 2020. Kayla Ltd also recognised a contingent liability relating to an impending court case which was disclosed in the most recent audited accounts of Chubb Ltd. The fair value of this contingent liability was estimated to be $130,000 at the acquisition date. An extract of the financial information of Kayla Ltd and Chubb Ltd for the financial year ended 30 June 2020 showed the following financial information: Kayla Ltd Chubb Ltd Share capital - ordinary shares $5,200,000 $ 2,400,000 Share capital - preference shares 400,000 Retained earnings (at 1 July 2019) 3,850,000 1,920,000 Asset revaluation reserve 1,500,000 700,000 General reserve 850,000 260,000 Development reserve 500,000 Interim dividends paid 350,000 240,000 Profit for the year 3,889,000 1,490,000 Investment in Chubb Ltd 3,200,000 Goodwill 50,000 Fair value of non-controlling interest (at 1/10/17) 380,000 Accounting policies (extracts) The tax rate is 30%. Kayla Ltd uses the full goodwill method to prepare its consolidated financial statements in compliance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements. Any adjustments for differences between carrying amounts at the acquisition date and fair values are made on consolidation. Business combination valuation reserve (BCVR) created on fair value adjustments at Group level are transferred on consolidation to retained earnings when assets are sold or fully consumed. The full effects of intragroup transactions are eliminated upon consolidation. Additional information for the financial year ended 30 June 2020: . The movement of pre-acquisition reserves was as follows: Chubb Ltd transferred $180,000 from pre-acquisition retained earnings at 1 October 2017 to general reserve ($80,000) and to development reserve ($100,000). The opening inventories of Kayla Ltd on 1 July 2019 included items purchased from Chubb Ltd for $380,000, that had cost Chubb Ltd $280,000 to produce. This was still on hand in Kayla Ltd at 30 June 2019 and 80% of these inventories was sold to external parties by 30 June 2020. During the current year, Kayla Ltd charged Chubb Ltd $35,000 in technical and services fees. Chubb Ltd still owed Kayla Ltd 33% of these as at year end. On 1 January 2019, Kayla Ltd purchased loan stock issued by Chubb Ltd amounted to $650,000. These loan stocks were payable over 4 years with an interest rate of 7.0% per annum. Interest on the loan stock is paid yearly the 31 March. Both companies accrue interest amounts at the 31 March of every year. Chubb Ltd has redeemed an amount of $100,000 on the loan stock on 1 April 2020. On 1 May 2020, Chubb Ltd sold inventories to Kayla Ltd for $350,000, at a cost plus 30% pricing. Half of these inventories were still on hand as at year end. . On 15 June 2020, Kayla Ltd sold inventories to Chubb Ltd for $30,000. It originally cost Kayla Ltd $50,000 and it remained on hand on 30 June 2020. On 1 February 2019, Chubb Ltd sold an item of plant to Kayla Ltd for $350,000 at a before tax loss of $200,000. The plant has a further useful life of 5 years and is depreciated using the straight-line method by both companies. Goodwill is tested on an annual basis for impairment. The directors of the Group have decided that 10% of the goodwill of subsidiary purchased in the acquisition of Chubb Ltd has been impaired in the financial year ended 30 June 2019. It was decided that a further 10% of the goodwill of subsidiary has been impaired in the financial year ended 30 June 2020. The constitution of Kayla Ltd and Chubb Ltd allows directors to declare a dividend at any time and this is not subject to any further approval, authorization, or discretion. Required: (a) Prepare the acquisition analysis of the Investment in Chubb Ltd as at 1 October 2017. (5 marks) (b) Prepare consolidation worksheet journal entries necessary to consolidate Kayla Ltd and its subsidiary for the financial year ended 30 June 2020, in accordance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements: BCVR entries Pre-acquisition entries Elimination of intragroup transactions NCI adjustments . . Show all workings. Narrations are not required. (30 marks) (Question 2 = 5 + 30 = 35 marks) Acronyms to be allowed to be used: BCVR = Business combination valuation reserve FV = Fair value DTA = Deferred tax assets DTL = Deferred tax liabilities ITE = Income tax expense ORE = Retained earnings b/f Acc. = Accumulated NCI = Non-controlling interest FVINA = Fair value of identifiable net assets BVINA = Book value of identifiable net assets FVC = Fair value of consideration Depn = Depreciation