Response to the following problem:
On 1 July 2015, WC Ltd acquired all the shares in SC Ltd for $400,000. The equity and liability sections of SC Ltd.'s balance sheet showed the following:
Share capital (300,000 shares) $300,000
General reserve $60,000
Retained earnings $10,000
Dividend payable $5,000
At acquisition date, all the identifiable assets and liabilities of SC Ltd were recorded at amounts equal to fair value except for:
Carrying amount Fair value
Inventory $120,000 $130,000
Machinery (cost $200,000) $150,000 $165,000
In June 2017, a $4,000 dividend was declared by SC Ltd from post-acquisition profits to be paid in August 2017.
The inventory was all sold by 30 June 2016. The machinery had a further five year life and is depreciated on a straight line basis. This machinery was sold on 1 January 2017.
At the acquisition date, SC Ltd had a contingent liability of $20,000 that WC Ltd considered to have a fair value of $12,000. This liability was settled in full at its fair value in June 2017.
Goodwill was not impaired in any period. In the year ending 30 June 2016, SC Ltd transferred $2,000 from pre-acquisition retained earnings to general reserve.
In the year ending 30 June 2017, SC Ltd transferred $5,000 to retained earnings from the general reserve pre-acquisition.
(Please turn over for the continued question)
On 30 June 2017, the trial balances of WC Ltd and SC Ltd were as follows:
WC Ltd SC Ltd
Shares in SC Ltd $390 000 -
Inventory 174 000 $160 000
Other current assets 54 000 25 000
Machinery 572 500 412 000
Land 166 200 65 000
Income tax expenses 25 000 30 000
Goodwill - 5 000
Interim dividend paid 10 000 5 000
Dividend declared 10 000 4 000
1 401 700 706 000
Share capital $800 000 $330 000
General reserve 150 000 57 000
Retained earnings (30/06/2017) 15 000 15 000
Profit before tax 80 000 90 000
Debentures 100 000 40 000
Dividend payable 10 000 4 000
Other current liabilities 34 700 60 000
Accumulated depreciation - Machinery 212 000 110 000
1 401 700 706 000
Additional information:
a) On 1 January 2017, SC Ltd sold inventory costing $15,000 to WC Ltd for $25,000. Half of this inventory was sold by WC Ltd to external parties and the other half of the inventory was still on hand at 30 June 2017.
b) On 31 March 2017, WC Ltd sold machinery to SC Ltd for $6,000 which was $1,000 below its carrying amount at that date. SC Ltd charged depreciation at the rate of 20% per annum on this machinery.
c) The tax rate is 30%.
REQUIREMENTS:
Prepare the consolidation worksheet journal entries for the year ended 30 June 2017. Include narrations and show any relevant workings also in the narrations.