Financial Information for Lotus Limited and its 100% owned subsidiary, Troy Limi
ID: 2337374 • Letter: F
Question
Financial Information for Lotus Limited and its 100% owned subsidiary, Troy Limited, for the period ended 31 December 2018 is shown in the table below:
Lotus Limited
Troy Limited
$
$
Sales Revenue
50000
47200
Dividend Revenue
2000
0
Gain On Sale of Property, Plant and Equipment
2000
4000
Other Income
2000
4000
Total Income
56000
55200
Cost of Sales
42000
36000
Other Expenses
6000
2000
Total Expenses
48000
38000
Profit Before Income Tax
8000
17200
Income Tax Expense
2700
3900
Profit for the Period
5300
13300
Retained earnings ( 1 January 2018)
12000
6000
17300
19300
Interim Dividend Paid
5000
2000
Retained earnings (31 December 2018)
12300
17300
ADDITIONAL INFORMATION:
Lotus Limited acquired the shares in Troy Limited at 1 January 2018, buying the 10000 shares in Troy Limited for $40000. At that date, Troy Limited recorded share capital of $20000. The shares were bought on acumulation div basis. Troy Limited had declared prior to the acquisition a dividend of $6000 that was paid in March 2018.
At 1 January 2018, all identifiable assets and liabilities of Troy Limited were recorded at fair value, except for inventories, for which the carrying amount was $800 less than fair value. A number of inventories have been difficult to sell, and 10% of it is still in hand at 31 December 2018.
Inventories on hand in Troy Limited at 31 December 2018 also include some items acquired from Lotus Limited during the period ended 31 December 2018. These were sold by Lotus Limited for $10000, at a profit before tax of $2000.
Half of the goodwill was written off as the result of an impairment test on 31 December 2018.
During March 2018, Lotus Limited provided management services to Troy Limited at a fee of $1000 paid by 31 December 2018.
On 1 July 2018, Troy Limited sold machinery to Lotus Limited at a gain of $4000. This machinery had a carrying amount to Troy Limited of $40000. Lotus considered that this machinery had a 5 year life.
By 31 December 2108, the financial assets acquired by Lotus Limited and Troy Limited from external entities increased $2000 and $1300 respectively, with gains and losses being recognised in other comprehensive income.
The TAX RATE is 30%
Questions
1. Prepare the acquisition analysis as at 1 January 2018.
2.Prepare the business combination valuation entries and pre-acquisition entries as at 1 January 2018.
Lotus Limited
Troy Limited
$
$
Sales Revenue
50000
47200
Dividend Revenue
2000
0
Gain On Sale of Property, Plant and Equipment
2000
4000
Other Income
2000
4000
Total Income
56000
55200
Cost of Sales
42000
36000
Other Expenses
6000
2000
Total Expenses
48000
38000
Profit Before Income Tax
8000
17200
Income Tax Expense
2700
3900
Profit for the Period
5300
13300
Retained earnings ( 1 January 2018)
12000
6000
17300
19300
Interim Dividend Paid
5000
2000
Retained earnings (31 December 2018)
12300
17300
Explanation / Answer
1. Group Structure
Loutus- 100% of Troy
Minority interest- nill
Date of Aquisition -1st jan 2018
2. Aquisition analysis
1.Calculation of value of troy as on 1 jan 2018
(in $)
Share capital 20000
Retain Earning 6000
Increase in value of inventories 560(800*70%)
Value of troy 26560
Payment made by lotus to buy troy 40000
Less Dividend -6000
Cost of Investment 34000
Goodwill 7200
2. Pre acquisition entries
Share capital 20000
Retain earning 6000
business combination valuation reserve 560
Deffered tax Assets 240
Good will 7200
To share in troy 34000
-on Impair ment of goodwil
Impairment expenses a/c dr 3600
To Goodwill 3600
for futher year
Retain Earning a/c dr 3720
To Goodwill-accumulated impairement loss 3720
:-Entries for inventory
Opening inventory sales
Retain Earning a/c dr 504
Income tax Ex penses 216
To business combination valuation reserve 504
To Deffered tax Assets 216
Retain Eraning a/c dr
1.
Sales Revenue a/c dr 10000
To Cost of good sold 8000
To inventory 2000
2.
Deffered tax assets 600
To income tax expenses 600
:- Sales of machinery entry
Retain earning a/c dr 2800
Deffered tax assets 1200
To Machinery 4000
Depreciation entry
Accumulated depreciation a/c dr 400
To Depreciation 400
Income tax Expenses 120
To Deffered tax Liabilities 120
Increase in assets value of lotus
Assets a/c dr 2000
To gain on assets 1400
To Deffered tax liabilities 600
Increase in assets value of troy
Assets a/c dr 1300
To Deffered tax 390
to Retain Earning 910
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