Question 4

On 1 June 2010, Big Farm Limited acquired a hundred percent of the share capital of Small Farm Limited for $581.000. On the day of acquisition all the assets of Small Farm Limited are considered to be fairly valued and the shareholder equity of the company was as follows: Contributed Capital $400,000 Retained Earnings $77,000 Revaluation reserve $64,000 During the financial year ended 31 December 2013, Big Farm Limited made sales to Small Farm Limited amounting to $170,000. Big Farm Limited had always sold goods to Small Farm Limited at a mark-up of 25% on cost. During the financial year ended 31 December 2013 Small Farm Limited sold goods to Big Farm Limited amounting to $64,000. Small Farm Limited had always sold good to Big Farm Limited at a mark-up of 20% on cost. The inventory of Big Farm Limited as at 1 January 2013 consists of items amounting to $83,520 that was purchased from Small Farm Limited. Of the inventory Big Farm Limited has on hand at 31 December 2013, $67,200 was purchased from Small Farm Limited. The inventory of Small Farm Limited as at 31 December 2013 consists of items amounting to $24,000 that was purchased from Big Farm Limited. This was the first year that Small Farm Limited had purchased inventory from Big Farm Limited. For the year ended 31 December 2013 Small Farm Limited paid management fees of $53,000 to Big Farm Limited. For the year ended 31 December 2013 Small Farm Limited paid interim dividends of $30,000 and declared a final dividend of $30,000. There have been no intra-group transfer of non-current assets and no transfers to or from revaluation reserve took place during the year. The directors of Big Farm Limited were of the opinion that an amount of $6,000 of goodwill arising from the acquisition has been impaired during the year ending 31 December 2013. For the previous financial years the impairment of goodwill was $10,000. Big Farm Limited remained the sole owner of Small Farm Limited as at 31 December 2013. Assume income tax rate of 28%.

Required: Prepare notional journal entries (with narrations) o consolidate the financial statements of Big Farm Limited and its wholly owned subsidiary Small Farm Limited for the year ended 31 December 2013.