Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,0

Question

Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,000, when the equity of Sarina Ltd consisted of:

Share Capital                                       $500,000

General Reserve                                      80,000

Retained Earnings                                   30,000

All identifiable assets and liabilities of Sarina Ltd were fairly valued at acquisition except the machinery, which had a fair value of $140,000. The machinery had a further 7-year life with depreciation based on the straight-line method.

Selected financial information of the two entities as at 1 July 2015 were as follows:

                                                   Hahndorf Ltd                    Sarina Ltd

Retained earnings at 30/6/15                 240,000                           30,000

Share capital                                          700,000                         500,000

General reserve                                        60,000                           80,000

Total equity                                       1,000,000                         610,000                  

Land                                                      350,000                         400,000

Machinery at cost                                                                        240,000

Accumulated depreciation                                                         (200,000)

Equipment at cost                                                                        250,000

Accumulated depreciation and                                                    (75,000)

impairment losses

Cash                                                         40,000                           20,000

Investment in Sarina Ltd                       700,000                                     -

Inventory                                                 40,000                           35,000

Liabilities                                               130,000                           60,000

Net assets                                           1,000,000                         610,000

The company income tax rate is 30%.

Required

Prepare the consolidation journal entries resulting from the acquisition on 1 July 2015 as they will be carried forward as at 30 June 2018. (Tip: do the journals related to the revaluation of the machinery as they would have appeared on 1 July 2015 and then do all the consolidation journal entries related to the acquisition and the revaluation of the machinery as at 30 June 2018, i.e. 3 years later).                                                                                (10 marks)

Explanation / Answer

Journal Entry for Revalution of Machinery S.No. Account Titles and explanation Debit Credit 1 Accumulated Depreciation $200,000 Machinery A/c $140,000 Machinery A/c $240,000 Revalution Reserve $100,000 To Record Revalution of Machinery Journal Entry for Consolidation as at Jul1,2015 carried Forward to Jul1, 2018 S.No. Account Titles and explanation Debit Credit 1 Business Purchase $700,000 Shareholders of Sarina Ltd. $700,000 To Record Business Purchased 2 Land $400,000 Machinery $140,000 Equipment $250,000 Cash $20,000 Inventory $35,000 Liabilities $60,000 Accumulated Depreciation on Equipment $75,000 Businee Purchase $700,000 Capital Reserve ( Bal. Fig.) $10,000 TO Record all asset & liabilities trfd at Fair Value 3 Shareholders of Sarian Ltd. $700,000 Cash $700,000 To Record Cash Payment Made

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