Gaming Ltd is a public company listed on the JSE Limited in South Africa. To diversify its business, Gaming Ltd acquired 75% of the ordinary share capital and voting rights of Console Ltd on 1 July 2021. Gaming Ltd had control over Console Ltd in accordance with IFRS 10 Consolidated Financial Statements from that date. The acquisition of Console Ltd also met the definition of ‘acquiring a business’, as defined in IFRS 3 Business Combinations. Both entities have a 30 June financial year-end.
Investment in Console Ltd:
• The consideration paid by Gaming Ltd was as follows:
o A cash consideration of R550 000 was paid on 1 July 2021.
o Gaming Ltd issued 200 of its ordinary shares to the shareholders of Console Ltd. The fair value of the shares was R40 per share on 1 July 2021. The fair value increased to R45 per share on the registration date of the shares on 8 July 2021. Gaming Ltd paid share issue costs of R1 000 directly to the stockbroker on 8 July 2021, which was the registration date of the 200 ordinary shares.
o Gaming Ltd transferred a machine with a carrying amount of R160 000 to Console Ltd on 1 July 2021. The machine had a fair value of R188 000, a remaining useful life of three years and a residual value of R3 000 at that date.
• On 1 July 2021 Console Ltd had a share capital balance of R100 000 (100 000 shares) and retained earnings of R105 000.
• On the acquisition date all the assets and liabilities of Console Ltd were deemed to be fairly valued, except for the following:
o Console Ltd had a secret new game that was researched, planned, and ready for production on 1 July 2021. The future economic benefits from the new game developed are legally protected. The expected useful life of the new game was fifteen years on 1 July 2021 and the fair value was R220 000. Console Ltd did not recognise an asset in its separate financial statements in this regard.
o No additional assets, liabilities, or contingent liabilities were identified at the acquisition date.
The following intragroup transactions took place during the financial year ended 30 June 2023:
o From 1 July 2022, Console Ltd purchased inventory from Gaming Ltd at a cost plus 20%.
o Total intragroup sales recorded by Gaming Ltd for the 2023 financial year amounted to R360 000.
o Included in the closing inventory of Console Ltd on 30 June 2023, was inventory amounting to R65 000 purchased from Gaming Ltd.
• Console Ltd had a retained earnings balance of R205 000 on 1 July 2022.
• Console Ltd’s statement of profit or loss and other comprehensive income for the financial year ended 30 June 2023 showed a profit after tax of R250 000.
• Gaming Ltd declared and paid dividends of R12 000 on 30 June 2023.
• Console Ltd declared and paid dividends of R8 000 on 30 June 2023.
Additional information:
• Gaming Ltd accounts for investments in subsidiaries at cost in its separate financial statements.
• It is the accounting policy of Gaming Ltd to account for property, plant, and equipment using the cost model in accordance with IAS 16 Property, Plant, and Equipment.
• The Gaming Ltd Group provides depreciation on property, plant, and equipment items using the straight-line method over the asset's remaining useful life.
• You may assume that all income tax-related entries have been correctly accounted for in the separate accounting records of Gaming Ltd.
• Gaming Ltd has elected to measure the non-controlling interests of Console Ltd at fair value on the acquisition date. The fair value of the shares of Console Ltd amounted to R20 per share on 1 July 2021.
• Assume a normal Income Tax rate of 28% and a Capital Gains Tax inclusion rate of 80%. Ignore Value Added Tax (VAT) and Dividend Tax.
• None of the companies are considered share traders for income tax purposes or investment entities as defined in IFRS 10 Consolidated Financial Statements.
Using the Excel template provided together with your knowledge on Excel formulas and functions:
• Calculate the consideration transferred by Gaming Ltd in acquiring the 75% shareholding in Console Ltd on 1 July 2021;
(4 marks)
• Calculate the goodwill or gain on bargain purchase price on the acquisition of the 75% shareholding in Console Ltd on 1 July 2021;
(5 marks)
• Prepare the pro forma journal entries necessary to prepare the consolidated financial statements of the Gaming Group for the financial year ended 30 June 2023. Journal narrations are required.
(26 marks)
You are required to complete the Excel template to the best of your ability based on the information and instructions provided. You need to make use of Excel functions as far as possible.
Please note, for the computation of the consideration and goodwill/gain on bargain purchase your own templates may be used, as long as the computation is performed in terms of IFRS.