Question
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:
- 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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started