Prepare an acquisition analysis and the consolidation


Topics 1 & 2: Consolidation: Principles, accounting requirements and intra-group transactions

On 1 July 2015, Peace Ltd acquired all the shares of Sublime Ltd. At this date, the equity and liability sections of Sublime Ltd's statement of financial position comprised of the following items:

 

$

Share capital (30 000 shares)

30 000

Retained earnings

10 500

General reserve

15 000

Other reserves

3 000

At acquisition date, all the identifiable assets and liabilities of Sublime Ltd were recorded at amounts equal to fair value except for:

 

Carrying amount

Fair value

 

$

$

Inventory

25 000

28 000

Equipment (cost $15 000)

12 000

16 000

Machinery (cost $8 500)

7 500

8 000

Land

9 240

12 240

The inventory on hand in Sublime Ltd at 1 July 2015 was sold during September 2015.

The machinery which had a further 5-year life on acquisition date was sold on 1 January 2017. The land on hand at acquisition date was sold by 1 March 2016. The equipment was estimated to have a further 8-year life. Valuation adjustments are made on consolidation and, on realisation of a business combination valuation reserve, a transfer is made to retained earnings on consolidation.

On 30 June 2017, the trial balances of Peace Ltd and Sublime Ltd were as follows:

Debit balances

Peace Ltd

Sublime Ltd

 

$

$

Shares in Sublime Ltd

68 600

-

Inventory

85 790

35 160

Other current assets

4 310

1 550

Deferred tax assets

8 100

3 700

Machinery

14 000

11 000

Land

-

12 240

Equipment

17 000

18 650

Cost of sales

32 500

26 750

Other expenses

11 000

13 500

Income tax expense

3 600

1 000

Interim dividend paid

2 000

1 000

Final dividend declared

5 000

1 500

Advance to Sublime Ltd

5 000 

-       

 

256 900

126 050

Credit balances

 

 

Share capital

85 000

33 000

General reserve

20 500

15 000

Retained earnings (1/7/16)

8 000

17 750

Debentures

60 000

-

Final dividend payable

5 000

1 500

Current tax liabilities

4 000

1 250

Other payables

17 400

5 050

Advance from Peace Ltd

-

5 000

Sales

42 500

32 500

Other revenue

9 500

10 500

Gains/(losses) on sale of non-current assets

2 000

500

Accumulated depreciation - machinery

2 000

1 000

Accumulated depreciation - equipment

1 000 

3 000 

 

256 900

126 050

Additional information

(1) A bonus dividend, on the basis of 3 ordinary shares for every 30 ordinary shares held, was paid in January 2017 out of other reserves existing at acquisition date.

(2) On 1 July 2016, Sublime Ltd has on hand inventory worth $6 000 transferred from Peace Ltd in June 2016. The inventory had previously cost Peace Ltd $5 900. Profit in inventory on hand at 30 June 2016 is $100. By 30 June 2017, Sublime Ltd had sold all $6 000 of the inventory to external parties.

(3) On 1 January 2017, Peace Ltd acquired $7 500 worth of inventory for cash from Sublime Ltd. The inventory had previously cost Sublime Ltd $5 500. By 30 June 2017, Peace Ltd had sold $5 625 of the transferred inventory for $8 000 to external entities.

(4) On 1 January 2016, Sublime Ltd sold equipment to Peace Ltd for $4 000. This had originally cost Sublime Ltd $6 000 and had a carrying amount at the time of sale of $3 500. Both entities charge depreciation at a rate of 10% p.a. straight-line.

(5) Peace Ltd sold an item of inventory to Sublime Ltd on 1 January 2017 for use as machinery. This item cost Peace Ltd $2 000 and was sold to Sublime Ltd for $3 000. Sublime Ltd depreciated the item at 10% p.a. straight-line.

(6) On 30 June 2017, half of the goodwill was written off as a result of an impairment test.

(7) All dividends declared by Sublime Ltd have been from post-acquisition profits.

(8) The tax rate is 30%.

Required -

(i) Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Peace Ltd and Sublime Ltd.

(ii) Complete a detailed consolidation worksheet for the year ending 30 June 2017.

(iii) Prepare the following financial statements for Peace Ltd at 30 June 2017:

a. Consolidated Statement of Profit or Loss and Other Comprehensive Income.

b. Consolidated Statement of Changes in Equity.

c. Consolidated Statement of Financial Position.

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Accounting Basics: Prepare an acquisition analysis and the consolidation
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