Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,0
ID: 2533672 • Letter: H
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 for both companies at 30 June 2018 is as follows: Hahndorf Ltd Sarina Ltd Sales revenue $1,000,000 $800,000 Cost of sales (600,000) (600,000) Gross profit 400,000 200,000 Dividend received from Sarina Ltd 30,000 - Management fee received 26,500 - Gain on sale of plant 35,000 - Admin expenses 55,800 28,700 Depreciation 29,500 56,800 Management fee paid - 26,500 Other expenses 306,200 8,000 Profit before tax 100,000 80,000 Tax expense (30,000) (24,000) Profit for the period 70,000 56,000 Retained earnings at 1/7/17 230,000 120,000 300,000 176,000 Dividend paid (20,000) (10,000) Dividend declared (40,000) (20,000) Retained earnings at 30/6/18 240,000 146,000 Share capital 900,000 500,000 General reserve 60,000 80,000 Total equity 1,200,000 726,000 Dividend payable 40,000 20,000 Other liabilities (note 1) 120,000 30,000 Total equity and liabilities 1,360,000 776,000 Shares in Sarina Ltd 700,000 - Dividends Receivable 20,000 - Inventory 40,000 50,000 Other assets (note 2) 600,000 726,000 Total assets 1,360,000 776,000 Notes 1. Other liabilities include deferred tax liabilities 2. Other assets include Land, Machinery, Equipment, and Accumulated depreciation and Impairment losses, and Deferred Tax asset. Other information: During the 2017-18 period, Sarina Ltd sold some items of inventory to Hahndorf Ltd for $92,000, recording a profit before tax of $12,000. Hahndorf Ltd has since resold half of these items. During the 2016-17 period, Hahndorf Ltd sold some items of inventory to Sarina Ltd. At 30 June 2017, Sarina Ltd still had inventory on hand on which Hahndorf Ltd had recorded a before-tax profit of $16,000. All this inventory has been sold during the 2017/18 financial year. During the year, Hahndorf Ltd made total sales to Sarina Ltd of $60,000. Sarina Ltd sold all these goods to customers outside the group. On 1 July 2017 Hahndorf Ltd sold an item of plant to Sarina Ltd for $116,000 when its carrying value in Hahndorf Ltd’s accounts was $81,000 (cost $135,000, accumulated depreciation $54,000). This plant is assessed as having a remaining useful life of five years. The Group has a policy of measuring its property, plant and equipment using the ‘cost model’. Sarina Ltd paid $26,500 in management fees to Hahndorf Ltd. The company income tax rate is 30%. Required (a) Prepare the consolidation journal entries for the above entities as at 30 June 2018, excluding those already done in Part B of this assessment task. Use reference numbers starting at (f) to number the journals. (18.5 marks) (b) Prepare the consolidated worksheet for the year ended 30 June 2018. Post all consolidation journal entries to the consolidated worksheet. Use the reference numbers (a) to (e) for the journals of Part B and (f) onwards for the journals in Part C when posting these journals to the consolidated worksheet. (11.5 marks)
Explanation / Answer
Answer To begin with we need to plot the Income Statement of both the companies as per below Income Statement as on June 30, 2018 Hahndorf Ltd Sarina Ltd Sales 1000000 800000 Less: Cost of Sales 600000 600000 Gross Profit 400000 200000 Other Income Dividend received from Sarina Ltd 30000 Management Fees received 26500 Gain on sale of Plant 35000 Total Income A 491500 200000 Depreciation 29500 56800 Admin Expenses 55800 28700 Management Fees paid 26500 Other expenses 306200 8000 Total Expenses B 391500 120000 Net Profit before tax C=A-B 100000 80000 Tax D 30000 24000 Profit after tax E=C-D 70000 56000 After plotting the Income Statement we need to plot the Balance Sheet of both the companies as per information given. Once all the given information in entered properly then we can begin entering the eliminations that is part b of the question Q. b) eliminations as per below together with the consolidated worksheet Consolidated Statement of financial position as on June 30, 2018 Hahndorf Ltd Sarina Ltd Eliminations Consolidated Debit Credit $ $ $ $ $ Share Capital 900000 500000 -500000 900000 General Reserve 60000 80000 -80000 60000 Retained Earnings Op. balance pn 01/07/2017 230000 120000 -120000 230000 Add: Profit transferred from Income Statement 70000 56000 -16000 -12000 98000 Sub-total 300000 176000 -136000 -12000 328000 Less: Dividends paid -20000 -10000 -30000 Dividends declared -40000 -20000 -60000 Closing balance on 30/03/2018 240000 146000 -136000 -12000 238000 Total Equity 1200000 726000 -716000 -12000 1198000 Dividend Payable 40000 20000 60000 Other Liabilities 120000 30000 -35000 115000 Accumulated other comprehensive gain/loss 80000 80000 Total Equity & Liabilities 1360000 776000 -716000 33000 1453000 Assets Shares in Sarina Ltd 700000 -700000 0 Dividends receivable 20000 20000 Inventory 40000 50000 -16000 -12000 62000 Other assets 600000 726000 80000 -35000 1371000 0 Total Assets 1360000 776000 64000 -747000 1453000 0 0 -780000 780000 0 Workings for adjustment of fari value of Plant in Sarina Ltd Adjustment for fair value of Sarina Assets Plant as on July 1, 2015 140000 Balance 7 years useful life Less: Depreciation July 2015-June 2016 20000 Depreciaiton = 140000/7) Plant as on July 1, 2016 120000 Less: Depreciation July 2016-June 2017 20000 Plant as on July 1, 2017 100000 Less: Depreciation July 2017-June 2018 20000 Plant as on June 30, 2018 80000 The consolidated worksheet above comes from the below eliminating consolidated Journals which form part of Q a) Q. a) Consolidation Journals as below - Date Particulars Debit Credit $ $ 30-06-2018 Share Capital in Sarina Ltd Dr 500000 General Reserves in Sarina Ltd Dr 80000 Retained Earnings of Sarina Ltd Dr 120000 - To Shares in Sarina Ltd of Hahndorf Ltd 700000 (Being eliminations of investments made in Sarina Ltd by Hahndorf Ltd) 30-06-2018 General Reserves in consolidation Dr 16000 General Reserves in consolidation Dr 12000 Inventory in Sarina Ltd 16000 Inventory in Hahndorf Ltd 12000 (Being inter-company profits eliminated on consolidation) 30-06-2018 Other assets (Plant) Dr 80000 Accumulated other comprehensive gain/loss 80000 (Being adjustment made for fair value of plant in Sarina Ltd) 30-06-2018 Other Liabilities Dr 35000 Other assets (Plant) 35000 (Being elimination of profit on sale of plant sold between companies eliminated $ 116000 sale when cost is $ 81000)
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