Question
Topic 2: Consolidation: Intra-group transactions On 1 July 2016, Pandora Ltd acquired all the issued shares of Sebastian Ltd. Pandora Ltd paid $30,000 in cash
Topic 2: Consolidation: Intra-group transactions
On 1 July 2016, Pandora Ltd acquired all the issued shares of Sebastian Ltd. Pandora Ltd paid $30,000 in cash and 20,000 shares in Pandora Ltd valued at $3 per share. At this date, the equity of Sebastian Ltd consisted of $66,000 share capital and $6,000 retained earnings.
At 1 July 2016, all the identifiable assets and liabilities of Sebastian Ltd were recorded at amounts equal to their fair values except for:
The plant was considered to have a further 5-year life. The patents were sold for $120,000 to an external entity on 18 August 2016. The inventory was all sold by 30 June 2017.
Additional information:
(a) Pandora Ltd sells certain raw materials to Sebastian Ltd to be used in its manufacturing process. At 1 July 2017, Sebastian Ltd held inventory sold to it by Pandora Ltd in the previous year at a profit of $600. During the 2017/2018 year, Pandora Ltd sold inventory to Sebastian Ltd for $21,000. None of this was on hand at 30 June 2018.
(b) Sebastian Ltd also sells items of inventory to Pandora Ltd. During the 2017/2018 year, Sebastian Ltd sold goods to Pandora Ltd for $4,500. At 30 June 2018, inventory which had been sold to Pandora Ltd at a profit of $300 was still on hand in Pandora Ltds inventory.
(c) On 1 July 2017, Sebastian Ltd sold an item of plant to Pandora Ltd for $15,000. This plant had a carrying amount in the records of Sebastian Ltd of $14,000 at time of sale. This type of plant is depreciated at 10% p.a. on cost.
(d) On 1 January 2017, Pandora Ltd sold an item of inventory to Sebastian Ltd for $18,000. The inventory had cost Pandora Ltd $16,000. This item was classified by Sebastian Ltd as plant. Plant of this type is depreciated by Sebastian Ltd at 20% p.a.
(e) On 1 March 2018, Sebastian Ltd sold an item of plant to Pandora Ltd. Whereas Sebastian Ltd classified this as plant, Pandora Ltd classified it as inventory. The sales price was $9,000 which included a profit to Sebastian Ltd of $1,500. Pandora Ltd sold this to another entity on 31 March 2018 for $9,900.
(f) The tax rate is 30%.
At 30 June 2018, the following financial information was provided by the two companies:
| Pandora Ltd | Sebastian Ltd | |||
| Dr ($) | Cr ($) | Dr ($) | Cr ($) | |
| Sales revenue | 64,500 | 78,000 | ||
| Cost of sales | 30,900 | 46,350 | ||
| Trading expenses | 4,800 | 9,000 | ||
| Office expenses | 7,950 | 4,050 | ||
| Depreciation expenses | 1,800 | 3,900 | ||
| Proceeds on sale of plant | 9,000 | 15,000 | ||
| Carrying amount of plant sold | 7,500 | 14,000 | ||
| Income tax expense | 11,100 | 7,300 | ||
| Share capital | 96,000 | 66,000 | ||
| Retained earnings (1/7/17) | 48,000 | 31,500 | ||
| Current liabilities | 21,100 | 10,500 | ||
| Deferred tax liability | 11,000 | 15,000 | ||
| Plant | 57,000 | 107,250 | ||
| Accumulated depreciation plant | 18,300 | 33,450 | ||
| Intangibles | 12,000 | 11,100 | ||
| Deferred tax assets | 8,100 | 9,450 | ||
| Shares in Sebastian Ltd | 90,000 | 0 | ||
| Inventories | 28,500 | 24,600 | ||
| Receivables | 8,250 | 12,450 | ||
| 267,900 | 267,900 | 249,450 | 249,450 | |
Required:
1. Prepare the acquisition analysis at 1 July 2017.
2. Prepare the consolidation worksheet entries for Patience Ltds group at 1 July 2017.
| Question 1 | Max. marks allocated |
| Acquisition analysis (Part 1) | 5 |
| Consolidation worksheet entries (Part 2) | 14 |
| Presentation | 1 |
| Total | 20 |
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