Question 5 Total 35 marks

On 1 July 2020, IRT Ltd acquired all the issued shares (cum div.) of Fortescue Ltd for $588,000. At this date the equity of Fortescue Ltd consisted of:

Share capital $260,000

Retained earnings 195,000

On 1 July 2020, Fortescue Ltd had recorded a dividend payable of $18,000, which was subsequently paid in July 2020. All of the identifiable assets and liabilities of Fortescue Ltd were recorded at amounts equal to their fair values except for the following:

	Carrying amount	Fair value
Inventory	$300,000	$340,000
Plant (accumulated depreciation of $200,000)	800,000	850,000

Of the inventory on hand at 1 July 2020, only 20% remained unsold by 30 June 2021. The plant on hand at the date of acquisition was expected to have a further useful life of 5 years. The companies in the group use the straight line method of depreciation.

During the 202021 year, the following transactions occurred:

1. IRT Ltd sold inventory to Fortescue Ltd for $50,000 at a profit before tax of $10,000. This inventory had originally cost IRT Ltd $40,000. This inventory was still on hand in the books of Fortescue Ltd at 30 June 2021.
2. IRT Ltd charged Fortescue Ltd management fees of $24,000. This amount was paid by 30 June 2021.
3. On 1 January 2021, IRT Ltd sold furniture to Fortescue Ltd for $40,000, with a gain on sale of $6,000. The furniture was considered to have a further 5-year life.
4. At 30 June 2021, an impairment test was conducted on Fortescue Ltd and this resulted in the recognition of an impairment loss on the goodwill on acquisition of $12,000 (this has no tax effect).
5. At 30 June 2021, the directors of Fortescue Ltd declared a dividend of $13,000. This dividend remained unpaid at the end of the year.
6. The tax rate is 30%.

The following financial information was provided by the companies at 30 June 2021:

	IRT Ltd	Fortescue Ltd
Sales revenue	$162 500	$59 000
Dividend revenue	19 000
Other income	62 500	5 000
Gains on sale of non-current assets	12 500	5 000
Total income	256 500	69 000
Cost of sales	(92 500)	(45 000)
Other expenses	(10 500)	(2 500)
Total expenses	(103 000)	(47 500)
Profit before income tax	153 500	21 500
Income tax expense	(45 000)	(6 500)
Profit for the year	108 500	15 000
Retained earnings (1/7/20)	205 000	195 000
	313 500	210 000
Dividend paid	(10 000)	(6 000)
Dividend declared		(13 000)
Retained earnings (30/6/21)	$303 500	$191 000

2. Prepare the journal entries necessary to prepare consolidated financial statements as at the date of acquisition on 1 July 2020

(Show all workings and narrations)

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