Question

On 1 July 2019, Diana Ltd acquired 100% of the issued shares of Charles Ltd for $320 000. At the date of acquisition, the shareholders equity of Charles Ltd consisted of:

$

Share capital 200 000

General reserve 50 000

Retained earnings 30 000

280 000

At 30 June 2023, the accounts of the two companies are presented below.

	Diana Ltd $	Charles Ltd $
Sales	360 000	195 000
Cost of goods sold	(230 000)	(120 000)
Gross profit	130 000	75 000
Dividends revenue	14 000	-
Interest revenue	3 000	5 000
	147 000	80 000
Less Expenses
Depreciation	11 000	7 000
Financial expenses	9 000	9 000
Selling expenses	8 000	10 000
Profit before tax	119 000	54 000
Tax expense	48 000	20 000
Profit after tax	71 000	34 000
Retained earnings 1 July 2022	60 000	10 000
	131 000	44 000
Interim dividend paid	10 000	6 000
Final dividend proposed	30 000	10 000
Retained earnings 30 June 2023	91 000	28 000

Statement of financial position	Diana Ltd $	Charles Ltd $
Shareholders equity
Retained earnings	91 000	28 000
Share capital	350 000	200 000
General reserve	30 000	50 000
Liabilities
Accounts payable	45 000	5 000
Dividend payable	30 000	10 000
Accrued interest Diana Ltd	-	1 000
Loan Diana Ltd	-	40 000
Other liabilities	40 000	10 000
	586 000	344 000
Assets
Cash at bank	2 000	1 000
Deposits		65 000
Inventory	40 000	30 000
Interest receivable	1 000	-
Loan Charles Ltd	40 000
Investment in Charles Ltd	320 000
Plant and equipment	110 000	180 000
Accumulated depreciation	(45 000)	(40 000)
Land and buildings	120 000	102 000
Accumulated depreciation	(5 000)	(14 000)
Other assets	3 000	20 000
	586 000	344 000

Additional information:

• The identifiable net assets of Charles ltd were recorded at fair value at the date of acquisition.
• In applying the impairment test for goodwill in the current year, the directors have determined that a write-down of $10 000 is required for consolidation purposes. The cumulative goodwill impairment write-downs for prior years amounted to $15 000.
• An item of plant and equipment owned by Charles (cost $30 000 and accumulated depreciation of $15 000) was sold to Diana Ltd for $13 000 on 1 July 2020. Charles depreciated the asset at 10% per annum straight-line on original cost (assuming a 10-year economic life). Diana, assuming a further economic life for the plant and equipment of five years from its date of acquisition, has applied a depreciation rate of 20% straight-line from the date of transfer of the asset.
• The opening inventory of Charles Ltd includes unrealised profit of $2 000 on inventory transferred from Diana Ltd during the prior financial year. All of this inventory was sold by Charles Ltd to parties external to the group during the year ended 30 June 2023.
• During the current financial year, Charles Ltd purchased inventory from Diana Ltd for $30 000. The inventory had previously cost Diana Ltd $24 000. One-third of this inventory was sold to outsiders by Charles during the year.
• Charles Ltd borrowed $40 000 from Diana Ltd during the financial year. Charles paid $2 000 interest on this loan during the year. In addition, a further $1 000 in interest has been recognised as an accrued expense in Charles Ltds accounts and as interest receivable in Diana Ltds accounts. Interest expense is included in Charles Ltds accounts under the financial expenses heading.
• On 15 July 2022, Charles Ltd paid a final dividend of $8 000 to Diana Ltd from profits for the prior financial year.
• Charles also paid an interim dividend of $6 000 to Diana Ltd on 1 February 2023. In addition, Charles Ltd has provided for a final dividend amounting to $10 000. Diana Ltd has not recognised this dividend as a receivable prior to receipt.
• The tax rate is 30%.

Required

1. Prepare an acquisition analysis.

2. Prepare the consolidation journal entries necessary to prepare consolidated accounts for the year ending 30 June 2023 for the group comprising Diana Ltd and Charles Ltd.

3. Prepare the consolidation worksheet for the preparation of the consolidated financial statements for the period ended 30 June 2023.

4. Why is it important to identify intragroup transactions as current or previous period transactions?

5. In what circumstances is a tax-effect adjustment required when making an adjustment for an intragroup transaction? Provide two examples of intragroup transactions that would require a tax-effect adjustment and one example of an intragroup transaction that would not require a tax-effect adjustment.