On 1 July 2015, Victoria Ltd acquired 70% of the shares of Melbourne Ltd for $526,000 on a cum div. basis. Victoria Ltd had acquired 30% of the shares of Melbourne Ltd two years earlier for $180,000. This investment, classified as an available-for-sale investment, was recorded at a fair value on 1 July 2015 of $226,000. At 1 July 2015, the equity and liability sections of Melbourne Ltd’s statement of financial position showed the following balances:
Share Capital 460,000
General Reserve 50,000
Retained Earnings 100,000
Other liabilities 100,000
Dividend payable 30,000
At acquisition date, all the identifiable assets and liabilities of Melbourne Ltd were recorded at amounts equal to fair value except for:
Carrying Amount Fair Value
Land 95,000 100,000
Vehicle (@ cost 40,000) 35,000 39,000
Equipment (@ cost 420,000) 294,000 309,000
Inventory 98,000 101,000
The Vehicle, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2018. The equipment had a further five year life at acquisition date and was expected to be used evenly over that time. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation.
Melbourne Ltd had not recorded an internally developed patent. Victoria Ltd valued this patent at $90,000 and was assumed to have a ten year life. In May 2017, Melbourne sold this patent to an external party for $100,000. It also had a contingent liability of $19,000 that Victoria Ltd considered to have a fair value of $15,000. This liability was settled in July 2017.
The dividend liability was paid on 1 September 2015. All inventories on hand at acquisition date were sold by June 2016. The land was sold on 1 June 2018 to Peters Ltd. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed.
On 30 May 2017, Melbourne Ltd transferred $8,000 from the general reserve (pre-acquisition) to retained earnings. A bonus dividend of $10,000 was paid in December 2017 out of pre-acquisition profits.
Goodwill was tested annually for impairment. For the year ended 30 June 2017, an impairment loss on goodwill of $4,000 was recorded.
(i) Melbourne Ltd sold a warehouse with a carrying amount of $82,000 to Victoria Ltd for $100,000. The transaction took place on 1 January 2017. Victoria Ltd charges depreciation at 5% p.a. on a straight-line basis.
(ii) On 31 March 2017, Victoria Ltd sold some land to Melbourne Ltd. The land had originally cost Victoria Ltd $64,000, but was sold to Melbourne Ltd for $63,000. To help Melbourne Ltd pay for the land, Victoria Ltd gave Melbourne Ltd an interest-free loan of $29,000. Melbourne Ltd has as yet made no repayments on the loan.
(iii) In April 2017, Victoria Ltd sold inventory to Melbourne Ltd for $12,000, at a mark-up of 20% on cost. One quarter of this inventory was unsold by Melbourne Ltd at 30 June 2017. The remaining inventory was sold in the following three months.
(iv) On 1 October 2017, Victoria Ltd issued 1,000 15% debentures of $100 at nominal value. Melbourne Ltd acquired 400 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities’ accounts.
(v) On 18 February 2018, interim dividend was paid by Melbourne Ltd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends.
(vi) On 1 April 2018, Melbourne Ltd transferred an item of plant with a carrying amount of $32,000 to Victoria Ltd for $41,000. Victoria Ltd treated this item as inventory. The item was still on hand at the end of the year. Melbourne Ltd applied a 20% depreciation rate to this plant.
(vii) During the year ending 30 June 2018, Melbourne Ltd sold inventory to Victoria Ltd for $60,000, recording a before-tax profit of $16,000. One quarter of this inventory was unsold by Victoria Ltd at 30 June 2018.
(viii) The tax rate is 30%.
On 30 June 2018 the trial balances of Victoria Ltd and Melbourne Ltd were as follows:
Victoria Ltd Melbourne Ltd
Cost of sales 338,000 307,000
Other expenses 80,000 72,000
Income tax expense 41,000 40,000
Interim dividend paid 21,000 14,000
Final dividend declared 22,000 15,000
Cash 181,000 105,000
Dividend receivable 20,000 -
Other receivables 206,000 227,000
Inventory 244,000 132,000
Deferred tax assets 35,000 -
Trucks 82,000 72,000
Plant & equipment 648,000 380,000
Land 130,000 123,000
Warehouses 180,000 90,000
Debentures in Victoria Ltd - 40,000
Shares in Melbourne Ltd 722,000 -
Goodwill 74,000 30,000
Loan to Melbourne Ltd 29,000 -
Sales 480,000 437,000
Other revenue & income 79,000 56,000
Share capital 874,000 470,000
Share options 80,000 -
General reserve 84,000 72,000
Retained earnings (1/7/2017) 490,000 228,000
Final dividend payable 22,000 15,000
Current tax liabilities 8,000 12,000
Other liabilities 96,000 60,000
Debentures 400,000 -
Loan from Victoria Ltd - 29,000
Accumulated depreciation – P & E 388,000 228,000
Accumulated depreciation – Trucks 25,000 22,000
Accumulated depreciation – Warehouses 27,000 18,000
a) Prepare the acquisition analysis as at 1 July 2015. (3 Marks).
b) Prepare the BVCR and pre-acquisition worksheet entries ONLY as at 30 June 2016. (5 marks)
c) Prepare full consolidation worksheet entries as at 30 June 2018. (12 marks)
Marking guide: total of 82 ticks / 6.83 = 12 marks.
Journal entry – 1 tick for each correct line entry – ie correct account description AND amount (NO TICK for correct description only or correct amount only.)
Consequential errors will not be penalised.