Question 1: Topic 3 and 4 - Consolidated financial statements, method, acquisition, business combination valuation and intra-group transactions

On 1 July 2017, Old Ltd acquired 100% of the share capital of School Ltd (cum div.) for $920,000. School Ltd's balance sheet on acquisition date included:

Dividend payable$20,000Retained earnings180,000Share capital600,000General reserve40,000

At acquisition date, all of School Ltd's net assets were recorded at fair value except for:

Carrying amountFair valueInventory$32,000$40,000Land62,00075,000Contingent liability-8,000Buildings (Cost $100,000)69,00078,000

Additional Information:

1. The dividend payable at acquisition date was subsequently paid in August 2017.
2. The revalued inventory was sold during the year ended 30 June 2018.
3. The contingent liability identified on the acquisition of School Ltd still existed at 30 June 2020.
4. The revalued land was sold during the year ended 30 June 2020 for $52,000.
5. The revalued buildings were still held at 30 June 2020 being depreciated on the straight-line basis at 15% per year.
6. In May 2018, goodwill was impaired by $1,500. An additional $2,500 impairment occurred during the year ended 30 June 2020.
7. Management fee revenues earned by Old Ltd during the year ended 30 June 2020 were collected from School Ltd.
8. School Ltd's inventory balance at 1 July 2019 included an item previously purchased from Old Ltd. This inventory had been sold by Old Ltd to School Ltd at a profit of $6,500.
9. During the year ended 30 June 2020, School Ltd sold a quantity of inventory to Old Ltd for $12,000. This inventory had originally cost School Ltd $8,000 with 30% of this inventory still being held by Old Ltd at 30 June 2020.
10. All dividends paid/declared by Old Ltd during the year ended 30 June 2020 were from post-acquisition profits.
11. Financial statements for the year ended 30 June 2020 are reproduced below:

Old LtdSchool LtdSales$6,320,000$3,260,000Cost of goods sold(3,060,000)(2,710,000)Gross profit3,260,000550,000Dividend revenue83,000Interest revenue18,000Management fees revenue22,000Other income30,000Loss on sale of land(10,000)Depreciation expense(180,000)(86,000)Finance costs(91,000)(35,000)Other expenses(284,000)(33,000)Profit before income tax2,840,000404,000Income tax expense(202,000)(88,000)Profit after tax2,638,000316,000Retained earnings at (01/07/19)695,000322,000Interim dividend paid(70,000)(22,000)Final dividend declared(140,000)(61,000)Retained earnings at (30/06/20)3,123,000555,000Share capital800,000600,000General reserve210,00040,000Total equity4,133,0001,195,000Trade and other payables413,000137,000Dividend payable140,00061,000Loan from School Ltd (6% per year, interest payable 31 December)300,000Mortgage loan1,453,000401,000Deferred tax liabilities90,000Total liabilities2,396,000599,000Total liabilities and equity6,529,0001,794,000Cash194,000115,000Trade and other receivables72,00035,000Dividends receivable61,000Inventory750,000438,000Land770,000250,000Buildings1,747,000770,000Accumulated depreciation buildings(320,000)(454,000)Plant and equipment2,790,000450,000Accumulated depreciation plant and equipment(435,000)(110,000)Investment in School Ltd900,000Loan to Old Ltd (6% per year, interest payable 31 December)300,000Total assets6,529,0001,794,000

Required:

1. Determine the gain on bargain purchase or goodwill as at acquisition date.
2. Prepare the consolidation journal entries for Old Ltd immediately after acquisition on 1 July 2017.
3. Prepare the consolidation journal entries for Old Ltd as at 30 June 2020.
4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Old Ltd as at 30 June 2020.

Question 2: Topic 3 and 4 (continued) and Topic 5 - Non-Controlling Interest

On 1 July 2018, Bay Ltd paid $236,400 for 60% of the issued shares of Watch Ltd. At this date, the equity of Watch Ltd consisted of:

Share capital (200,000 shares)$200,000General reserve80,000Retained earnings40,000

A comparison of the carrying amounts and fair values of Watch Ltd's assets at the acquisition date showed the following:

Carrying amountFair valueLand$183,000$200,000Plant (cost $150,000)100,000120,000Inventories65,00090,000Accounts receivable40,00035,000Goodwill4,000-

In relation to the accounts, the following information is available:

1. At acquisition date, the plant had a further 5-year life but was sold on 1 January 2020.
2. All the inventories were sold by 30 June 2019.
3. All the accounts receivable were collected by 30 June 2019.

Any valuation reserves arising on consolidation are transferred on realisation of the asset to retained earnings. The general reserve movement was from pre-acquisition equity. Dividends are recognised on declaration.

The following transactions occurred between 1 July 2018 and 30 June 2020:

2019Jan.1Watch Ltd sold an item of plant to Bay Ltd for $18,000, which included a profit of $6,000. The remaining useful life of the plant was 4 years.Jan.7Watch Ltd transferred $20,000 from general reserve to retained earnings.Feb.12Watch Ltd paid an $8,000 dividend.March23Watch Ltd sold inventories to Bay Ltd for $50,000 recording a before-tax profit of $10,000. The tax rate is 30%.June.26Watch Ltd declared a $15,000 dividend.30Watch Ltd recorded a profit after tax of $130,000. One-quarter of the inventories sold by Watch Ltd to Bay Ltd on 23 March 2019 are still on hand with Bay Ltd.

Aug.15The $15,000 dividend declared by Watch Ltd was paid.Sept.21The remaining inventories in Bay Ltd sold to it by Watch Ltd were sold outside the group.2020Jan.1Watch Ltd paid a $16,000 dividend.June30Watch Ltd recorded a profit after tax of $150,000.

Required:

1. Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-Controlling Interest on 1 July 2018 was $150,000.
2. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method