Topic 1: Consolidation: Principles and accounting requirements On 1 July 2017, Positive Ltd acquired all the issued shares of Smart Ltd for $123,000. At the date of acquisition, the shareholders equity of Smart Ltd was as follows. $ Share capital 65,000 General reserve 25,000 Retained earnings 20,250 Total 110,250 All the assets and liabilities of Smart Ltd were recorded at amounts equal to their fair values at the acquisition date, except for some assets detailed below. Carrying amount Fair value $ $ Plant (cost $115,000) 100,000 105,000 Land 50,000 60,000 Inventories 15,000 19,000 Additional information: The inventory was all sold by 30 June 2018. The land was sold on 1 February 2018 for $75,000. The plant was considered to have a further 5-year life. The plant was sold for $77,500 on 1 January 2019. At acquisition date Smart Ltd had recorded a dividend payable of $3,500 and goodwill of $2,500 (net of accumulated impairment losses of $6,500). Smart Ltd had not recorded some internally generated brands that Positive Ltd considered to have a fair value of $6,000. The brand was considered to have an indefinite life. An item not recorded by Smart Ltd was a contingent liability relating to a current court case in which Smart Ltd was involved and a supplier was seeking compensation. Positive Ltd placed a fair value of $7,500 on this liability. This court case was settled in May 2019 at which time Smart Ltd was required to pay damages of $8,000. In February 2018, Smart Ltd transferred $10,000 from the general reserve on hand at 1 July 2017 to retained earnings. A further $7,500 was transferred in February 2019. Both companies have an equity account entitled Other components of equity to which certain gains and losses from financial assets are taken. At 1 July 2018, the balances of these accounts were $15,000 (Positive Ltd) and $7,500 (Smart Ltd). The financial statements of the two companies at 30 June 2019 contained the following information: Positive Ltd Smart Ltd $ $ Revenue 45,000 32,000 Expenses 17,000 21,000 Trading profit 28,000 11,000 Gains (losses) on sale of non-current assets 4,000 4,000 Profit before tax 32,000 15,000 Income tax expense 6,000 2,500 Profit for the period 26,000 12,500 Retained earnings 1 July 2018 51,500 27,500 Transfer from general reserve 15,000 7,500 92,500 47,500 Dividend paid 10,000 0 Retained earnings 30 June 2019 82,500 47,500 Share capital 75,000 65,000 General reserve 5,000 10,000 Other components of equity 12,500 9,000 Total equity 175,000 131,500 Accounts payable 20,000 5,000 Deferred tax liability 9,000 5,000 Other non-current liabilities 125,000 115,000 Total liabilities 154,000 125,000 Total equity and liabilities 329,000 256,500 Plant 157,000 233,000 Accumulated depreciation plant (91,000) (110,000) Land 10,000 10,000 Brands 40,000 0 Shares in Smart Ltd 123,000 0 Financial assets 55,000 103,500 Cash 5,000 2,500 Inventories 20,000 15,000 Goodwill 10,000 9,000 Accumulated impairment losses 0 (6,500) Total assets 329,000 256,500 Required: Prepare the acquisition analysis at 1 July 2017. Prepare the consolidation worksheet entries for Positive Ltds group at 30 June 2019. Prepare the consolidation worksheet for Positive Ltds group at 30 June 2019. Note: you are not required to prepare the consolidation financial statements. Question 1 Max. marks allocated Acquisition analysis (Part 1) 4 Consolidation worksheet entries (Part 2) 13 Consolidation worksheet (Part 3) 9 Total 26 Question 2 [14 marks] Topic 2: Consolidation: Intra-group transactions On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders equity of Sing Song Ltd consisted of share capital $150,000; general reserve $20,000 and retained earnings $10,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values at the date of acquisition. At 30 June 2019, four years after acquisition, the accounts of the two companies appear as follows: Ping Pong Ltd Sing Song Ltd $ $ Sales 340,000 140,000 Cost of sales Opening inventory at 1 July 2018 20,000 5,000 Purchases 200,000 73,000 220,000 78,000 Closing inventory 30 June 2019 (25,000) (15,000) Cost of sales 195,000 63,000 Gross profit 145,000 77,000 Depreciation expenses 32,000 23,000 Interest expense 9,000 1,000 Management fee expense - 7,000 Other expenses 43,000 34,000 Total expenses 84,000 65,000 Gross profit less total expenses 61,000 12,000 Other income Dividend revenue 5,000 - Interest revenue - 3,000 Management fee revenue 7,000 - Total other income 12,000 3,000 Operating profit before tax 73,000 15,000 Income tax expense 28,000 5,000 Operating profit after tax 45,000 10,000 Retained earnings 1 July 2018 35,000 5,000 Available for appropriation 80,000 15,000 Interim dividend paid 10,000 2,000 Final dividend proposed 30,000 3,000 Dividends paid and proposed 40,000 5,000 Retained earnings 30 June 2019 40,000 10,000 Share capital 400,000 150,000 General reserve 20,000 30,000 Accounts payable 40,000 20,000 Dividend payable 30,000 3,000 12% unsecured notes 50,000 - Other liabilities 16,000 15,000 596,000 228,000 Assets Accounts receivable 50,000 26,000 Inventory 25,000 15,000 Dividend receivable 3,000 - Unsecured notes Ping Pong Ltd - 25,000 Investment in Sing Song Ltd 200,000 - Other assets 318,000 162,000 596,000 228,000 Additional information: The directors have decided that goodwill should be written off completely, no write-downs for goodwill impairment losses were made in prior years. During the current financial year, Sing Song Ltd paid management fees of $7,000 to Ping Pong Ltd. On 1 June 2019, Ping Pong Ltd sold inventory to Sing Song Ltd for $30,000. All of this inventory has been sold by Sing Song Ltd to parties external to the group during June 2018. This intra-group sale was made on credit terms, and $10,000 remains owing to Ping Pong at 30 June 2018. Sing Song Ltd holds half of the unsecured notes issued by Ping Pong Ltd. Interest at a rate of 12% has been paid on these notes during the year. On 25 January 2019, Sing Song Ltd paid an interim dividend of $2,000 to Ping Pong Ltd. Sing Song Ltd declared a final dividend of $3,000 on 20 June 2019. Ping Pong Ltd has recognised this dividend as a receivable at 30 June 2019. The tax rate is 30%. Required: Prepare an acquisition analysis. Prepare the consolidation worksheet entries necessary to prepare the consolidated financial statements for the year ending 30 June 2019 for the group comprising Ping Pong Ltd and Sing Song Ltd. Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements. Question 2 Max. marks allocated Acquisition analysis 1.5 Consolidation entries 12.5 Total 14