On 1 July 2015, Victoria Ltd acquired 70% of the shares of Melbourne Ltd for $52
ID: 2487210 • Letter: O
Question
On 1 July 2015, Victoria Ltd acquired 70% of the shares of Melbourne Ltd for $526,000 on a cum div. basis. Victoria Ltd had acquired 30% of the shares of Melbourne Ltd two years earlier for $180,000. This investment, classified as an available-for-sale investment, was recorded at a fair value on 1 July 2015 of $226,000. At 1 July 2015, the equity and liability sections of Melbourne Ltd’s statement of financial position showed the following balances:
Share Capital
460,000
General Reserve
50,000
Retained Earnings
100,000
Other liabilities
100,000
Dividend payable
30,000
At acquisition date, all the identifiable assets and liabilities of Melbourne Ltd were recorded at amounts equal to fair value except for:
Carrying Amount
Fair Value
Land
95,000
100,000
Vehicle (@ cost 40,000)
35,000
39,000
Equipment (@ cost 420,000)
294,000
309,000
Inventory
98,000
101,000
The Vehicle, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2018. The equipment had a further five year life at acquisition date and was expected to be used evenly over that time. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation.
Melbourne Ltd had not recorded an internally developed patent. Victoria Ltd valued this patent at $90,000 and was assumed to have a ten year life. In May 2017, Melbourne sold this patent to an external party for $100,000. It also had a contingent liability of $19,000 that Victoria Ltd considered to have a fair value of $15,000. This liability was settled in July 2017.
The dividend liability was paid on 1 September 2015. All inventories on hand at acquisition date were sold by June 2016. The land was sold on 1 June 2018 to Peters Ltd. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed.
On 30 May 2017, Melbourne Ltd transferred $8,000 from the general reserve (pre-acquisition) to retained earnings. A bonus dividend of $10,000 was paid in December 2017 out of pre-acquisition profits.
Goodwill was tested annually for impairment. For the year ended 30 June 2017, an impairment loss on goodwill of $4,000 was recorded.
Additional information:
(i) Melbourne Ltd sold a warehouse with a carrying amount of $82,000 to Victoria Ltd for $100,000. The transaction took place on 1 January 2017. Victoria Ltd charges depreciation at 5% p.a. on a straight-line basis.
(ii) On 31 March 2017, Victoria Ltd sold some land to Melbourne Ltd. The land had originally cost Victoria Ltd $64,000, but was sold to Melbourne Ltd for $63,000. To help Melbourne Ltd pay for the land, Victoria Ltd gave Melbourne Ltd an interest-free loan of $29,000. Melbourne Ltd has as yet made no repayments on the loan.
(iii) In April 2017, Victoria Ltd sold inventory to Melbourne Ltd for $12,000, at a mark-up of 20% on cost. One quarter of this inventory was unsold by Melbourne Ltd at 30 June 2017. The remaining inventory was sold in the following three months.
(iv) On 1 October 2017, Victoria Ltd issued 1,000 15% debentures of $100 at nominal value. Melbourne Ltd acquired 400 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities’ accounts.
(v) On 18 February 2018, interim dividend was paid by Melbourne Ltd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends.
(vi) On 1 April 2018, Melbourne Ltd transferred an item of plant with a carrying amount of $32,000 to Victoria Ltd for $41,000. Victoria Ltd treated this item as inventory. The item was still on hand at the end of the year. Melbourne Ltd applied a 20% depreciation rate to this plant.
(vii) During the year ending 30 June 2018, Melbourne Ltd sold inventory to Victoria Ltd for $60,000, recording a before-tax profit of $16,000. One quarter of this inventory was unsold by Victoria Ltd at 30 June 2018.
(viii) The tax rate is 30%.
On 30 June 2018 the trial balances of Victoria Ltd and Melbourne Ltd were as follows:
Victoria Ltd
Melbourne Ltd
Cost of sales
338,000
307,000
Other expenses
80,000
72,000
Income tax expense
41,000
40,000
Interim dividend paid
21,000
14,000
Final dividend declared
22,000
15,000
Cash
181,000
90,000
Dividend receivable
20,000
-
Other receivables
206,000
227,000
Inventory
244,000
132,000
Deferred tax assets
35,000
-
Vehicles
82,000
72,000
Plant & equipment
648,000
380,000
Land
130,000
123,000
Warehouses
180,000
90,000
Debentures in Victoria Ltd
-
40,000
Shares in Melbourne Ltd
722,000
-
Goodwill
74,000
30,000
Loan to Melbourne Ltd
29,000
-
3,053,000
1,647,000
Sales
480,000
437,000
Other revenue & income
79,000
56,000
Share capital
874,000
470,000
Share options
80,000
-
General reserve
84,000
72,000
Retained earnings (1/7/2017)
490,000
228,000
Final dividend payable
22,000
20,000
Current tax liabilities
8,000
7,000
Other liabilities
96,000
60,000
Debentures
400,000
-
Loan from Victoria Ltd
-
29,000
Accumulated depreciation – P & E
388,000
228,000
Accumulated depreciation – Vehicle
25,000
22,000
Accumulated depreciation – Warehouses
27,000
18,000
3,053,000
1,647,000
Required
Prepare the acquisition analysis as at 1 July 2015. (3 Marks).
Prepare the BVCR and pre-acquisition worksheet entries ONLY as at 30 June 2016. (5 marks)
Prepare full consolidation worksheet entries as at 30 June 2018. (12 marks)
Share Capital
460,000
General Reserve
50,000
Retained Earnings
100,000
Other liabilities
100,000
Dividend payable
30,000
Explanation / Answer
Solution -(a)
Calculation of Pre acquisition Profit
Retained Earnings as on July-1,2015
$1,00,000
Bonus Dividend
-$10,000
Interim Dividend paid out of preaquisition profit
-$11,000
General Reserve as on July 2015
$50,000
Profit on revaluation of asset
Land
$5,000
Truck (cost $30,000)
$4,000
Equipment (cost $420,000)
$15,000
Goodwill
$24,000
Inventory
$3,000
Share of Black Ltd. On Melbourne Ltd.'s Equity
$1,80,000
Investment in Melbourne Ltd.
$7,22,000
Share Capital
$4,00,000
Bonus Dividend
$1,00,000
Share of Preaquisition profit on Melbourne Ltd.'s Equity
$1,80,000
Amount paid for Goodwill
$42,000
Solution-(b)
Carrying Amount
Fair Value
Difference in Fair Value over Carrying Amount
Land
$75,000
$80,000
$5,000
Truck (cost $30,000)
$25,000
$29,000
$4,000
Equipment (cost $420,000)
$2,94,000
$3,09,000
$15,000
Goodwill
$48,000
$72,000
$24,000
Inventory
$88,000
$91,000
$3,000
BVCR and pre-acquisition worksheet entries ONLY at 30 June 2016
Land………………..Dr.
$5,000
Truck ……………..Dr.
$4,000
Equipment………..Dr.
$15,000
Goodwill……………Dr.
$24,000
Inventory……………..Dr.
$3,000
Investment in Melbourne Ltd.
$51,000
Solution-(c)
Prepare the consolidation worksheet entries (Inc. BCVR, pre-acquisition entries and inter-group transactions) at 30 June 2018.
Depreciation on truck per year ($29000/4)=
$7,250
Depreciation on truck upto Dec 2017=
$18,125
Carrying Value of truck on January 2018 =
$10,875
Depreciation on equipment per year ($309000/5)=
$61,800
Amortization on Internal Trademark per year ($90000/10)=
$9,000
Dividend Payable Account…………..Dr.
$30,000
Bank Account
$30,000
Bank Account……………….Dr.
$91,000
Inventories
$91,000
Investment in Melbourne Ltd. Account……………..Dr.
$8,000
Retained Earnings
$8,000
Dividend Receivable……………Dr.
$1,00,000
Investment in Melbourne Ltd. Account
$1,00,000
Impairment Loss on Goodwill……………..Dr.
$4,000
Goodwill Account
$4,000
Internal Trade Mark Account…………….Dr.
$90,000
Contingent Liability Account………….Dr.
$15,000
Retained Earnings
$75,000
Net Income for the year ended June 2018
Victoria Ltd
Melbourne Ltd
Sales
480000
437000
Other revenue & income
74000
56000
Total Revenue
554000
493000
Cost of sales
338000
307000
Other expenses
80000
72000
Income tax expense
41000
40000
Interim dividend paid
21000
11000
Net Income
74000
63000
Note-2 Retained earnings on 30th June 2018
Net Income of Victoria Ltd. on June 30th 2018 =
$74,000
Add: Share of Net Income of Melbourne Ltd. on 30th June 2018 =
$63,000
Add: Internal Trade Mark
$90,000
Less: Contingent Liability
$15,000
Less: Amortization of Trade Mark
$27,000
Less: Unrealised Profit on sale of warehouse
$18,000
Add: Depreciation overcharged on warehouse
$7,500
Less: Depreciation undercharged on Truck
$2,500
Less: Depreciation undercharged on Equipment
$9,000
Less: Transfer from General Reserve
$8,000
Add: Bonus Dividend from preaquisition
$1,00,000
Less: Unrealised Profit on sale of land to Melbourne Ltd
$9,000
Less: Unrealised Profit on sale of goods to Melbourne Ltd
$2,000
Add: interim dividend paid out of preaquisition profit
$11,000
Less: Unrealised Profit on sale of plant to Victoria Ltd
$9,000
Add: Depreciation overcharged on plant
$450
Less: Unrealised Profit on sale of goods to Victoria Ltd
$16,000
Retained earnings of Victoria on July 1 2017
$4,90,000
Retained earnings of Melbourne Ltd. from July 2015 to July 1 2017
$1,49,000
Consolidated Profit for Balance Sheet June 2018
$8,69,450
Solution-(d)
Financial Statements
Victoria
Melbourne
Adjustments
Group
Ltd
Ltd
Dr
Cr
Sales revenue
4,80,000
4,37,000
9,17,000
Other revenue & income
74,000
56,000
1,30,000
5,54,000
4,93,000
10,47,000
Cost of sales
3,38,000
3,07,000
6,45,000
Other expenses
80,000
72,000
1,52,000
4,18,000
3,79,000
7,97,000
Profit before tax
1,36,000
1,14,000
115500
271950
4,06,450
Tax expense
41,000
40,000
81,000
Profit
95,000
74,000
115500
271950
3,25,450
Retained earnings
4,90,000
2,28,000
7,18,000
(1/7/2017)
Transfer from BCV reserve
--
--
5,85,000
3,02,000
8,87,000
Dividend paid
21,000
11,000
32,000
Dividend declared
22,000
15,000
37,000
43,000
26,000
69,000
Retained earnings
5,42,000
2,76,000
(30/6/2018)
8,18,000
Share capital
8,74,000
4,10,000
12,84,000
Share options
80,000
60,000
1,40,000
General Reserve
84,000
72,000
8000
1,64,000
BCVR
-
-
Total Equity
15,80,000
8,18,000
8000
24,06,000
DTL
-
-
Dividend Payable
22,000
15,000
37,000
Current Tax Liabilities
8,000
7,000
15,000
Other liabilities
96,000
65,000
1,61,000
Debentures
4,00,000
-
4,00,000
Loan from Victoria Ltd
-
29,000
29000
0
Total Liabilities
5,26,000
1,16,000
29000
6,13,000
Total Liabilities + Equity
21,06,000
9,34,000
30,75,500
Victoria
Melbourne
Adjustments
Group
Ltd
Ltd
Dr
Cr
Cash
1,81,000
90,000
2,71,000
Dividend receivable
15,000
0
15,000
Other receivables
2,06,000
2,27,000
4,33,000
Inventory
2,44,000
1,32,000
3000
-18000
3,97,000
Deferred tax assets
35,000
0
35,000
Land
1,30,000
1,23,000
5000
2,58,000
Trucks
82,000
72,000
1,54,000
Accumulated depreciation – Trucks
-25,000
-22,000
-47,000
Plant & equipment
6,48,000
3,80,000
15000
10,43,000
Accumulated depreciation – Plant & Equipment
-3,88,000
-2,28,000
-9000
-6,25,000
Warehouses
1,80,000
90,000
2,70,000
Accumulated depreciation – Warehouses
-27,000
-18,000
7500
-37,500
Trademark
90000
90000
Accumulated amortization - Trademark
-27000
-27000
Debentures in Victoria Ltd
-
40,000
-40000
0
Shares in Melbourne Ltd
7,22,000
-
0
Goodwill
74,000
48,000
42000
1,64,000
Accumulated impairment losses
-
-
-4000
-4000
Loan to Melbourne Ltd
29,000
-
-29000
0
Total assets
21,06,000
9,34,000
162500
-127000
30,75,500
Solution -(a)
Calculation of Pre acquisition Profit
Retained Earnings as on July-1,2015
$1,00,000
Bonus Dividend
-$10,000
Interim Dividend paid out of preaquisition profit
-$11,000
General Reserve as on July 2015
$50,000
Profit on revaluation of asset
Land
$5,000
Truck (cost $30,000)
$4,000
Equipment (cost $420,000)
$15,000
Goodwill
$24,000
Inventory
$3,000
Share of Black Ltd. On Melbourne Ltd.'s Equity
$1,80,000
Investment in Melbourne Ltd.
$7,22,000
Share Capital
$4,00,000
Bonus Dividend
$1,00,000
Share of Preaquisition profit on Melbourne Ltd.'s Equity
$1,80,000
Amount paid for Goodwill
$42,000
Solution-(b)
Carrying Amount
Fair Value
Difference in Fair Value over Carrying Amount
Land
$75,000
$80,000
$5,000
Truck (cost $30,000)
$25,000
$29,000
$4,000
Equipment (cost $420,000)
$2,94,000
$3,09,000
$15,000
Goodwill
$48,000
$72,000
$24,000
Inventory
$88,000
$91,000
$3,000
BVCR and pre-acquisition worksheet entries ONLY at 30 June 2016
Land………………..Dr.
$5,000
Truck ……………..Dr.
$4,000
Equipment………..Dr.
$15,000
Goodwill……………Dr.
$24,000
Inventory……………..Dr.
$3,000
Investment in Melbourne Ltd.
$51,000
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