On the 1 July, 2016 Johnson Ltd acquired all the shares in Mason Ltd (cum div.), for $3,200,000. Equity at that date was:

	$
Share Capital	1,750,000
General Reserve	700,000
Retained Earnings	900,000
Dividend Payable	80,000

At acquisition date, all the identifiable assets and liabilities of Mason Ltd were recorded at amounts equal to fair value except for:

	Carrying Amount	Fair Value
	$	$
Inventory	900,000	950,000
Land	1,400,000	1,600,000
Plant (accumulated depreciation $1,260,000)	2,340,000	2,210,000

Johnson Ltd also identified a $75,000 contingent liability for a pending court ruling on patent infringements, which was recognised as a provision for consolidation purposes. Additional information regarding the acquired assets and liabilities. 1. The revalued inventory was all sold in August 2016. 2. The plant had a remaining useful life of 13 years and was still retained as at 30 June 2019. Depreciation is calculated on a straight-line basis. 3. Mason Ltd settled the patent infringement case on 25 January 2019 for $90,000. Additional information regarding the intragroup transactions. Transactions for the financial year 2016-2017: a. On 31 March 2017, Johnson Ltd sold machinery, with a carrying value of $435,000, to Mason Ltd for $471,250. The plant, which had a useful life of ten years, was purchased for $600,000. The remaining useful life of the plant was seven years and three months (7.25 years). Transactions for the financial year 2017-2018: a. Mason Ltd sold Inventory to Johnson Ltd for $17,000, which included a mark-up of 25%. As of 30 June 2018, 40% of that inventory was still held by Johnson Ltd. b. Johnson Ltd sold some plant, with a carrying amount of $12,000, to Mason Ltd for $8,000 on 31 December 2017. The remaining useful life of the plant was six years. Transactions for the financial year 2018-2019: a. Inventory still on hand as at 30 June 2018, was all on sold by Johnson Ltd in August 2018. b. Inventory worth $90,000 that was sold by Johnson Ltd to Mason Ltd for $120,000 during June 2019 was still on hand as at 30 June 2019. c. Mason Ltd also sold Johnson Ltd inventory for $55,000, at a mark-up of 25%. Only 20% of that inventory had been sold outside the group by 30 June 2019. d. On 1 October 2018 Johnson Ltd provided Mason Ltd with a loan for $200,000, on an interest-only basis for two years. The interest rate applicable to the loan was 5% per year. Interest is due on the last day of each quarter and paid by the 15th of the following month. Loan repayments will not commence until 2020. e. During 2019 Johnson Ltd provided management consulting services to Mason Ltd. The amount due as at 30 June was $115,000. f. Johnson Ltd recognises dividends when declared. g. Both Johnson Ltd and Mason Ltd revalued post-acquisition equipment assets as at 30 June 2018.

The tax rate for the entities is 30%, and all depreciation is on a straight-line basis. A consolidation worksheet has been partially prepared using the 30 June 2019 draft trial income statement and statement of financial position of Johnson Ltd and Mason Ltd as follows:

	Johnson Ltd	Mason Ltd
Sales Revenue	4,200,000	1,400,000
Cost of goods sold	(1,750,000)	(490,000)
Other operating expenses	(210,000)	(105,000)
Other revenue	245,000	87,500
Operating Profit	2,485,000	892,500
Income tax expense	(700,000)	(750,000)
Profit after tax	1,785,000	542,500
Retained Earnings - 1 July 2018	3,500,000	1,200,000
Dividend paid	(300,000)	(60,000)
Dividend declared	(400,000)	(80,000)
Retained earnings - 30 June 2019	4,585,000	1,602,500
Share Capital	14,000,000	1,750,000
Asset revaluation surplus	35,000	10,500
General Reserve		900,000
Total Equity	18,620,000	4,263,000
Current Liabilities
Trade and other payable	350,000	297,500
Non-current liabilities
Deferred tax liability	130,000	24,500
Loans	2,100,000	375,000
Loan from Johnson Ltd		200,000
Total non-current liabilities	2,230,000	599,500
Total Liabilities	2,580,000	897,000
Total Liabilities and Equity	21,200,000	5,160,000
Current Assets
Cash	925,000	87,500
Trade and other receivables	535,500	219,000
Impairment - trade receivables	(10,500)	(6,500)
Inventory	2,100,000	985,000
Total current assets	3,550,000	1,285,000
Non-current assets
Land	5,340,000	1,400,000
Plant	11,466,000	4,079,000
Accumulated depreciation - Plant	(3,276,000)	(1,944,000)
Equipment	615,000	207,000
Accumulated depreciation - Equipment	(165,000)	(42,000)
Loan to Mason Ltd	200,000
Investment in Mason Ltd	3,120,000
Deferred tax asset	350,000	175,000
Total non-current assets	17,650,000	3,875,000
Total assets	21,200,000	5,160,000

Required: 1. Determine the gain on bargain purchase or goodwill as at acquisition date. (4 marks) 2. Prepare the consolidation journal entries for Johnson Ltd immediately after acquisition on 1 July 2016. (10 marks) 3. Prepare the consolidation journal entries for Johnson Ltd as at 30 June 2017. (17 marks) 4. Prepare the pre-acquisition entries only as at 30 June 2018. (5 marks) 5. Prepare the consolidation journal entries for Johnson Ltd as at 30 June 2019. (34 marks) 6. Prepare the consolidation worksheet for the preparation of the consolidated financial statements for the year ended 30 June 2019. (20 marks)

Expert Answer