Question 3 (30 marks) On 1 August 2018, Erik Ltd acquired 10% of the shares in Finn Ltd for $8 000. Erik Ltd used the fair value method to measure this investment with movements in fair value being recognised in profit or loss. At 1 July 2019, the fair value of this investment was $15 400. The original investment in Finn Ltd was due to the fact that Finn Ltd was undertaking research into particular microbiological elements that could influence the profitability of Erik Ltd. With the continuing success of this research, Erik Ltd decided to acquire the remaining shares (cum div.) in Finn Ltd. On 1 July 2019, Erik Ltd made an offer to buy the remaining shares in Finn Ltd for $151 000 cash. This offer was accepted by the shareholders of Finn Ltd. On 1 July 2019, immediately after the business combination, the statement of financial position of Finn Ltd was as follows: Share capital General reserve Retained earnings Total equity Eric Ltd Finn Ltd $130,000 $90,000 56,500 12,000 93,500 36,000 280,000 138,000 Dividend payable 25,000 12,600 Other liabilities 75.000 25.000 Total liabilities 100,000 37.600 Total equity and liabilities 380,000 175,600 Cash 11,000 20,600 Receivables 25,200 20,000 Other assets 10,000 8,000 Shares in Finn Ltd 153,800 0 Inventory 55,000 42,000 Plant and equipment 210,000 107,000 Accumulated depreciation (85,000) (22,000) Total assets 380,000 175,600 On analysing the financial statements of Finn Ltd, Erik Ltd determined that all the assets and liabilities recorded by Finn Ltd were shown at amounts equal to their fair values except for: Plant and equipment (cost $46 000) Inventory Carrying amount $35 000 42 000 Fair value $43 000 46 000 The plant and equipment is expected to have a further 4-year life and is depreciated on a straight-line basis. The inventory was all sold by 30 June 2020. Finn Ltd had expensed all the outlays on research and development. Erik Ltd placed a fair value of $12 000 on this asset. Finn Ltd also had reported a contingent liability at 30 June 2019 in relation to claims by customers for damaged goods. Erik Ltd placed a fair value of $3 000 on these claims. The research and development is amortised evenly over a 10-year period. The claims by customers were settled in May 2020 for $2 800. The company tax rate is 30%. REQUIRED: A. Prepare the acquisition analysis of Erik Ltd at acquisition date of 1 July 2019. B. Prepare the consolidation worksheet entries at 1 July 2019 C. Complete the attached consolidation worksheet at 1 July 2019. D. Prepare the consolidation worksheet journals at 30 June 2020 (5 marks) (10 marks) (5 marks) (10 marks) Erik Ltd Cash 11 000 Finn Ltd 20 600 Adjustments Group Dr Cr Receivables 25 200 20 000 Other assets 10 000 8 000 Inventory Shares in Finn Ltd Plant Accum depreciation 55 000 153 800 42 000 0 210 000 107 000 (85 000) (22 000) 380 000 175 600 Dividend payable Other liabilities 25 000 75 000 12 600 25 000 Share capital 130 000 Retained earnings 93 500 General reserve 56 500 90 000 36 000 12 000 Business combination valuation reserve 380 000 175 600