Question 3 10 Marks On 1 July 2015, Yellow Ltd acquired all of the assets and liabilities of Black Ltd. In exchange for these assets and liabilities, Yellow Ltd issued 100,000 shares that at date of issue had a fair value of $10 per share. Costs of issuing these shares amounted to $5,000. Legal costs associated with the acquisition of Black Ltd amounted to $15,000. The asset and liabilities of Black Ltd at 1 July 2015 were as follows: Fair Value Carrying Amount Assets Cash 4,000 Accounts receivable 20,000 Inventory 140,000 Equipment 650,000 Accumulated depreciation - equipment (190,000) Buildings 480,000 Accumulated depreciation - buildings (180,000) 4,000 20,000 135,000 450,000 500,000 Liabilities Accounts payable Debentures (30,000) (120,000) (30,000) (120,000) At 30 June 2015, Black Ltd had reported a contingent liability relating to a guarantee given by Black Ltd to another company. Black Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $59,000. Required (a) Prepare the acquisition analysis at 1 July 2015 for the acquisition of Black Ltd by Yellow Ltd. (3 marks) (b) Prepare the journal entries in the records of Yellow Ltd at 1 July 2015. (7 marks) Question 1 20 Marks Swan Ltd acquired 80% of the shares of Duck Ltd on 1 July 2015 for $330,000 when the equity of Duck Ltd consisted of: Share Capital General Reserve Retained Earnings $300,000 50,000 15,000 All identifiable assets and liabilities of Duck Ltd are recorded at fair value at this date except for the following: Equipment (cost $160,000) Inventory Carrying Amount $80,000 50,000 Fair value $120,000 60,000 The equipment had a further 5-year life with depreciation based on the straight-line method. The inventory was sold by 30 June 2016. Selected financial information for both companies at 30 June 2018 is as follows: Sales revenue Expenses Profit before tax Tax expense Profit for the period Retained earnings at 1/7/17 Swan Ltd $500,000 (450,000) 50,000 (15,000) 35,000 115,000 150,000 (10,000) (20,000) 120,000 350,000 30,000 500,000 Duck Ltd $400,000 (360,000) 40,000 (10,000) 30,000 60,000 90,000 (5,000) (10,000) 75,000 300,000 50,000 425,000 Dividend paid Dividend declared Retained earnings at 30/6/18 Share capital General reserve Total equity Question 1 continued over next page Question 1 (continued) 10,000 15,000 450.000 Dividend payable Other liabilities Total equity and liabilities Shares in Duck Ltd Other assets Total assets 20,000 80,000 600,000 330,000 270,000 600.000 450,000 450.000 The company income tax rate is 30%. Swan Ltd uses the partial goodwill method. The following transactions took place between Swan Ltd and Duck Ltd: During the year ending 30 June 2018, Duck Ltd sold some items of inventory to Swan Ltd for $12,000, recording a profit before tax of $2,000. Swan Ltd has since resold half of these items. . During the year ending 30 June 2018, Swan Ltd sold some items of inventory to Duck Ltd for $20,000, recording a profit before tax of $5,000. Duck Ltd has since resold all this inventory. During the year ending 30 June 2017, Swan Ltd sold some items of inventory to Duck Ltd. At 30 June 2017, Duck Ltd still had some of this inventory on hand on which Swan Ltd had recorded a before-tax profit of $4,000. Duck Ltd has since resold all this inventory. Required (a) Prepare the acquisition analysis and the consolidation worksheet journal entries necessary for the preparation of consolidated financial statements by Swan Ltd on 30 June 2018. (15 marks) (b) Explain the accounting requirements that Swan Ltd would apply to any goodwill recognised in the acquisition of Duck Ltd. You should discuss revaluation, amortisation, impairment, and the reversal of impairment losses. (3 marks) (c) What would be the effect on the acquisition analysis if Swan Ltd already had recognised goodwill of $7,000 in relation to a previous acquisition? (2 marks) Question 3 10 Marks On 1 July 2015, Yellow Ltd acquired all of the assets and liabilities of Black Ltd. In exchange for these assets and liabilities, Yellow Ltd issued 100,000 shares that at date of issue had a fair value of $10 per share. Costs of issuing these shares amounted to $5,000. Legal costs associated with the acquisition of Black Ltd amounted to $15,000. The asset and liabilities of Black Ltd at 1 July 2015 were as follows: Fair Value Carrying Amount Assets Cash 4,000 Accounts receivable 20,000 Inventory 140,000 Equipment 650,000 Accumulated depreciation - equipment (190,000) Buildings 480,000 Accumulated depreciation - buildings (180,000) 4,000 20,000 135,000 450,000 500,000 Liabilities Accounts payable Debentures (30,000) (120,000) (30,000) (120,000) At 30 June 2015, Black Ltd had reported a contingent liability relating to a guarantee given by Black Ltd to another company. Black Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $59,000. Required (a) Prepare the acquisition analysis at 1 July 2015 for the acquisition of Black Ltd by Yellow Ltd. (3 marks) (b) Prepare the journal entries in the records of Yellow Ltd at 1 July 2015. (7 marks) Question 1 20 Marks Swan Ltd acquired 80% of the shares of Duck Ltd on 1 July 2015 for $330,000 when the equity of Duck Ltd consisted of: Share Capital General Reserve Retained Earnings $300,000 50,000 15,000 All identifiable assets and liabilities of Duck Ltd are recorded at fair value at this date except for the following: Equipment (cost $160,000) Inventory Carrying Amount $80,000 50,000 Fair value $120,000 60,000 The equipment had a further 5-year life with depreciation based on the straight-line method. The inventory was sold by 30 June 2016. Selected financial information for both companies at 30 June 2018 is as follows: Sales revenue Expenses Profit before tax Tax expense Profit for the period Retained earnings at 1/7/17 Swan Ltd $500,000 (450,000) 50,000 (15,000) 35,000 115,000 150,000 (10,000) (20,000) 120,000 350,000 30,000 500,000 Duck Ltd $400,000 (360,000) 40,000 (10,000) 30,000 60,000 90,000 (5,000) (10,000) 75,000 300,000 50,000 425,000 Dividend paid Dividend declared Retained earnings at 30/6/18 Share capital General reserve Total equity Question 1 continued over next page Question 1 (continued) 10,000 15,000 450.000 Dividend payable Other liabilities Total equity and liabilities Shares in Duck Ltd Other assets Total assets 20,000 80,000 600,000 330,000 270,000 600.000 450,000 450.000 The company income tax rate is 30%. Swan Ltd uses the partial goodwill method. The following transactions took place between Swan Ltd and Duck Ltd: During the year ending 30 June 2018, Duck Ltd sold some items of inventory to Swan Ltd for $12,000, recording a profit before tax of $2,000. Swan Ltd has since resold half of these items. . During the year ending 30 June 2018, Swan Ltd sold some items of inventory to Duck Ltd for $20,000, recording a profit before tax of $5,000. Duck Ltd has since resold all this inventory. During the year ending 30 June 2017, Swan Ltd sold some items of inventory to Duck Ltd. At 30 June 2017, Duck Ltd still had some of this inventory on hand on which Swan Ltd had recorded a before-tax profit of $4,000. Duck Ltd has since resold all this inventory. Required (a) Prepare the acquisition analysis and the consolidation worksheet journal entries necessary for the preparation of consolidated financial statements by Swan Ltd on 30 June 2018. (15 marks) (b) Explain the accounting requirements that Swan Ltd would apply to any goodwill recognised in the acquisition of Duck Ltd. You should discuss revaluation, amortisation, impairment, and the reversal of impairment losses. (3 marks) (c) What would be the effect on the acquisition analysis if Swan Ltd already had recognised goodwill of $7,000 in relation to a previous acquisition? (2 marks)