On 1 July 2011, Amy Ltd acquired all the issued ordinary shares (cum div.) and gained control of Zara Ltd for a consideration of $528,000. At that date the shareholders' equity of Zara Ltd was:
Share Capital $310,000
General Reserve 38,000
Retained Earnings 68,000
At acquisition date, all the identifiable assets and liabilities of Zara Ltd were recorded at amounts equal to fair value except for:
Carrying Fair
Amount Value
Goodwill 40,000 82,000
Inventory $100,000 $120,000
Land 80,000 120,000
Machinery (cost $30,000) 23,000 25,000
Plant & Equipment (cost $460,000) 280,000 286,000
Trademark (cost $225,000) 150,000 180,000
In addition at the date of acquisition, Zara Ltd had a provision for dividend of $20,000 and other provisions of $254,000. The dividend liability was paid on 1 September 2011. It also had a contingent liability of $13,000 that Amy Ltd considered to have a fair value of $11,000. This liability was settled in July 2015.
The machinery, which was estimated to have a further ten year life at acquisition date, was sold on 1 January 2016. The plant and equipment had a further six year life at acquisition date and was expected to be used evenly over that time. The trademark had a further ten year life. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation.
During the year ended 30 June 2012, all inventories on hand at acquisition date were sold, and the land was sold on 1 June 2016. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed.
Goodwill was tested annually for impairment. For the year ended 30 June 2015, an impairment loss on goodwill of $2,500 was recorded.
On 30 June 2015, Zara Ltd transferred $10,000 from the general reserve (pre-acquisition) to retained earnings.
Additional information:
On 4 May 2015, Amy Ltd sold some land to Zara Ltd. The land had originally cost Amy Ltd $40,000, but was sold to Zara Ltd for $46,000. To help Zara Ltd pay for the land, Amy Ltd gave Zara Ltd an interest-free loan of $18,000. Zara Ltd has as yet made any repayments on the loan.
On 1 July 2015, Zara Ltd has on hand inventory worth $23,000, being transferred from Amy Ltd in May 2015. The inventory had previously cost Amy Ltd $15,000. All this inventory was sold in the following four months.
On 1 January 2016, Amy Ltd sold furniture to Zara Ltd for $12,000. This had originally cost Amy Ltd $26,000 and had a carrying amount at the time of sale of $14,000. Both entities charge depreciation at a rate of 10% p.a.
On 3 February 2016, interim dividend was paid by Zara Ltd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends.
On 1 April 2016, Zara Ltd transferred an item of plant with a carrying amount of $21,000 to Amy Ltd for $29,000. Amy Ltd treated this item as inventory. The item was still on hand at the end of the year. Zara Ltd applied a 20% depreciation rate to this plant.
On 4 May 2016, Zara Ltd acquired $19,000 inventory from Amy Ltd. This inventory originally cost Amy Ltd $13,000. The profit in inventory at hand at 30 June 2016 was $2,000.
During the year ending 30 June 2016, Zara Ltd sold inventory costing $24,000 to Amy Ltd for $36,000. One quarter of this was sold to external parties for $13,500.
The tax rate is 30%.
On 30 June 2016 the trial balances of Amy Ltd and Zara Ltd were as follows:
Amy Ltd Zara Ltd
Cost of sales $282,000 $256,000
Other expenses 66,000 60,000
Income tax expense 43,000 39,000
Interim dividend paid 21,000 9,000
Final dividend declared 22,000 10,000
Cash 10,000 87,000
Dividend receivable 10,000 -
Other receivables 88,000 42,000
Inventory 120,000 110,000
Deferred tax assets 27,000 -
Machinery 68,000 60,000
Plant & equipment 540,000 490,000
Land 108,000 46,000
Furniture 20,000 25,000
Shares in Zara Ltd 508,000 -
Trademark - 325,000
Goodwill 62,000 40,000
Loan to Zara Ltd 18,000 -
2,013,000 1,599,000
Sales 400,000 364,000
Other income 62,000 56,000
Share capital 728,000 310,000
General reserve 70,000 100,000
Retained earnings (1/7/15) 409,000 190,000
Final dividend payable 22,000 10,000
Current tax liabilities 7,000 5,000
Other provisions 80,000 40,000
Loan from Amy Ltd - 18,000
Accumulated depreciation - P & E 216,000 320,000
Accumulated depreciation - Machinery 13,000 33,000
Accumulated depreciation - Furniture 6,000 33,000
Accumulated amortisation - trademark - 120,000
2,013,000 1,599,000
1) Prepare the acquisition analysis at 1 July 2011
2) Prepare the BVCR and pre-acquisition worksheet entries ONLY at 1July 2011
3) Prepare the consolidation worksheet entries (BCVR,pre-acquisition and intra-group adjustment entries) at 30 June 2016.