On July 1 2013 Kaiba Ltd acquired 22% of the shares in Yugi Ltd for$160,000. Tuna's equity at acquisition date was:

Ordinary share capital500,000

Retained earnings$90,000

At 1 July 2013 all assets and liabilities of Tuna were recorded at fair value except for:

Carrying amountFair value

Machinery$130,000$180,000

Inventory$65,000$90,000

June 30 2014, all inventory held by Yugi had been sold. The machinery had an expected useful life of 2 years, then it will be scrapped. Tax rate is 30%. Dividends declared at 30 June are paid within 2 months of declaration.

The financial statements of Yugi over 3 periods are as follows:

30/06/2014 30/06/2015 30/06/2016

profit and loss 110,000 67,000 90,000

Retained earnings (opening) 90,000 150,000 167,000

200,000 217,000 257,000

Dividend paid 25,000 18,000 20,000

Dividend declared 15,000 22,000 20,000

Transfer to general reserve 10,000 10,000 0

50,000 50,000 40,000

Retained earnings (close) 150,000 167,000 217,000

1: acquisition analysis

Add acquired equity items

Add: adjustments for FV (after tax)

Total

Calculate investor's share

Deduct consideration paid

Balance = goodwill or gain on purchase.

2: pre-acquisition factors

Egs. Machinery depreciation

Sale of inventory

3: Consolidation worksheet/entries

Period profit less FV adjustments (pre-acquisition)

Total

Determine investor's share

Journal entry for Investor profit share and dividends

4: Movement in retained earnings since acquisition

Changes in RE and reserves

Less: pre-acquisition adjustments

Total

Investor's share

Journal entry

5: repeat for following years