QUESTION 5 Total 40 marks

Smiles Ltd purchased 100% of the shares of Degrees Ltd on 1 July 2019 for $820,000 (cumul div). At that date the financial statements of Degrees Ltd showed the following amounts:

Share Capital	$600,000
Retained Earnings	125,000
General Reserve	30,000
Dividend Payable	20,000

At 1 July 2019 all of the identifiable assets of Degrees Ltd were recorded at fair value except for the following:

	Carrying Amount	Fair Value
Inventory	$50,000	60,000
Machinery (cost $215,000)	150,000	220,000

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%.

Required:

a)	Prepare the journal entries necessary to prepare consolidated financial statements as at 30 June 2020. Show all dates and narrations.	(30 marks)