Accounting
Part A (30 Marks)
At 1 July 2011, White Ltd acquired 80% of the share capital of Pages Ltd for $290,000 (cum div.). At this date the statement of financial position of Pages Ltd, including comparative information on fair values for assets, was as shown as follows.
Carrying amount Fair value
Current assets
Inventory 60,000 65,000
Receivables 40,000
Allowance for doubtful debts 5,000 35,000 35,000
Total current assets 95,000
Non-current assets
Plant and machinery (at cost) 200,000
Accumulated depreciation 125,000 75,000 90,000
Vehicles (at cost) 80,000
Accumulated depreciation 10,000 70,000 75,000
Buildings (at cost) 120,000
Accumulated depreciation 5,000 115,000 115,000
Trademark (at valuation) 100,000 100,000
Other assets 40,000 40,000
Goodwill 20,000
Total non-current assets 420,000
Total assets 515,000
Equity
Share capital 200,000
Asset revaluation surplus 50,000
Retained earnings 50,000
Total equity 300,000
Current liabilities
Accounts payable 40,000
Dividend payable 20,000
Total current liabilities 60,000
Non-current liabilities
Debentures 155,000
Total non-current liabilities 155,000
Total liabilities 215,000
Total equity and liabilities 515,000
At 1 July 2011, the depreciable assets had the following remaining useful lives:
Plant and machinery 5 years
Vehicles 10 years
Trademark 100 years
Buildings 10 years
All the inventory on hand at 1 July 2011 was sold by Pages Ltd by 30 June 2012. Adjustments for differences between fair values and carrying amounts at acquisition date are made on consolidation.
Additional information:
(a) The dividend payable in the records of Pages Ltd at 1 July 2011 was paid in September 2011.
(b) On 1 January 2014, one of the machines that was on hand in Pages Ltd at 1 July 2011 was sold for $6,000. At 1 July 2011, the machine was recorded at cost of $50,000 with accumulated depreciation of $30,000, and had a fair value of $23,000. Any related revaluation surplus was transferred on consolidation to retained earnings.
(c) During the 2014 financial year, Pages Ltd transferred $10,000 from the asset revaluation surplus (on hand at 1 July 2011) to retained earnings, and transferred $20,000 to general reserve from retained earnings.
(d) Information on dividends paid and declared is as follows:
2011–12 period:
paid a $5000 dividend
2012–13 period:
paid a $4,000 interim dividend
declared, in June 2013, a $6,000 dividend
2013–14 period:
paid the $6,000 dividend declared in the previous period
paid a $5,000 interim dividend
declared, in June 2014, an $8,000 dividend.
(e) Information on inventory sold by Pages Ltd to White Ltd at cost plus 25%:
• At 1 July 2013 White Ltd had $10,000 of inventory on hand.
• During the 2013–14 period, $50,000 worth of inventory was sold, with 10% still on hand at White Ltd on 30 June 2014.
(f) On 1 July 2013 White Ltd leased a machine from Pages Ltd under a direct financing lease arrangement. The fair value of the asset leased was $25,000, and the lease agreement had an implicit interest rate of 10%. The lease term was for the whole of the machine’s useful life, being 5 years. The residual value at the end of the lease term was expected to be zero. At 30 June 2014 White Ltd made a lease payment to Pages Ltd of $7,500, which included an amount of $1,500 to cover the costs of insurance and maintenance, both supplied by Pages Ltd.
(g) The retained earnings balance at 30 June 2013 in Pages Ltd was $60,000. The total comprehensive income for the year ended 30 June 2014 was $28,000, including $3,000 due to revaluation of land measured using the revaluation model. The asset revaluation surplus balance at 30 June 2013 for Pages Ltd was $55,000.
(h) The tax rate is 30%.
Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method. (2 marks)
2. Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-controlling interest at 1 July 2011 was $67,000. (3 marks)
3. Prepare the consolidation journal entries for White Ltd using the full goodwill method at 1 July 2011, immediately after acquisition. (7 marks)
4. Prepare the consolidation journal entries for White Ltd using the full goodwill method at 30 June 2014. (18 marks)
