Question 3 (30 Marks)

On 1 July 2013, Samwell Ltd acquired 100% of the share capital of Gilly Ltd (cum div) for $810,000. Gilly Ltd's balance sheet on acquisition date included:

Dividend payable

$10,000

Retained earnings

200,000

Share capital

500,000

General reserve

50,000

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

Carrying amount

Fair value

Inventory

$34,000

$40,000

Land

67,000

75,000

Contingent liability

-

10,000

Buildings (Cost $96,000)

67,200

78,000

Additional Information:

a) The dividend payable at acquisition date was subsequently paid in August 2013.

b) The revalued inventory was sold during the year ended 30 June 2014.

c) The contingent liability identified on the acquisition of Gilly Ltd still existed at 30 June 2017.

d)The revalued land was sold during the year ended 30 June 2017 for $42,000.

e)The revalued buildings were still held at 30 June 2017 being depreciated on the straight line basis at 10% p.a.

f) Since acquisition, goodwill has been impaired by $4,000. $1,500 of this impairment occurred during the year ended 30 June 2017.

g) Of the management fee revenues earned by Samwell Ltd during the year ended 30 June 2017, $12,000 was collected from Gilly Ltd.

h) Gilly Ltd's inventory balance at 1 July 2016 included an item previously purchased from Samwell Ltd. This inventory had been sold by Samwell Ltd to Gilly Ltd at a profit of $4,000.

i) During the year ended 30 June 2017, Gilly Ltd sold a quantity of inventory to Samwell Ltd for $18,000. This inventory had originally cost Gilly Ltd $12,000 with 25% of this inventory still being held by Samwell Ltd at 30 June 2017.

j) All dividends paid/declared by Samwell Ltd during the year ended 30 June 2017 was from post-acquisition profits.

k) Financial statements for the year ended 30 June 2017 are reproduced below:

Samwell Ltd

Gilly Ltd

Sales

$5,220,000

$2,670,000

Cost of goods sold

(4,070,000)

(2,210,000)

Gross profit

1,150,000

460,000

Dividend revenue

92,000

-

Interest revenue

-

20,000

Management fees revenue

25,000

-

Other income

30,000

-

Depreciation expense

(180,000)

(86,000)

Finance costs

(91,000)

(35,000)

Other expenses

(284,000)

(33,000)

Profit before income tax

742,000

326,000

Income tax expense

(202,000)

(88,000)

Profit after tax

540,000

238,000

Retained earnings at (01/07/16)

695,000

322,000

Interim dividend paid

(70,000)

(32,000)

Final dividend declared

(140,000)

(60,000)

Retained earnings at (30/06/17)

1,025,000

468,000

Share capital

800,000

500,000

General reserve

210,000

50,000

Total equity

2,035,000

1,018,000

Trade and other payables

413,000

137,000

Dividend payable

140,000

60,000

Loan from Gilly Ltd

(8% per year, interest payable 31 December)

250,000

-

Mortgage loan

1,453,000

401,000

Deferred tax liabilities

90,000

-

Total liabilities

2,346,000

598,000

Total liabilities and equity

4,381,000

1,616,000

Cash

194,000

115,000

Trade and other receivables

72,000

35,000

Dividends receivable

60,000

-

Inventory

750,000

440,000

Land

770,000

250,000

Buildings

1,500,000

780,000

Accumulated depreciation buildings

(320,000)

(494,000)

Plant and equipment

790,000

450,000

Accumulated depreciation plant and equipment

(235,000)

(210,000)

Investment in Gilly Ltd

800,000

-

Loan to Samwell Ltd

(8% per year, interest payable 31 December)

-

250,000

Total Assets

4,381,000

1,616,000

Required:

1. Determine the gain on bargain purchase or goodwill as at acquisition date.(2 marks)

2. Prepare the consolidation journal entries for Samwell Ltd immediately after acquisition on 1 July 2013.(6 marks)

3. Prepare the consolidation journal entries for Samwell Ltd as at 30 June 2017.(14 marks)

4.Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Samwell Ltd as at 30 June 2017.(8 marks)

(Source: adapted fromArthur, N., Luff, L., Keet, P. Accounting for corporate combinations and associations (7e), Pearson Education, Australia.)

Marking Guide - Question 3

Max. marks awarded

1)

Acquisition analysis with workings

2

2)

Consolidation journal entries provided immediately after acquisition date

6

3)

Consolidation journal entries provided as at 30 June 2017

14

4)

Consolidation worksheet

8

Total

30

Question 3 (30 Marks) On 1 July 2013, Samwell Ltd acquired 100% of the share capital of Gilly Ltd (cum div) for $810,000. Gilly Ltd's balance sheet on acquisition date included: Dividend payable Retained earnings Share capital General reserve $10,000 200,000 500,000 50,000 At acquisition date, all of Gilly Ltd's net assets were recorded at fair value except for: Inventory Land Contingent liability Buildings (Cost $96,000) Carrying amount $34,000 67,000 67,200 Fair value $40,000 75,000 10,000 78,000 Additional Information: a) The dividend payable at acquisition date was subsequently paid in August 2013. b) The revalued inventory was sold during the year ended 30 June 2014. c) The contingent liability identified on the acquisition of Gilly Ltd still existed at 30 June 2017. d) The revalued land was sold during the year ended 30 June 2017 for $42,000. e) The revalued buildings were still held at 30 June 2017 being depreciated on the straight line basis at 10% p.a. f) Since acquisition, goodwill has been impaired by $4,000. $1,500 of this impairment occurred during the year ended 30 June 2017. g) Of the management fee revenues earned by Samwell Ltd during the year ended 30 June 2017, $12,000 was collected from Gilly Ltd. h) Gilly Ltd's inventory balance at 1 July 2016 included an item previously purchased from Samwell Ltd. This inventory had been sold by Samwell Ltd to Gilly Ltd at a profit of $4,000. i) During the year ended 30 June 2017, Gilly Ltd sold a quantity of inventory to Samwell Ltd for $18,000. This inventory had originally cost Gilly Ltd $12,000 with 25% of this inventory still being held by Samwell Ltd at 30 June 2017. j) All dividends paid/declared by Samwell Ltd during the year ended 30 June 2017 was from postacquisition profits. k) Financial statements for the year ended 30 June 2017 are reproduced below: Samwell Ltd Gilly Ltd Sales Cost of goods sold Gross profit Dividend revenue Interest revenue Management fees revenue Other income Depreciation expense Finance costs Other expenses Profit before income tax Income tax expense Profit after tax Retained earnings at (01/07/16) Interim dividend paid Final dividend declared Retained earnings at (30/06/17) Share capital General reserve Total equity Trade and other payables Dividend payable Loan from Gilly Ltd (8% per year, interest payable 31 December) Mortgage loan Deferred tax liabilities Total liabilities Total liabilities and equity Cash Trade and other receivables Dividends receivable Inventory Land Buildings Accumulated depreciation buildings Plant and equipment Accumulated depreciation plant and equipment Investment in Gilly Ltd Loan to Samwell Ltd (8% per year, interest payable 31 December) Total Assets $5,220,000 (4,070,000) 1,150,000 92,000 25,000 30,000 (180,000) (91,000) (284,000) 742,000 (202,000) 540,000 695,000 (70,000) (140,000) 1,025,000 800,000 210,000 2,035,000 413,000 140,000 $2,670,000 (2,210,000) 460,000 20,000 (86,000) (35,000) (33,000) 326,000 (88,000) 238,000 322,000 (32,000) (60,000) 468,000 500,000 50,000 1,018,000 137,000 60,000 250,000 1,453,000 90,000 2,346,000 4,381,000 194,000 72,000 60,000 750,000 770,000 1,500,000 (320,000) 790,000 (235,000) 800,000 401,000 598,000 1,616,000 115,000 35,000 440,000 250,000 780,000 (494,000) 450,000 (210,000) - 4,381,000 250,000 1,616,000 Required: 1. Determine the gain on bargain purchase or goodwill as at acquisition date. (2 marks) 2. Prepare the consolidation journal entries for Samwell Ltd immediately after acquisition on 1 July 2013. (6 marks) 3. Prepare the consolidation journal entries for Samwell Ltd as at 30 June 2017. (14 marks) 4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Samwell Ltd as at 30 June 2017. (8 marks) (Source: adapted from Arthur, N., Luff, L., Keet, P. Accounting for corporate combinations and associations (7e), Pearson Education, Australia.) Marking Guide - Question 3 1) Acquisition analysis with workings 2) Consolidation journal entries provided immediately after acquisition date 3) Consolidation journal entries provided as at 30 June 2017 4) Consolidation worksheet Total Max. marks awarded 2 6 14 8 30