` Topics 1 & 2: Consolidation: Principles, accounting requirements and intra-group transactions

On 1 July 2015, Peace Ltd acquired all the shares of Sublime Ltd. At this date, the equity and liability sections of Sublime Ltds statement of financial position comprised of the following items:

	$
Share capital (30 000 shares)	30 000
Retained earnings	10 500
General reserve	15 000
Other reserves	3 000

At acquisition date, all the identifiable assets and liabilities of Sublime Ltd were recorded at amounts equal to fair value except for:

	Carrying amount	Fair value
	$	$
Inventory	25 000	28 000
Equipment (cost $15 000)	12 000	16 000
Machinery (cost $8 500)	7 500	8 000
Land	9 240	12 240

The inventory on hand in Sublime Ltd at 1 July 2015 was sold during September 2015.

The machinery which had a further 5-year life on acquisition date was sold on 1 January 2017. The land on hand at acquisition date was sold by 1 March 2016. The equipment was estimated to have a further 8-year life. Valuation adjustments are made on consolidation and, on realisation of a business combination valuation reserve, a transfer is made to retained earnings on consolidation.

On 30 June 2017, the trial balances of Peace Ltd and Sublime Ltd were as follows:

Debit balances	Peace Ltd	Sublime Ltd
	$	$
Shares in Sublime Ltd	68 600
Inventory	85 790	35 160
Other current assets	4 310	1 550
Deferred tax assets	8 100	3 700
Machinery	14 000	11 000
Land		12 240
Equipment	17 000	18 650
Cost of sales	32 500	26 750
Other expenses	11 000	13 500
Income tax expense	3 600	1 000
Interim dividend paid	2 000	1 000
Final dividend declared	5 000	1 500
Advance to Sublime Ltd	5 000
	256 900	126 050
Credit balances
Share capital	85 000	33 000
General reserve	20 500	15 000
Retained earnings (1/7/16)	8 000	17 750
Debentures	60 000
Final dividend payable	5 000	1 500
Current tax liabilities	4 000	1 250
Other payables	17 400	5 050
Advance from Peace Ltd		5 000
Sales	42 500	32 500
Other revenue	9 500	10 500
Gains/(losses) on sale of non-current assets	2 000	500
Accumulated depreciation machinery	2 000	1 000
Accumulated depreciation equipment	1 000	3 000
	256 900	126 050

Additional information

(1) A bonus dividend, on the basis of 3 ordinary shares for every 30 ordinary shares held, was paid in January 2017 out of other reserves existing at acquisition date.

(2) On 1 July 2016, Sublime Ltd has on hand inventory worth $6 000 transferred from Peace Ltd in June 2016. The inventory had previously cost Peace Ltd $5 900. Profit in inventory on hand at 30 June 2016 is $100. By 30 June 2017, Sublime Ltd had sold all $6 000 of the inventory to external parties.

(3) On 1 January 2017, Peace Ltd acquired $7 500 worth of inventory for cash from Sublime Ltd. The inventory had previously cost Sublime Ltd $5 500. By 30 June 2017, Peace Ltd had sold $5 625 of the transferred inventory for $8 000 to external entities.

(4) On 1 January 2016, Sublime Ltd sold equipment to Peace Ltd for $4 000. This had originally cost Sublime Ltd $6 000 and had a carrying amount at the time of sale of $3 500. Both entities charge depreciation at a rate of 10% p.a. straight-line.

(5) Peace Ltd sold an item of inventory to Sublime Ltd on 1 January 2017 for use as machinery. This item cost Peace Ltd $2 000 and was sold to Sublime Ltd for $3 000. Sublime Ltd depreciated the item at 10% p.a. straight-line.

(6) On 30 June 2017, half of the goodwill was written off as a result of an impairment test.

(7) All dividends declared by Sublime Ltd have been from post-acquisition profits.

(8) The tax rate is 30%.

Required

(i) Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Peace Ltd and Sublime Ltd.

(ii) Complete a detailed consolidation worksheet for the year ending 30 June 2017.

(iii) Prepare the following financial statements for Peace Ltd at 30 June 2017:

a. Consolidated Statement of Profit or Loss and Other Comprehensive Income.

b. Consolidated Statement of Changes in Equity.

c. Consolidated Statement of Financial Position.