The consolidated financial statements incorporate the financial statements of the subsidiary (Squash Limited) of Pumpkin Limited (Parent) as at the reporting date. Pumpkin Limited and its subsidiary together are referred to in these financial statements as the Group or the consolidated entity. The subsidiary is an entity over which the Parent has control. The Parent controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The subsidiary is included in the consolidated financial statements using the acquisition method of consolidation. It is fully consolidated from the date on which control is transferred to the Parent. The Group recognises non-controlling interest at its proportionate share of subsidiary net identifiable assets.

The Subsidiary, Squash On 31 December 2014, Pumpkin Limited acquired 85% of the shares in Squash Limited.

On that date, the equity of Squash Limited comprised:

Share capital 640,000 Retained earnings 300,000Equity $940,000

At acquisition, the book value of the assets and liabilities of Squash Limited were considered to be at fair value, except that there were brand names (considered to be part of net identifiable assets) that had a book value of zero and where Pumpkin assessed the fair value to be $120,000. There has been no change to assessed value of these brand names since acquisition. At the most recent balance date (31 December 2018), the returns from Squash were not as high as expected. The directors of Pumpkin considered that acquired goodwill had been impaired by $72,000. Tax and Deferred Tax Assume a tax rate of 30% wherever relevant .

Financial statements

Income statement for year end 31 December & Balance sheet as at 31 December 2018

Pumpkin Squash Sales (3,200,000) (1,040,000)

Cost of goods sold 1,600,000 480,000

Operating expenses (incl. Interest & Impairment) 320,000 160,000

Operating profit (1,280,000) (400,000)

Other income (incl. Dividends and Interest) (232,000) (16,000)

Normal profit on merchandise sales was 55% for Pumpkin and 55% for Squash. Tom wants to visualise the impact of these adjustments on the consolidated financial statements. He has therefore asked you to provide him with a spreadsheet showing the consolidation adjustments (in journal form) for the following intra-group transactions during 2018:

1. Pumpkin sold Squash merchandise at a price of $220,000
2. Squash sold Pumpkin merchandise at a price of $120,000
3. $22,000 remained owing by Pumpkin at 31 December 2018 for the merchandise sold to it by Squash.
4. Pumpkins inventories of merchandise (bought from Squash) were:
   1. $42,000 at the beginning of 2018, and
   2. $22,000 at the end of 2018.
5. Squashs beginning and closing inventories (of merchandise bought from Pumpkin) for 2018 were:
   1. Beginning: $32,000, and
   2. Closing: $12,000.
6. The other investment on Pumpkins balance sheet is actually a 10-year loan to Squash.
7. The terms of the 10-year loan to Squash require 5% annual interest payments. The loan was made on 1 January 2018 and interest was paid on 31 December 2018.

Required:

Prepare the consolidation journal entries only for the above intragroup transactions for the year ended 31 December 2018. Please use the template providedIncome

Tax 480,000 160,000

Net Income (1,032,000) (256,000)

Opening Retained earnings (1,440,000) (320,000)

(2,472,000) (576,000)

Dividends paid 800,000 144,000

Closing retained earnings (1,672,000) (432,000)

Share capital (1,600,000) (640,000)

Total equity (3,272,000) (1,072,000)

Accounts Payable (800,000) (360,000)

Non-current liabilities (800,000) (650,000)

Deferred tax (760,000) (30,000)

Total liabilities (2,360,000) (1,040,000)

Total liabilities and equity (5,632,000) (2,112,000)

Cash 80,000 96,000

Accounts Receivable 160,000 240,000

Inventory 160,000 240,000

Other investments 640,000

Investment in Squash (at Cost) 1400,000

Plant (net) 3,192,000 1,536,000

Total assets 5,632,000 2,112,000

Cost of goods sold for 31 December 2018.

Pumpkin Squash

Beginning inventory 120,000 100,000

Purchases 1,640,000 620,000

Ending inventory (160,000) (240,000)

Cost of goods sold 1,600,000 480,000

TEMPLATE #1 #2 #3 #4 #5 #6 #7

Accounts: DR CR DR CR DR CR DR CR DR CR DR CR DR CR

Sales

Beginning inventory

Purchases

Ending inventory

Operating expenses (incl. Interest & Impairment)

Other income (incl. Interest)

Income Tax

Non controlling interest in earnings

Opening Retained earnings

Dividends paid

Closing retained earnings

Share capital

Non-controlling interest

Accounts Payable

Non-current liabilities

Deferred tax

Cash

Accounts Receivable

Inventory

Other investments

Investment in Squash (at Cost)

Brand

Goodwill

Plant (net)