QUESTION 5 Total 40 marks Smiles Ltd purchased 100% of the shares of Degrees Ltd on 1 July 2019 for $820,000 (cum div). At that date the financial statements of Degrees Ltd showed the following amounts: Share Capital Retained Earnings General Reserve Dividend Payable $600,000 125,000 30,000 20,000 At 1 July 2019 all of the identifiable assets of Degrees Ltd were recorded at fair value except for the following: Carrying Fair Value Amount $50,000 60,000 150,000 220,000 Inventory Machinery (cost $215,000) At 1 July 2019 Degrees Ltd had a contingent liability of $50,000 relating to a lawsuit for damaged goods that had not been recorded in the accounts. This lawsuit was settled in November 2019, and Degrees Ltd was required to pay $44,000 in damages. All of the above inventory was sold by December 2019. The machinery had a further 4-year useful life. Any valuation adjustments are made on consolidation. Additional information: i) During the year, Smiles Ltd sold inventory to Degrees Ltd for $10,000, at a mark-up of 25% on cost. At year end, Degrees Ltd still had 25% of this inventory on hand. ii) On 1 January 2020, Degrees Ltd sold Smiles Ltd an item of plant for $23,000. This plant originally cost Degrees Ltd $25,000 and was written down to $16,000 just before the intragroup sale. Smiles Ltd depreciates plant at the rate of 25% p.a. on cost. iii) During the year ended 30 June 2020 Smiles Ltd charged Degrees Ltd management fees of $12,000. At 30 June 2020, Degrees Ltd had not paid these fees. iv) At 30 June 2020, the balance in the Retained Earnings account for Smiles Ltd was $644,350CR and for Degrees Ltd it was $167,400CR. V At 30 June 2020, Degrees Ltd declared a dividend of $25,000. This dividend was paid in August 2020. vi) The income tax rate is 30%. Requirements: Question 5 continued. a) Prepare the acquisition analysis at 1 July 2019. (6 marks) b) Prepare the journal entries necessary to prepare consolidated financial statements as at 30 June 2020. Show all dates and narrations. (30 marks) Calculate the balance in the Consolidated Retained Earnings account as at 30 June 2020. Show details - descriptions and amounts. (4 marks) QUESTION 5 Total 40 marks Smiles Ltd purchased 100% of the shares of Degrees Ltd on 1 July 2019 for $820,000 (cum div). At that date the financial statements of Degrees Ltd showed the following amounts: Share Capital Retained Earnings General Reserve Dividend Payable $600,000 125,000 30,000 20,000 At 1 July 2019 all of the identifiable assets of Degrees Ltd were recorded at fair value except for the following: Carrying Fair Value Amount $50,000 60,000 150,000 220,000 Inventory Machinery (cost $215,000) At 1 July 2019 Degrees Ltd had a contingent liability of $50,000 relating to a lawsuit for damaged goods that had not been recorded in the accounts. This lawsuit was settled in November 2019, and Degrees Ltd was required to pay $44,000 in damages. All of the above inventory was sold by December 2019. The machinery had a further 4-year useful life. Any valuation adjustments are made on consolidation. Additional information: i) During the year, Smiles Ltd sold inventory to Degrees Ltd for $10,000, at a mark-up of 25% on cost. At year end, Degrees Ltd still had 25% of this inventory on hand. ii) On 1 January 2020, Degrees Ltd sold Smiles Ltd an item of plant for $23,000. This plant originally cost Degrees Ltd $25,000 and was written down to $16,000 just before the intragroup sale. Smiles Ltd depreciates plant at the rate of 25% p.a. on cost. iii) During the year ended 30 June 2020 Smiles Ltd charged Degrees Ltd management fees of $12,000. At 30 June 2020, Degrees Ltd had not paid these fees. iv) At 30 June 2020, the balance in the Retained Earnings account for Smiles Ltd was $644,350CR and for Degrees Ltd it was $167,400CR. V At 30 June 2020, Degrees Ltd declared a dividend of $25,000. This dividend was paid in August 2020. vi) The income tax rate is 30%. Requirements: Question 5 continued. a) Prepare the acquisition analysis at 1 July 2019. (6 marks) b) Prepare the journal entries necessary to prepare consolidated financial statements as at 30 June 2020. Show all dates and narrations. (30 marks) Calculate the balance in the Consolidated Retained Earnings account as at 30 June 2020. Show details - descriptions and amounts. (4 marks)