Question A

i) John Ltd sold items of inventory during the current financial year to

its wholly owned subsidiary, McClane Ltd for $20,000. The items previously cost John Ltd $18,000 and McClane Ltd subsequently sold 60% of the items to external parties. The tax rate is 30%. Prepare the adjusting entries at the end of the period (including the tax effect on any unrealized profit or losses)

ii) On 1 July 2006 Squiggle Ltd acquired 80% of the share capital of

Blackboard Ltd for $ 91,200 when the equity of Blackboard Ltd

consisted of:

Share capital $ 80,000

General reserve 4,000

Retained earnings 4,500

At the acquisition date, all the identifiable assets and liabilities of Blackboard Ltd were recorded at fair value except for plant and inventory:

Carrying amount Fair value

Plant (Cost $125,000) 90,000 100,000

Inventory 20,000 25,000

The tax rate is 30%.

Required:

a) Prepare business combination valuation journal entries.

b) Prepare an acquisition analysis.

c) Prepare pre acquisition journal entries.

Question B

AUST MINING Ltd commences operations on 1 January 2010; during 2010 AUST MINING Ltd explores three areas and incurs the following exploration and evaluation expenditures:

Area West 60 Million

Area North 80 Million

Area South 50 Million

In 2011 oil is discovered at Area North site. Area South site is abandoned. Area West site has not yet reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in the area of interest are continuing. In relation to the exploration and evaluation expenditures incurred at Area North and West sites, 85% of the expenditures relate to property, plant and equipment and the balance relates to intangible assets.

In 2011 development costs of $64 million are incurred at Area North site (to be written off on production basis). $52 million of this expenditure relates to property, plant and equipment and the balance relates to intangible assets. Area North site is estimated to have a capacity of 20 million barrels. The current sale price is $55 per barrel. 5 million barrels are extracted at a production cost of $30 million and 4 million barrels are sold.

Required:

Provide the necessary journal entries (including relevant narrations) using area of interest method.

Question C

Big Al Ltd owns 100 per cent of Little Cam Ltd. On 1 July 2017 Big Al Ltd sells an item of plant to Little Cam Ltd for $3.8 million. This plant cost Big Al Ltd $4.4 million and had accumulated depreciation of $1.5 million at the date of the sale. The remaining useful life of the plant is assessed as 12 years and the tax rate is 30 per cent.

Required :

Provide the consolidation journal entries for 30 June 2018 and 30 June 2019 to adjust for the above sale