Question 2 [35 marks] Topic 2: Consolidation: Intra-group transactions On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders equity of Sing Song Ltd consisted of share capital $120,000; general reserve $25,000 and retained earnings $55,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values, except for the following assets: Carrying amount Fair value $ $ Land 100,000 130,000 Inventories 78,500 86,100 Machinery (cost $86,000) 52,000 56,000 Vehicles (cost $58,000) 47,000 53,000 The assets of Sing Song Ltd at acquisition date included goodwill recorded at $15,000 arising from a business combination transaction in 2011. As at the date of acquisition, the vehicles and machinery were expected to have a further useful life of 6 and 8 years respectively, with benefits to be received evenly over those periods. Inventories on hand on 1 July 2015 was all sold by 31 January 2016. The land owned at 1 July 2015 was sold in September 2016 for $150,000. The machinery on hand at 1 July 2015 was sold on 1 January 2018 for $38,000. Adjustments for the differences between carrying amount and fair values of assets and liabilities on hand at acquisition date are recognised on consolidation. When assets are sold or derecognised, any related valuation reserves are transferred to retained earnings. At 1 July 2015, Sing Song Ltd owned but had not recorded an internally generated brand name, an identifiable asset included as part of the business combination transaction. This brand name was considered by Ping Pong Ltd to have a fair value of $29,000 and an indefinite useful life. An impairment test conducted with respect to the brand name on 30 June 2018 concluded that its recoverable amount at that date was $2,000 less than its carrying amount. In June 2017, Sing Song Ltd paid a share dividend worth $20,000 from the general reserve on hand at 1 July 2015. The trial balances of both companies at 30 June 2018 showed the following balances: Ping Pong Ltd Sing Song Ltd Dr ($) Cr ($) Dr ($) Cr ($) Sales revenue 450,000 320,000 Dividend revenue 17,000 - Other income 11,400 17,000 Proceeds on sale of equipment 18,000 - Proceeds on sale of machinery - 38,000 Cost of sales 210,000 192,550 Income tax expense 30,000 32,000 Depreciation and other expenses 39,000 36,000 Carrying amount of equipment sold 21,000 - Carrying amount of machinery sold - 30,500 Dividend paid 10,000 5,000 Dividend declared 20,000 12,000 Transfer to general reserve 10,000 5,000 Share capital 200,000 140,000 General reserve 35,000 10,000 Retained earnings (1 July 2017) 51,300 67,500 Accounts payable 69,500 36,000 Loan payable (due 30 June 2022) 25,000 15,000 Dividend payable 20,000 12,000 Provisions 12,500 9,300 Current tax liability 43,000 34,000 Deferred tax liability 11,800 5,000 Accumulated depreciation-vehicles 16,400 60,000 Accumulated depreciation-equipment - 34,500 8%Debentures (matures 30 June 2021) 25,000 - Cash 2,500 1,250 Receivables 27,000 13,000 Inventories 39,700 24,500 Other current assets 15,200 8,200 Deferred tax assets 7,500 3,500 Vehicles 88,000 158,000 Equipment - 42,000 Land 140,000 180,000 Financial assets 68,000 14,800 Goodwill 28,000 15,000 Shares in Sing Song Ltd 250,000 - Debentures in Ping Pong Ltd - 25,000 1,005,900 1,005,900 798,300 798,300 Additional information: On 1 January 2018, Ping Pong Ltd sold an item of equipment to Sing Song Ltd for $18,000. The equipment had a carrying amount at the date of sale of $21,000. Both companies depreciate equipment at 20% on a straight line basis. On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for $7,800. The machine had a carrying amount of $7,000 at the date of sale. Ping Pong Ltd recorded the machine as inventories. The inventories item was sold to an external party in November 2017 for $8,200. All interests on the 8% debentures has been paid and brought to account in the records of both companies. During the 2017-2018 financial year, Ping Pong Ltd sold inventories to Sing Song Ltd for $75,000. The cost of these inventories to ping pong Ltd was $70,000. Of these inventories, 25% is still on hand at 30 June 2018. The transfer to the general reserve recorded by Sing Song Ltd in the current year was from retained earnings recorded at 1 July 2015. The tax rate is 30%. Required: Prepare an acquisition analysis. Prepare the consolidation worksheet entries necessary to prepare the consolidated financial statements for the year ending 30 June 2018 for the group comprising Ping Pong Ltd and Sing Song Ltd. Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements. Question 2 Max. marks allocated Acquisition analysis 5 Consolidation entries for part (1) 28 Presentation 2 Total 35 Rationale back to top This assessment task will assess the following learning outcome/s: be able to explain the relationships that exist between a parent company and its subsidiary(ies), an investor and its investee, a company and its overseas subsidiaries. be able to prepare accounts for each of the above-mentioned business combinations in accordance with relevant professional and statutory reporting requirements. Marking criteria and standards back to top