Question

Jimmy Ltd acquired all the issued shares (cum-div.) of Nu Ltd on 1 July 2019 for $110 000. At this date Nu Ltd recorded a dividend payable of $10 000 and equity of:

Share capital	$54 000
Retained earnings	36 000
Asset revaluation surplus	18 000

All the identifiable assets and liabilities of Nu Ltd were recorded at amounts equal to their fair values at acquisition date except for:

	Carrying amount	Fair value
Inventories	14 000	16 000
Machinery (cost $100 000)	92 500	94 000

The machinery was considered to have a further 5-year life. Of the inventory, 90% was sold by 30 June 2020. The remainder was sold by 30 June 2021.

Both Jimmy Ltd and Nu Ltd use the valuation method to measure the land. At 1 July 2019, the balance of Jimmy Ltd’s asset revaluation surplus was $13 500.

In May 2020, Nu Ltd transferred $3 000 from the retained earnings at 1 July 2019 to a general reserve.

The tax rate is 30%.

The following information was provided by the two companies at 30 June 2020.

	Jimmy Ltd	Nu Ltd
Profit before tax	$ 120 000	$ 12 500
Income tax expense	(56 000)	(4 200)
Profit for the year	64 000	8 300
Retained earnings (1/7/19)	80 000	36 000
	144 000	44 300
Transfer to general reserve	(0)	(3 000)
Retained earnings (30/6/20)	$144 000	$41 300
Share Capital	$360 000	$54 000
Retained earnings	144 000	41 300
General reserve	10 000	3 000
Asset revaluation reserve	18 500	20 000
Liabilities	42 500	13 000
	$575 000	$131 300
Land	$160 000	$20 000
Plant & Machinery	360 000	125 600
Accumulated depreciation —Plant & machinery	(110 000)	(33 000)
Inventories	55 000	18 700
Shares in Nu Ltd	110 000	0
	$575 000	$131 300

Required

A. Prepare the acquisition analysis and BCVR entries of Jimmy Ltd at 1 July 2019 (10 marks)

B. Prepare the consolidation worksheet entries at 30 June 2020. (10 marks)

C Complete the consolidation worksheet at 30 June 2020. (Suggested template below). (10 marks)

Answer 1

Preparation of acquisition analysis at 1 July 2020

Net Fair Value of identifiable Assets and

Net fair value of identifiable assets and liabilities of Darren’s Ltd =

                                               ($54,000 + $36,000 + $18,000) (Equity)

                                                 + $1,500 (1 – 30%) (Plant)

                                                             + $2,000 (1 – 30%) (Inventory)

                                                       =$110,450

Net fair value of identifiable assets and liabilities of Darren Ltd 110,450

Less Consideration transferred (110,000)

Gain on Bargain Purchase 450

                     Account Title & Explanation Debit     Credit

Accumulated Depreciation 7500     

               Plant & Machinery              6000

               Deferred Tax Liability (1500 *30%)   450

              Business Combination Valuation Reserve    1050

(To record Accumulated depreciation and related tax)                 

Depreciation expense (1500 /5)   300       

          Accumulated depreciation    300

(To record depreciation expense)

Deferred Tax Liability 90

             Income Tax expense (300*30%) 90

(To record Deferred Tax Liability)

Cost of Sales (2000 *90%) 1800

          Income Tax expense (1800 *30%) 540

         Transfer from Business Combination Valuation Reserve 1260

(To record cost of inventory sold)

Inventory (2000 – 1800) 200

               Deferred Tax Liability (200 *30%)   60

              Business Combination Valuation Reserve   140

(To record Inventory and related tax)

2. at july 1st 2019

Account Title & Explanation Debit       Credit

Share Capital 54000     

Retained Earnings (1/7 /18) 36000     

Asset revaluation surplus 18000                 

Business Combination Valuation Reserve 2450       

            Gain on Bargain Purchase 450

             Shares in ‘Darren’ limited 110000

(To record shares in Darren Limited)

at june 30 2020

Retained Earnings (1/7 /18) 36000     

Share Capital 54000     

Asset revaluation surplus 18000                 

Business Combination Valuation Reserve   2450       

Gain on Bargain Purchase                          450

                          Shares in ‘Darren’ limited 110000

(To record shares in Darren Limited)                         

Transfer from Business Combination Valuation Reserve        1260                 

                    Business Combination Valuation Reserve                          1260

(To record transfer to Business Combination Valuation reserve)

General Reserve 3000

            Transfer from General Reserve 3000

(To record transfer from General Reserve)

Consolidated Statement of Profit or Loss and Other Comprehensive Income   

                                            For financial year ended 30 June 2019        

Profit before income tax 130850

Income tax expense                  (59570)

Profit for the period   71280

Other comprehensive income                 

Gains on revaluation of assets    7000

Comprehensive income 78280

Consolidated Statement of Changes in Equity

                                          For financial year ended 30 June 2019                                                           

Comprehensive income for the period 78280

Retained earnings at 1 July 2018                  80000

Profit for the period 71280

Retained earnings at 30 June 2019 151280

    Share capital at 1 July 2018                  360000

Share capital at 30 June 2019                  360000

Asset revaluation surplus at 1 July 2018 13500

Increments 7000

Asset revaluation surplus at 30 June 2019 20500

General reserve at 1 July 2018 10000

                                  

                  Consolidated Statement of Financial Position         

              Assets     

Current Assets    

Inventory 73900

Non-curent Assets              

Property, plant and equipment:                 

Land 180000

Plant & machinery                                        479600

Accumulated depreciation (135800)

Total Non-current Assets   523800

Total Assets 597700

                 Equity

Share capital 360000

Retained earnings 151280

General reserve 10000

Asset revaluation surplus 20500

Total Equity 541780

Liabilities 55920

Total Equity and Liabilities 597700