Acquisition Analysis and Consolidation Worksheet

Answer:

Acquisition Analysis:
Particulars		Fair Value	Carrying Amount	Net Fair Value
Share Capital		0	0	380000
General Reserve		0	0	52000
Retained Earnings		0	0	40000
Plant & Machinery		199000	187000	12000
Net Fair Value of Identifiable Assets & Liabilities of Square Ltd.	A	199000	187000	484000
Consideration Transferred	B			560000
Goodwill of Square Ltd.	C= A-B			76000

Consolidation Worksheet Journal Entries:-
			Dr.	Cr.
Date	Particulars		Amount	Amount
1	Business Combination Valuation:
1.a	Accumulated Depreciation - Plant & Machinery A/c.	Dr.	33000
	To,	Plant & Machinery A/c.		21000
	To,	Deferred Tax Liability A/c.		6300
	To,	Business Combination Valuation Reserve A/c.		5700
1.b	Depreciation Expense A/c.	Dr.	1200
	Retained Earnings (1/1/2016) A/c.	Dr.	4800
	To,	Accumulated Depreciation - Plant & Machinery A/c.		6000
1.c	Deferred Tax Liability A/c.	Dr.	1800
	To,	Income Tax Expenses A/c.		360
	To,	Retained Earnings (1/1/2016) A/c.		1440
1.d	Goodwill A/c.	Dr.	76000
	To,	Business Combination Valuation Reserve A/c.		76000
2	Transfer from General Reserve:-
	General Reserve A/c.	Dr.	38000
	To,	Share Capital A/c.		38000
3	Pre-Acquisition Entries:
3.a	At 1/1/2012:-
	Retained Earnings (1/1/2012)	Dr.	40000
	Share Capital A/c.	Dr.	380000
	General Reserve A/c.	Dr.	52000
	Business Combination Valuation Reserve A/c.	Dr.	88000
	To,	Shares in Navy Ltd. A/c.		560000
3.b	At 31/12/2016:-
	Retained Earnings (1/1/2016)	Dr.	40000
	Share Capital A/c.	Dr.	418000
	General Reserve A/c.	Dr.	14000
	Business Combination Valuation Reserve A/c.	Dr.	88000
	To,	Shares in Navy Ltd. A/c.		560000
4	Sale & Profit in Closing Inventory:
	Sales Revenue A/c.	Dr.	44000
	To,	Cost of Sales A/c.		40400
	To,	Inventories A/c.		3600
	Deferred Tax Asset A/c.	Dr.	1080
	To,	Income Tax Expense A/c.		1080
5	Sale of Inventory classified as Plant:
	Retained Earnings (1/1/2016) A/c.	Dr.	9100
	Deferred Tax Assets A/c.	Dr.	3900
	To,	Plant & Machinery A/c.		13000
	Accumulated Depreciation - Plant & Machinery A/c.	Dr.	5850
	To,	Depreciation Expense A/c.		1300
	To,	Retained Earnings (1/1/2016) A/c.		4550
	Income Tax Expenses A/c.	Dr.	390
	Retained Earnings (1/1/2016) A/c.	Dr.	1365
	To,	Deferred Tax Assets A/c.		1755
6	Sale of Plant:
	Proceeds from Sale of PP&E A/c.	Dr.	84000
	Plant & Machinery A/c.	Dr.	14000
	To,	Carrying Amount of PP&E A/c.		98000
	Income Tax Expense A/c.	Dr.	4200
	To,	Deferred Tax Liability A/c.		4200
	Depreciation Expense A/c.	Dr.	1120
	To,	Accumulated Depreciation - Plant & Machinery A/c.		1120
	Deferred Tax Asset A/c.	Dr.	336
	To,	Income Tax Expense A/c.		336
7	Profit in Opening/Closing Inventory:
	Retained Earnings (1/1/2016) A/c.	Dr.	1050
	Income Tax Expenses A/c.	Dr.	450
	To,	Cost of Sales A/c.		1500
8	Dividend Declared:
	Accounts Payables A/c.	Dr.	12000
	To,	Dividend Declared A/c.		12000
	Other Income A/c.	Dr.	12000
	To,	Accounts Receivables A/c.		12000

Consolidation Worksheet:
			Adjustments
Particulars	Square Ltd.	Navy Ltd.		Dr.	Cr.		Group
Sales Revenue	847000	260000	4	44000			1063000
Less: Cost of Sales	376000	213180			41900	4,7	547280
Gross Profit	471000	46820					515720
Less: Other Expenses	56000	10000	1.b,6	2320	1300	5	67020
Operating Profit	415000	36820					448700
Add:
Proceeds from Sale of PP&E	30000	84000	6	84000			30000
Carrying Amount of PP&E	36000	98000			98000	6	36000
Gain/(Loss) on Sale	-6000	-14000					-6000
Other Income	30000	12000	8	12000			30000
Profit before Tax	439000	34820					472700
Less: Income Tax Expenses	104000	14000	5,6,7	5040	1776	1.c,4,6	121264
Net Profit	335000	20820					351436
Retained Earnings (1/1/2016)	80000	130000	1.b,3.b,5,7	56315	5990	1.c,5	159675
Less: Dividend Declared	22000	12000			12000	8	22000
Retained Earnings (31/12/2016)	393000	138820					489111
Share Capital	1000000	418000	3.b	418000			1000000
General Reserve	50000	14000	3.b	14000			50000
Asset Revaluation Surplus	20000	12000					32000
Business Combination Valuation Reserve			3.b	88000	81700	1.a,1.d	-6300
Other Components of Equity	30000	20000					50000
Total Equity	1493000	602820					1614811
Deferred Tax Liabilities	12480	10400	1.c	1800	10500	1.a,6	31580
Current Tax Liabilities	46000	38000					84000
Accounts Payable	48000	30000	8	12000			66000
Total Equity & Liabilities	1599480	681220					1796391
Plant & Machinery	900000	688000	6	14000	34000	1.a,5	1568000
Acc. Depreciation - Plant & Machinery	-600000	-522000	1.a,5	38850	7120	1.b,6	-1090270
Motor Vehicles	569400	305800					875200
Acc. Depreciation - Motor Vehicle	-300000	-180000					-480000
Goodwill			1.d	76000			76000
Shares in Navy Ltd.	560000				560000	3.b	0
Financial Assets	140000	70000					210000
Deferred Tax Assets	25400	12600	4,5,6	5316	1755	5	41561
Accounts Receivable	52000	16840			12000	8	56840
Inventories	158880	218000			3600	4	373280
Bank	93800	71980					165780
Total Assets	1599480	681220		871641	871641		1796391

Acquisition Analysis:
Particulars		Fair Value	Carrying Amount	Net Fair Value
Share Capital		0	0	120000
General Reserve		0	0	24000
Retained Earnings		0	0	16000
Plant		88000	80000	8000
Land		80000	60000	20000
Inventory		52000	40000	12000
Goodwill		0	5000	-5000
Net Fair Value of Identifiable Assets & Liabilities of Square Ltd.	A	220000	185000	195000
Consideration Transferred				161400
Less: 80% Dividend Payable				8000
Net Consideration Transferred	B			153400
Non-Controlling Interest	C			39000
Total Purchase Value	D=B+C			192400
Gain on Bargain Purchase	E=D-A			-2600

Consolidation Worksheet Journal Entries:-
			Dr.	Cr.
Date	Particulars		Amount	Amount
	Asset Revaluation Entries:
	Retained Earnings (1/7/2016) A/c.	Dr.	12000
	To,	Deferred Tax Liability A/c.		3600
	To,	Transfer from Asset Revaluation Surplus A/c.		1080
	Gain on Sale of Land A/c.	Dr.	20000
	To,	Income Tax Expenses A/c.		6000
	To,	Transfer from Asset Revaluation Surplus A/c.		14000
	Accumulated Depreciation - Plant A/c.	Dr.	20000
	To,	Plant A/c.		12000
	To,	Deferred Tax Liability A/c.		3600
	To,	Asset Revaluation Surplus A/c.		4400
	Depreciation Expense A/c.	Dr.	2000
	Retained Earnings (1/7/2016) A/c.	Dr.	2000
	To,	Accumulated Depreciation - Plant & Machinery A/c.		4000
	Deferred Tax Liability A/c.	Dr.	1200
	To,	Income Tax Expenses A/c.		600
	To,	Retained Earnings (1/7/2016) A/c.		600
	Transfer from General Reserve:-
	General Reserve A/c.	Dr.	8000
	To,	Retained Earnings A/c.		8000
	Pre-Acquisition Entries:
	At 1/7/2015:-
	Retained Earnings (1/7/2015) A/c.	Dr.	12800
	Share Capital A/c.	Dr.	96000
	General Reserve A/c.	Dr.	19200
	Asset Revaluation Surplus A/c.	Dr.	28000
	To,	Gain on Bargain Purchase A/c.		2600
	To,	Shares in Hana Ltd. A/c.		153400
	At 30/07/2017:-
	Retained Earnings (1/7/2016)	Dr.	38800
	Share Capital A/c.	Dr.	96000
	General Reserve A/c.	Dr.	12800
	Asset Revaluation Surplus A/c.	Dr.	8400
	To,	Gain on Bargain Purchase A/c.		2600
	To,	Shares in Hana Ltd. A/c.		153400
	Transfer from Asset Revaluation Surplus A/c.	Dr.	12064
	To,	Asset Revaluation Surplus A/c.		12064
	NCI Share of Equity as on 1/7/2015:-
	Retained Earnings (1/7/2016)	Dr.	3200
	Share Capital A/c.	Dr.	24000
	General Reserve A/c.	Dr.	4800
	Asset Revaluation Surplus A/c.	Dr.	7000
	To,	NCI A/c.		39000
	NCI Share of Equity from 1/6/2016 - 30/06/2017:
	NCI Share of Profit A/c.	Dr.	7760
	To,	NCI A/c.		7760
	Transfer from Asset Revaluation Surplus A/c.	Dr.	3016
	To,	Asset Revaluation Surplus A/c.		3016
	NCI A/c.	Dr.	2400
	To,	Dividend Paid A/c.		2400
	NCI A/c.	Dr.	3200
	To,	Dividend Declared A/c.		3200
	Dividend Paid:
	Other Revenue A/c.	Dr.	9600
	To,	Dividend Paid A/c.		9600
	Dividend Declared:
	Payables A/c.	Dr.	12800
	To,	Dividend Declared A/c.		12800
	Other Revenue A/c.	Dr.	12800
	To,	Receivables A/c.		12800
	Intragroup Sales:
	Sales Revenue A/c.	Dr.	120000
	To,	Cost of Sales A/c.		115000
	To,	Inventory A/c.		5000
	Deferred Tax Asset A/c.	Dr.	1500
	To,	Income Tax Expense A/c.		1500
	NCI A/c.		700
	To,	NCI Share of Profit A/c.		700
	Sale of Inventory classified as Plant:
	Retained Earnings (1/7/2016) A/c.	Dr.	3500
	Deferred Tax Assets A/c.	Dr.	1500
	To,	Plant & Machinery A/c.		5000
	Accumulated Depreciation - Plant & Machinery A/c.	Dr.	1500
	To,	Depreciation Expense A/c.		1000
	To,	Retained Earnings (1/7/2016) A/c.		500
	Income Tax Expenses A/c.	Dr.	300
	Retained Earnings (1/7/2016) A/c.	Dr.	150
	To,	Deferred Tax Assets A/c.		450
	NCI A/c.	Dr.	610
	To,	NCI Share of Profit A/c.		610

Acquisition Analysis:
Particulars		Fair Value	Carrying Amount	Net Fair Value
Share Capital		0	0	300000
Retained Earnings		0	0	200000
Building		200000	160000	40000
Net Fair Value of Identifiable Assets & Liabilities of Square Ltd.	A	200000	160000	540000
Consideration Transferred	B			240000
Non-Controlling Interest	C			405000
Total Purchase Value	D=B+C			645000
Goodwill	E=D-A			0

Though, Star Ltd. had acquired significant portion of interest in Mart Ltd., but it does not own majority voting right, i.e, equal or above 50% of the voting interest. Hence, Mart Ltd. cannot be considered as The Subsidiary Company of Star Ltd. For this reason, no goodwill or gain on bargain purchase would be recorded in the books of Star Ltd. for the acquisition of 25% shares in Mart Ltd.

Investment Journal Entries:-
			Dr.	Cr.
Date	Particulars		Amount	Amount
	Investment in Mart Ltd.:
1/7/2015	Investment in Mart Ltd. A/c.	Dr.	240000
	To,	Cash A/c.		240000
	Profit of Mart Ltd. on 2015-16:-
30/6/2016	Investment in Mart Ltd. A/c.	Dr.	15000
	To,	Equity Income in Mart Ltd.		15000
	Income Tax Expenses A/c.	Dr.	4500
	To,	Deferred Tax Liability A/c.		4500
	Dividend Received on 2015-16:-
30/06/2016	Cash A/c.	Dr.	5000
	To,	Investment in Mart Ltd. A/c.		5000
	Income Tax Expenses A/c.	Dr.	1500
	To,	Current Tax Liability A/c.		1500
	Profit of Mart Ltd. on 2016-17:-
30/6/2017	Investment in Mart Ltd. A/c.	Dr.	50000
	To,	Equity Income in Mart Ltd.		50000
	Income Tax Expenses A/c.	Dr.	15000
	To,	Deferred Tax Liability A/c.		15000
	Dividend Received on 2016-17:-
30/06/2016	Cash A/c.	Dr.	25000
	To,	Investment in Mart Ltd. A/c.		25000
	Income Tax Expenses A/c.	Dr.	7500
	To,	Current Tax Liability A/c.		7500

It is assumed that, Star Ltd. is not eligible to enjoy tax offset for Dividend Received Deduction. Otherwise, it can save 20% tax expenses for the cash dividend received.

Bibliography:-

Beams, F. A., Anthony, J. H., Bettinghaus, B., & Smith, K. (2015). Beams: Advanced Accounting. Pearson Higher Ed.

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia

Gornik-Tomaszewski, S., & Larson, R. K. (2014). New consolidation requirements under IFRS. Review of Business, 35(1), 47.

Gray, S. J. (Ed.). (2014). International accounting and transnational decisions. Butterworth-Heinemann

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill

Knapp, J. (2013). A Reconsideration of Consolidation Accounting Requirements and Pre?acquisition Dividends. Australian Accounting Review, 23(3), 190-207.

Parker, R. H. (2014). Concepts of consolidation in the EEC. International Accounting and Transnational Decisions, 171.

Saunders, A., & Cornett, M. M. (2014). Financial institutions management. McGraw-Hill Education,.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning

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