Question

Ethan Ltd acquired all the issued shares ( div.) of Darren Ltd on 1 July 2018 for $110 000. At this date Darren 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 Darren 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 2019. The remainder was sold by 30 June 2020.

Both Darren Ltd and Ethan Ltd use the valuation method to measure the land. At 1 July 2018, the balance of Ethan Ltd’s asset revaluation surplus was $13 500.

In May 2019, Darren Ltd transferred $3 000 from the retained earnings at 1 July 2018 to a general reserve.

The tax rate is 30%.

The following information was provided by the two companies at 30 June 2019.

	Ethan Ltd	Darren 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 (1/7/18)	80 000	36 000
	144 000	44 300
Transfer to general reserve	(0)	(3 000)
Retained earnings (30/6/19)	$144 000	$41 300
Share Capital	$360 000	$54 000
Retained earnings	144 000	41 300
General reserve	10 000	3 000
Asset revaluation surplus	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 Darren Ltd	110 000	0
	$575 000	$131 300

Required

A.      Prepare the acquisition analysis and BCVR entries of Ethan Ltd at 1 July 2018            (10 marks)

B.      Prepare the consolidation worksheet entries at 30 June 2019.                                      (10 marks)

Answer 1

A. Acquisition Analysis: Net fair value of identifiable assets and liabilities of Darren Ltd. = (54,000 + 36,000 + 18,000) equity + 1,500 (1-0.30) machinery + 2,000 (1-0.30) inventory = $ 110,450 Consideration transferred = $ 110,000 Goodwill = $ 450 (110,450 - 110,000)

Business Combination Valuation entries Dr 7500 Accumilated Depreciation Machinery Defferred Tax Liability Business combination valuation reserve 6000 450 1050 300 Depreciation Expence Accumilated Depreciation (1500*(1/5)) 300 90 Deferred tax liability Income tax expences (300*30%) 90 1800 540 Cost of sales Income Tax expences Transfer from Business combination valuation reserve 1260 200 Inventory Defferred Tax Liability Business combination valuation reserve 60 140 Pre-acquisition entries Dr Dr Retained Earnings Share capital Asset revaluation surplus Business combination valuation reserve Goodwill Shares in Darren Ltd. 36000 54000 18000 2450 Dr 450 110000 Transfer from Business combination valuation reserve Business combination valuation reserve 1260 1260 3000 General Reserve Transfer to general reserve 3000