Topic 1: Consolidation: Principles and accounting requirements On 1 July 2017, P

Question

Topic 1: Consolidation: Principles and accounting requirements

On 1 July 2017, Patience Ltd acquired all the issued shares of Silence Ltd for a cash consideration of $1,000,000. At that date, the financial statements of Silence Ltd showed the following information.

Share Capital                650,000

General Reserve           20,000

Retained Earning           250,000

All the assets and liabilities of Silence Ltd were recorded at amounts equal to their fair values at the acquisition date, except some equipment recorded at $50,000 below its fair value with a related accumulated depreciation of $80,000. Silence Ltd accounted for all its property, plant and equipment in its own books using the cost model. In addition, Patience Ltd identified at acquisition date a contingent liability related to a lawsuit where Silence Ltd was sued by a former supplier and attached a fair value of $40,000 to that liability.

Required:

1. Prepare the acquisition analysis at 1 July 2017.

2. Prepare the consolidation worksheet entries for Patience Ltd’s group at 1 July 2017.

Explanation / Answer

1 Acquisition analysis Cash consideration $ 10,00,000 Less: Cost of acquisition (Refer working below) $ -8,50,000 Goodwill $   1,50,000 Working Share Capital $          6,50,000 General Reserve $             20,000 Retained earnings $          2,50,000 $9,20,000 Fair value of equipment $             50,000 Less: Accumulated depreciation $            -80,000 $-30,000 Contingent liabilty (lawsuit)    $-40,000 $   8,50,000 2 Consolidation worksheet entries for Patience Ltd’s group at 1 July 2017: Assets/Liabilties Dr. $   8,50,000 Goodwill Dr. $   1,50,000 Bank Cr. $ 10,00,000

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