Question
On the 1 July, 2016 Johnson Ltd acquired all the shares in Mason Ltd ( cumulative div. ), for $3,200,000. Equity at that date was:
On the 1 July, 2016 Johnson Ltd acquired all the shares in Mason Ltd (cumulative 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.
- The revalued inventory was all sold in August 2016.
- 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.
- 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:
- 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:
- 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.
- 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:
- Inventory still on hand as at 30 June 2018, was all on sold by Johnson Ltd in August 2018.
- 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.
- 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.
- 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.
- During 2019 Johnson Ltd provided management consulting services to Mason Ltd. The amount due as at 30 June was $115,000.
- Johnson Ltd recognises dividends when declared.
- 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) | (350,000) |
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 payables | 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:
- Determine the gain on bargain purchase or goodwill as at acquisition date.
- Prepare the consolidation journal entries for Johnson Ltd immediately after acquisition on 1 July 2016.
- Prepare the consolidation journal entries for Johnson Ltd as at 30 June 2017.
- Prepare the pre-acquisition entries only as at 30 June 2018.
- Prepare the consolidation journal entries for Johnson Ltd as at 30 June 2019.
- Prepare the consolidation worksheet for the preparation of the consolidated financial statements for the year ended 30 June 2019.
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