Consolidation worksheet entries | My Assignment Tutor

Question 10.15Consolidation worksheet entries ⋆⋆⋆ LO5Ron Ltd operates a number of supermarkets with an emphasis on the supply of qualityproduce. The operations of Sam Ltd are primarily in the fine fruit market. Believingthat the acquisition of Sam Ltd would enable Ron Ltd to expand its supply of qualityproduce to its customers, Ron Ltd commenced actions to acquire the shares of Sam Ltd.On 1 July 2019, Ron Ltd acquired all the issued shares (cum div.) of Sam Ltd for $247000. At this date the equity of Sam Ltd consisted of: Share capitalReserves$ 20000010000Retained earnings20000       On 1 July 2019, Sam Ltd had recorded a dividend payable of $12 000 and goodwill of$10 000 (net of accumulated impairment losses of $14 000). The dividend was paid inAugust 2019. In the previous year’s annual report Sam Ltd had reported the existenceof a contingent liability for damages based upon a lawsuit by a customer who hadslipped on some fallen fruit in one of the stores operated by Sam Ltd. Ron Ltdcalculated that this liability had a fair value of $20  000. Sam Ltd also had somecustomer databases that were not recorded as assets but Ron Ltd placed a fair value of$12 000 on these items. Sam Ltd believed that the databases had a future life of 4 years.All of the identifiable assets and liabilities of Sam Ltd were recorded at amounts equalto their fair values except for the following:Carrying amount Fair value Plant (cost $240000)Land$ 188000160000$ 192000170000Inventories4000048000              The plant had an expected remaining useful life of 10 years. The land was sold by SamLtd in February 2021. The inventories were all sold by 30 June 2020.In February 2022, Sam Ltd transferred $6000 of the reserves on hand at 1 July 2019 toretained earnings. The remaining $4000 was transferred in February 2023.The court case involving the damages sought by the customer was settled in May 2023.Sam Ltd was required to pay $15 000 to the customer.RequiredPrepare the consolidation worksheet entries for the preparation by Sam Ltd of itsconsolidated financial statements at 30 June 2023.At 1 July 2016:Net fair value of identifiable assetsand liabilities of Sam Ltd = ($200 000 + $10 000 + 20 000) (equity)+ $4 000 (1 – 30%) (plant)+ $10 000 (1 – 30%) (land)+ $8 000 (1 – 30%) (inventory)+ $12 000 (1 – 30%) (data bases)– $20 000 (1 -30%) (damages payable)– $10 000 (goodwill)= $229 800 Consideration transferred= $247 000 – $12 000 (dividend receivable)= $235 000GoodwillRecorded goodwillUnrecorded goodwillWorksheet entries at 30 June 2023:Business combination valuation entries:Accumulated depreciationPlantDeferred tax liability= $5 20052 00048 0001 200= $10 000= $(4 800)DrCrCrBusiness combination valuation reserveCr2 800Depreciation expenseRetained earnings (1/7/22)Accumulated depreciation(1/10 x $4 000 p.a. for 4 years)Deferred tax liabilityDrDrCr4001 2001 600Dr480Income tax expenseRetained earnings (1/7/22)CrCr120360Amortisation expense – data basesIncome tax expenseRetained earnings (1/7/22)DrCrDr3 0009006 300Transfer from business combinationvaluation reserveCr8 400Transfer from business combination valuationreserveIncome tax expenseDamages expenseDrDrCr14 0006 00015 000GainCr5 000Accumulated impairment losses – goodwillBusiness combination valuation reserveDrDr14 0004 800GoodwillPre-acquisition entries:At 1/7/19:Retained earnings (1/7/19)Share capitalCr18 800DrDr20 000200 000ReservesDr10 000Business combination valuation reserveDr5 000Shares in Sam LtdCr235 000Dividend payableDividend receivableDrCr12 00012 000 Note: at 30/6/23 the entry at acquisition date is affected by: sale of inventory in prior period payment of dividend: $12 000 in prior period sale of land in prior period transfer from reserves – $6 000 – in prior period transfer from reserve – $4 000 – in current period settlement of court case in current period de-recognition of data bases in current period. Retained earnings (1/7/22) *Share capitalReservesDrDrDr38 600200 0004 000Business combination valuation reserve Cr7 600Shares in Sam LtdCr235 000* = $20 000 + $5 600 (BCVR – inventory) + $7 000 (BCVR – land) + $6 000 (reservetransfer)Transfer from reserves4 000DrReservesCr4 000Business combination valuation reserveTransfer from business combinationvaluation reserve(Court case settled)Dr14 00014 000CrTransfer from business combination valuationreserveDr8 400 Business combination valuation reserve Cr(Data bases de-recognised)8 400 QUESTION 11.4Worksheet journal entries for intragroup transactions: inventories and PPE (LO2, 3, 4)Sharon Ltd owns all the issued shares of Kelly Ltd. In relation to the followingintragroup transactions, prepare the consolidation adjustment entries for 30 June 2022.Assume an income tax rate of 30%.a) On 1 January 2021, Sharon Ltd sold inventories costing $6000 to Kelly Ltd at atransfer price of $10 000. On 1 September 2021, Kelly Ltd sold half theinventories back to Sharon Ltd for $5000. Sharon Ltd has none of theinventories on hand at 30 June 2022. Kelly Ltd’s records show $2500 of theinventories were sold to an external party at a loss of $500 during the currentyear and $2500 of the inventories are still on hand at 30 June 2022.d) During the period ended 30 June 2021, Sharon Ltd sold inventories to Kelly Ltdfor $18 000, recording a before-tax profit of $6800. Half these inventories wereunsold by Kelly Ltd at 30 June 2021 and one quarter were unsold at 30 June 2022.(f) On 1 May 2022, Kelly Ltd sold inventories costing $3000 to Sharon Ltd for $3600.The goods were sold to Sharon Ltd on credit terms of 60 days. At 30 June 2022,Sharon Ltd has half of the goods still on hand and has only paid Kelly Ltd half ofthe invoice amount.CONSOLIDATION WORKSHEET ENTRIES 30 JUNE 2022(a) Intragroup sale of inventories in prior period with unrealised profit in opening andending inventories and intragroup sale of inventories in current periodRetained Earnings (1/7/21) Dr 4 000Cost of Sales Cr 4 000Income Tax Expense Dr 1 200Retained Earnings (1/7/21) Cr 1 200Sales Dr 5 000Cost of Sales Cr 5 000Cost of Sales Dr 1 000Inventories Cr 1 000Deferred Tax Asset Dr 300Income Tax Expense Cr 300CalculationsUnrealised profit b/t in opening retained earnings $4000 [= $10 000 – $6000]Tax effect $1800 [= 30% x $1200]Current period sale $5000Inventories still on hand at period end 25% [= $2500 ÷ $10 000]Unrealised profit b/t in ending inventories $1000 [= $4000 x 25%]Tax effect $300 [= 30% x $1000]Combined journal entry SalesRetained Earnings (1/7/21)Deferred Tax AssetDrDrDr5 0002 800300Income Tax ExpenseCost of SalesInventoriesDrCrCr9008 0001 000 (d) Intragroup sale of inventories in prior period with unrealised profit in openingand ending inventoriesRetained Earnings (1/7/21) Dr 3 400Cost of Sales Cr 3 400Income Tax Expense Dr 1 020Retained Earnings (1/7/21) Cr 1 020Cost of Sales Dr 1 700Inventories Cr 1 700Deferred Tax Asset Dr 510Income Tax Expense Cr 510CalculationsUnrealised profit b/t in opening retained earnings $3400 [= $6800 x 50% on hand]Tax effect $1020 [= 30% x $3400]Unrealised profit b/t in inventories $1700 [= $6800 x 25% on hand]Tax effect $510 [= 30% x $1700](f) Intragroup sale of inventories in current period with unrealised profit in endinginventories and outstanding invoice amountSales Dr 3 600Cost of Sales Cr 3 000Inventories Cr 600Deferred Tax Asset Dr 180Income Tax Expense Cr 180Accounts Payable Dr 1 800Accounts Receivable Cr 1 800CalculationsUnrealised profit b/t in ending inventories $600 [= $3600 – $3000]Tax effect $180 [= 30% x $600]Outstanding payable/receivable $1800 [=$3600 x 50%]Question 11.9Consolidation journal entries for intragroup transactions: inventories, PPE, services(LO2, 3, 4, 5)On 1 July 2018, Priscilla Ltd acquired all the issued shares of Lisa Marie Ltd. Theconsideration for the acquisition was $30  000 in cash and 20  000 shares in Priscilla Ltd,valued at $3 per share. At this date, the equity of Lisa Marie Ltd consisted of $66  000share capital and $6000 retained earnings.At 1 July 2018, all the identifiable assets and liabilities of Lisa Marie Ltd were recordedat amounts equal to their fair values except for:Carrying amount Fair value Plant (cost $150000)Patents$ 12000090000$ 123000105000Inventories1800022500               The plant was considered to have a further 5-year life. The patents were sold for $120  000to an external entity on 18 August 2018. The inventories were all sold by 30 June 2019.Additional information(a) Priscilla Ltd sells certain raw materials to Lisa Marie Ltd to be used in itsmanufacturing process. At 1 July 2021, Lisa Marie Ltd held inventories sold to itby Priscilla Ltd in the previous year at a profit of $600. During the 2021–22 year,Priscilla Ltd sold inventories to Lisa Marie Ltd for $21  000. None of theinventories are on hand at 30 June 2022. (b)Lisa Marie Ltd also sells items of inventories to Priscilla Ltd. During the 2021–22year, Lisa Marie Ltd sold goods to Priscilla Ltd for $4500. At 30 June 2022, inventories which had been sold to Priscilla Ltd at a profit of $300 are still on handin Priscilla Ltd’s inventories. (d)On 1 January 2021, Priscilla Ltd sold inventories to Lisa Marie Ltd for $18000.The inventories had cost Priscilla Ltd $16000. This item was classified by Lisa     Marie Ltd as plant and depreciated at 20% p.a.CONSOLIDATION FOR 30 JUNE 2022ACQUISITION ANALYSISAt 1 July 2018: ===$66 000 + $6 000$72 000+ $3 000 (1 – 30%) (plant)+ $15 000 (1 – 30%) (patents)+ $4 500 (1 – 30%) (inventories)+ $15 750$87 750$90 000$2 250==== Net fair value of identifiable assets WORKSHEET ENTRIES FOR 30 JUNE 2022Business combination valuation entries:1. Recognition of fair value adjustment for plant of $3000 Accumulated DepreciationDr30 000PlantCr27 000Deferred Tax LiabilityCr900Business Combination Valuation ReserveCr2 100 Explanations Accumulated DepreciationDr30 000PlantCr30 000PlantDr3000Deferred Tax LiabilityCr900Business Combination Valuation ReserveCr2 100 2. Depreciation adjustment for plant of $600 p.a. [= $3000 x 20%] for 4 years from 1/7/18Depreciation Expense Dr 600Retained Earnings (1/7/21) Dr 1 800Accumulated Depreciation Cr 2 400Deferred Tax Liability Dr 720Income Tax Expense Cr 180Retained Earnings (1/7/21) Cr 540ExplanationsCurrent year adjustment to depreciation expense $600 [= $600 x 1 year]Prior year adjustment to retained earnings (1/7/21) $1800 [= $600 x 3 years]3. Recognition of purchased goodwill of $2250 GoodwillDr2 250Business Combination Valuation ReserveCr Pre-acquisition entries:4. Elimination of investment asset against pre-acquisition equitiesShare Capital Dr 66 000Retained Earnings (1/7/21) Dr 19 650Business Combination Valuation Reserve Dr 4 350Shares in Mamie Ltd Cr 90 000ExplanationsRetained earnings $19 650 [= $6000 + ($3150 + $10 500) fair value adjustments after tax forpatents and inventories sold in prior year]BCVR $4 350 [= $2250 goodwill + $2100 fair value adjustment after tax for plant still on hand]Check: Fair value adjustments $15 750 [= Retained earn (op.) $13 650 + BCVR (op.) $2100]Intragroup transactions:5. Sales in current period of $21 000 with no unrealised profit in ending inventoriesSales Revenue Dr 21 000Cost of Sales Cr 21 0006. Sales in current period of $4500 with unrealised profit of $300 in ending inventories Sales RevenueDr4 500Cost of SalesCr4 200InventoriesCr300Deferred Tax AssetDr90Income Tax ExpenseCr90 7. Sales in prior period with unrealised profit of $600 in opening inventoriesRetained Earnings (1/7/21) Dr 420Income Tax Expense Dr 180Cost of Sales Cr 600ExplanationsRetained Earnings (1/7/21) Dr 600Cost of Sales Cr 600Income Tax Expense Dr 180Retained Earnings (1/7/21) Cr 18010. Sale of inventory in prior period at a profit before tax of $2000 reclassified as plant Retained Earnings (1/7/21)Deferred Tax AssetDrDr1 400600PlantCr2 000 Explanations Retained Earnings (1/7/21)PlantDrCr2 0002 000Deferred Tax AssetRetained Earnings (1/7/21)DrCr600600