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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

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:

  1. The inventory was all sold by 30 June 2018.
  2. The land was sold on 1 February 2018 for $75,000.
  3. The plant was considered to have a further 5-year life. The plant was sold for $77,500 on 1 January 2019.
  4. 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).
  5. 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.
  6. 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.
  7. 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.
  8. 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:

  1. Prepare the acquisition analysis at 1 July 2017.
  2. Prepare the consolidation worksheet entries for Positive Ltds group at 30 June 2019.
  3. Prepare the consolidation worksheet for Positive Ltds group at 30 June 2019.

Note: you are not required to prepare the consolidation financial statements.

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