Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,0

Question

Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,000, when the equity of Sarina Ltd consisted of: Share Capital $500,000 General Reserve 80,000 Retained Earnings 30,000 All identifiable assets and liabilities of Sarina Ltd were fairly valued at acquisition except the machinery, which had a fair value of $140,000. The machinery had a further 7-year life with depreciation based on the straight-line method. Selected financial information of the two entities as at 1 July 2015 were as follows: Hahndorf Ltd Sarina Ltd Retained earnings at 30/6/15 240,000 30,000 Share capital 700,000 500,000 General reserve 60,000 80,000 Total equity 1,000,000 610,000 Land 350,000 400,000 Machinery at cost 240,000 Accumulated depreciation (200,000) Equipment at cost 250,000 Accumulated depreciation and (75,000) impairment losses Cash 40,000 20,000 Investment in Sarina Ltd 700,000 - Inventory 40,000 35,000 Liabilities 130,000 60,000 Net assets 1,000,000 610,000 The company income tax rate is 30%. Required Prepare the consolidation journal entries resulting from the acquisition on 1 July 2015 as they will be carried forward as at 30 June 2018. (Tip: do the journals related to the revaluation of the machinery as they would have appeared on 1 July 2015 and then do all the consolidation journal entries related to the acquisition and the revaluation of the machinery as at 30 June 2018, i.e. 3 years later).

Explanation / Answer

Journal Entry for Revalution of Machinery S.No. Account Titles and explanation Debit Credit 1 Accumulated Depreciation $200,000 Machinery A/c $140,000 Machinery A/c $240,000 Revalution Reserve $100,000 To Record Revalution of Machinery Journal Entry for Consolidation as at Jul1,2015 carried Forward to Jul1, 2018 S.No. Account Titles and explanation Debit Credit 1 Business Purchase $700,000 Shareholders of Sarina Ltd. $700,000 To Record Business Purchased 2 Land $400,000 Machinery $140,000 Equipment $250,000 Cash $20,000 Inventory $35,000 Liabilities $60,000 Accumulated Depreciation on Equipment $75,000 Businee Purchase $700,000 Capital Reserve ( Bal. Fig.) $10,000 TO Record all asset & liabilities trfd at Fair Value 3 Shareholders of Sarian Ltd. $700,000 Cash $700,000 To Record Cash Payment Made

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