You are a newly appointed accountant at Palvidia Ltd, who is considering purchasing the majority of the shares in Soletta Ltd. Senior management of Palvidia arranged a meeting with the executive team to discuss the effect of this decision. They asked Jane Penfold, the Chief Financial Officer, to explain a few issues about their decision to purchase shares in Soletta Ltd in preparation for their meeting with the executive team.
Draft a memorandum for Jane Penfold to sign for her presentation to the executive team that explains the following issues:
Word limit: maximum 300 words
On 1 July 2019, Paldivia Ltd acquired all the issued shares of Soletta Ltd for a cash consideration of $1 000 000. At that date, the financial statements of Soletta Ltd showed the following information.
All the assets and liabilities of Soletta Ltd were recorded at amounts equal to their fair values at the acquisition date, except some equipment recorded at $50 000 below its fair value with a related accumulated depreciation of $80 000. Also, Palvidia Ltd identified at acquisition date a contingent liability related to a lawsuit where Soletta Ltd was sued by a former supplier and attached a fair value of $40 000 to that liability.
Patagonia Ltd owns all the share capital of Salto Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2018 to 30 June 2020.
(b) On 1 January 2018, Salto Ltd sold a new tractor to Patagonia Ltd for $20 000. This had cost Salto Ltd $16 000 on that day. Both entities charged depreciation at the rate of 10% p.a. on the diminishing balance. The tractor was still on hand with Patagonia Ltd at 30 June 2020.
(c) On 1 May 2019, Salto Ltd sold inventories costing $200 to Patagonia Ltd for $400 on credit. On 30 June 2019, only half of these goods had been sold by Patagonia Ltd, and Patagonia Ltd had paid $300 to Salto Ltd. All remaining inventories were sold to external entities by 30 June 2020 and Patagonia Ltd paid the outstanding amount to Salto Ltd on 5 May 2020.
In relation to the above intragroup transactions:
Prepare adjusting journal entries for the consolidation worksheet at 30 June 2019 and 30 June 2020.
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