QUESTION 6 Total 40 marks Fire Ltd purchased 100% of the shares of Sun Ltd on 1 July 2018 for $345,000 (cum div). At that date the financial statements of Sun Ltd showed the following amounts: Share Capital Retained Earnings General Reserve Dividend Payable $210,000 75,000 20,000 10,000 At 1 July 2018 all of the identifiable assets of Sun Ltd were recorded at fair value except for the following: Fair Value Carrying Amount $20,000 75,000 Inventory Plant (cost $95,000) 25,000 100,000 All of the inventory was sold by December 2018. The plant had a further 5-year useful life. Any valuation adjustments are made on consolidation. Financial information for Fire Ltd and Sun Ltd for the period ended 30 June 2019 is shown below. Sales Cost of sales Gross profit Other income Dividend income Total expenses Profit before tax Income tax expense Profit after tax Retained earnings 1/7/18 Fire Ltd $275,000 184,000 91,000 5,000 10,000 106,000 57,500 48,500 12,700 35,800 44,000 79,800 0 15,000 64,800 Sun Ltd $160,400 110,400 50,000 0 0 50,000 23,600 26,400 2,100 24,300 75,000 99,300 3,000 7,000 89.300 Interim dividend paid Final dividend declared Retained earnings 30/6/19 Question 6 is continued on the next page. Question 6 continued. Additional information: i) During the year, Fire Ltd sold $9,000 worth of inventory to Sun Ltd, making a profit of $1,500. At year end, Sun Ltd still had 25% of this inventory on hand. ii) During the year, Fire Ltd charged Sun Ltd $5,000 in management fees. At 30 June 2019, Sun Ltd had not paid for this. iii) On 31 December 2018, Sun Ltd sold Fire Ltd some office furniture for $5,000. This furniture originally cost Sun Ltd $3000 and was written down to $2500 just before the intragroup sale. Fire Ltd depreciates office furniture at the rate of 10% p.a. on cost. iv) At 30 June 2019, an impairment test was conducted on Sun Ltd and this resulted in the recognition of an impairment loss on the goodwill on acquisition of $4,000 (this has no tax effect) v) The income tax rate is 30%. Required: a) Prepare the acquisition analysis at 1 July 2018. (8 marks) b) Prepare the journal entries necessary to prepare consolidated financial statements as at the date of acquisition. (12 marks) c) Prepare the journal entries necessary to prepare consolidated financial statements as at 30 June 2019. (20 marks) Round entries to the nearest dollar. Show dates and narrations. QUESTION 6 Total 40 marks Fire Ltd purchased 100% of the shares of Sun Ltd on 1 July 2018 for $345,000 (cum div). At that date the financial statements of Sun Ltd showed the following amounts: Share Capital Retained Earnings General Reserve Dividend Payable $210,000 75,000 20,000 10,000 At 1 July 2018 all of the identifiable assets of Sun Ltd were recorded at fair value except for the following: Fair Value Carrying Amount $20,000 75,000 Inventory Plant (cost $95,000) 25,000 100,000 All of the inventory was sold by December 2018. The plant had a further 5-year useful life. Any valuation adjustments are made on consolidation. Financial information for Fire Ltd and Sun Ltd for the period ended 30 June 2019 is shown below. Sales Cost of sales Gross profit Other income Dividend income Total expenses Profit before tax Income tax expense Profit after tax Retained earnings 1/7/18 Fire Ltd $275,000 184,000 91,000 5,000 10,000 106,000 57,500 48,500 12,700 35,800 44,000 79,800 0 15,000 64,800 Sun Ltd $160,400 110,400 50,000 0 0 50,000 23,600 26,400 2,100 24,300 75,000 99,300 3,000 7,000 89.300 Interim dividend paid Final dividend declared Retained earnings 30/6/19 Question 6 is continued on the next page. Question 6 continued. Additional information: i) During the year, Fire Ltd sold $9,000 worth of inventory to Sun Ltd, making a profit of $1,500. At year end, Sun Ltd still had 25% of this inventory on hand. ii) During the year, Fire Ltd charged Sun Ltd $5,000 in management fees. At 30 June 2019, Sun Ltd had not paid for this. iii) On 31 December 2018, Sun Ltd sold Fire Ltd some office furniture for $5,000. This furniture originally cost Sun Ltd $3000 and was written down to $2500 just before the intragroup sale. Fire Ltd depreciates office furniture at the rate of 10% p.a. on cost. iv) At 30 June 2019, an impairment test was conducted on Sun Ltd and this resulted in the recognition of an impairment loss on the goodwill on acquisition of $4,000 (this has no tax effect) v) The income tax rate is 30%. Required: a) Prepare the acquisition analysis at 1 July 2018. (8 marks) b) Prepare the journal entries necessary to prepare consolidated financial statements as at the date of acquisition. (12 marks) c) Prepare the journal entries necessary to prepare consolidated financial statements as at 30 June 2019. (20 marks) Round entries to the nearest dollar. Show dates and narrations