On 1 July 2013, Rock Ltd acquired ( ex div .) all of the issued capital of Walla
ID: 2487041 • Letter: O
Question
On 1 July 2013, Rock Ltd acquired (ex div.) all of the issued capital of Wallaby Ltd. The recorded equity of Wallaby Ltd at this date consisted of:
Share capital
$120 000
General reserve
25 000
Retained earnings
55 000
At 1 July 2013, all the identifiable assets and liabilities of Wallaby Ltd were recorded at fair value except for the following assets:
Carrying amount
Fair value
Land
$100 000
$130 000
Inventory
78 500
86 100
Machinery (cost $86 000)
52 000
56 000
Vehicles (cost $58 000)
47 000
53 000
Additionally, Wallaby Ltd’s records showed a dividend payable at 1 July 2013 of $8000. This dividend was paid on 31 October 2013. The assets of Wallaby Ltd at acquisition date included goodwill recorded at $15 000 arising from a business combination transaction in 2009. At 1 July 2013, Wallaby Ltd owned but had not recorded an internally generated brand name.
This brand name was considered by Rock Ltd to have a fair value of $29 000 and an indefinite useful life. An impairment test conducted with respect to the brand name on 30 June 2016 concluded that its recoverable amount at that date was $2000 less than its carrying amount.
Adjustments for the differences between carrying amounts and fair values of assets and liabilities on hand at acquisition date are recognised on consolidation. When assets are sold or derecognised, any related valuation reserves are transferred to retained earnings. In June 2015, Wallaby Ltd paid a share dividend worth $20 000 from the general reserve on hand at 1 July 2013. The trial balances of both companies at 30 June 2016 showed the following balances:
The vehicles and machinery were expected to have a further useful life of 6 and 8 years respectively, with benefits to be received evenly over those periods. Inventory on hand at 1 July 2013 was all sold by 31 January 2014. The land owned at 1 July 2013 was sold in September 2014 for $150 000. The machinery on hand at 1 July 2013 was sold on 1 January 2016 for $38 000.
Debit balances
Rock Ltd
Wallaby Ltd
Cash
$ 2 500
$ 1 250
Receivables
27 000
13 000
Inventory
39 700
24 500
Other current assets
15 200
8 200
Deferred tax assets
7 500
3 500
Vehicles
88 000
158 000
Equipment
—
42 000
Land
140 000
180 000
Financial assets
68 000
14 800
Goodwill
28 000
15 000
Shares in Wallaby Ltd
250 000
—
Debentures in Rock Ltd
—
25 000
Dividend paid
10 000
5 000
Dividend declared
20 000
12 000
Transfer to general reserve
10 000
5 000
Cost of sales
210 000
192 550
Income tax expense
30 000
32 000
Depreciation and other expenses
39 000
36 000
Carrying amount of machinery sold
—
30 500
Carrying amount of equipment sold
21 000
—
$1 005 900
$798 300
Credit balances
Rock Ltd
Wallaby Ltd
Share capital
$ 200 000
$ 140 000
General reserve
35 000
10 000
Retained earnings (1/7/15)
51 300
67 500
Accounts payable
69 500
36 000
Loan payable (due 30/6/20)
25 000
15 000
Dividend payable
20 000
12 000
Provisions
12 500
9 300
Current tax liability
43 000
34 000
Deferred tax liability
11 800
5 000
Accumulated depreciation – vehicles
16 400
60 000
Accumulated depreciation – equipment
—
34 500
8% Debentures (matures 30/6/19)
25 000
—
Sales revenue
450 000
320 000
Dividend revenue
17 000
—
Other income
11 400
17 000
Proceeds on sale of equipment
18 000
—
Proceeds on sale of machinery
—
38 000
$1 005 900
$798 300
Additional information
Dividends may be declared by either company without shareholder approval.
The tax rate is 30%.
On 1 January 2016, Rock Ltd sold an item of equipment to Wallaby Ltd for $18 000. The equipment had a carrying amount at the date of sale of $21 000. Both companies depreciate equipment at 20% p.a. on a straight-line basis.
On 1 May 2015, Wallaby Ltd sold a machine to Rock Ltd for $7800. The machine had a carrying amount of $7000 at the date of sale. Rock Ltd recorded the machine as inventory. The inventory item was sold to an external party in November 2015 for $8200
All interest on the 8% debentures has been paid and brought to account in the records of both companies.
During the 2015–16 financial year, Rock Ltd sold inventory to Wallaby Ltd for $75 000. The cost of this inventory to Wallaby Ltd was $70 000. Of this inventory, 25% is still on hand at 30 June 2016.
The transfer to general reserve recorded by Wallaby Ltd in the current year was from retained earnings recorded at 1 July 2013.
Required
Prepare the consolidation worksheet journal entries for the preparation of the consolidated financial statements of Rock Ltd at 30 June 2016.
Share capital
$120 000
General reserve
25 000
Retained earnings
55 000
Explanation / Answer
Acquisition analysis
At 1 July 2013:
Net fair value of identifiable assets, liabilities and contingent liabilities of Wallaby Ltd
= $120 000 + $25 000 +$55 000 (equity)
+ $6 000 (1-30%) (BCVR - vehicles)
+ $4 000 (1-30%) (BCVR machinery)
+ $30 000 (1-30%) (BCVR - land)
+ $7 600 (1- 30%) (BCVR - inventory)
+ $29 000 (1-30%) (BCVR brand name)
- $15 000 (goodwill)
Net fair value acquired = $238 620
Consideration transferred = $250 000
Goodwill = $11 380
Recorded goodwill = $11 380 - $15 000
Adjustment required = $(3 620)
CONSOLIDATION WORKSHEET ENTRIES YEAR AT -30 JUNE 2016 1.
Business combination valuation entries
Accumulated depreciation - vehicles Dr 11 000
Vehicles Dr 5 000
Deferred tax liability Cr 1 800
Business combination valuation reserve Cr 4 200
Depreciation expense Dr 1 000
Retained earnings (1/7/15) Dr 2 000
Accumulated depreciation - Vehicles Cr 3 000 (1/6 x $6000 p.a for 3 years)
Deferred tax liability Dr 900
Income tax expense Cr 300
Retained earnings (1/7/15) Cr 600
Depreciation expense Dr 250
Carrying amount of machinery sold * Dr 2 750
Income tax expense Cr 900
Retained earnings (1/7/15) Dr 700
Transfer from BCVR Cr 2 800 (1/8 x $4000 p.a. for 2.5 yrs prior to sale)
* 5.5 yrs x $500 p.a
Brand name Dr 29 000
Deferred tax liability Cr 8 700
Business combination valuation reserve Cr 20 300
Impairment loss Dr 2 000
Accumulated impairment losses - brand Cr 2 000
Deferred tax liability Dr 600
Income tax expense Cr 600
Business combination valuation reserve Dr 3 620
Goodwill Cr 3 620
2. Pre-acquisition entries
Retained earnings (1/7/15)* Dr 81 320
Share capital ** Dr 140 000
General reserve Dr 5 000
Business combination valuation reserve Dr 23 680
Shares in Wallaby Ltd Cr 250 000
* ($55 000 + $5 320 (BCVR– inventory)+ $21 000 (BCVR - land)
** $120 000 + $20 000
Transfer from business combination
valuation reserve Dr 2 800
Business combination valuation reserve Cr 2 800
(Transfer on sale of machinery)
General reserve Dr 5 000
Transfer to general reserve Cr 5000
3. Dividend paid
Dividend revenue Dr 5 000
Dividend paid Cr 5 000
Acquisition analysis
At 1 July 2013:
Net fair value of identifiable assets, liabilities and contingent liabilities of Wallaby Ltd
= $120 000 + $25 000 +$55 000 (equity)
+ $6 000 (1-30%) (BCVR - vehicles)
+ $4 000 (1-30%) (BCVR machinery)
+ $30 000 (1-30%) (BCVR - land)
+ $7 600 (1- 30%) (BCVR - inventory)
+ $29 000 (1-30%) (BCVR brand name)
- $15 000 (goodwill)
Net fair value acquired = $238 620
Consideration transferred = $250 000
Goodwill = $11 380
Recorded goodwill = $11 380 - $15 000
Adjustment required = $(3 620)
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