Question

On 1 July 2017, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $3,230,000. At this date, the equity of Son Ltd consisted of: $1,200,000 Share capital -600 000 shares General reserve Retained earnings 500,000 900,000 At the acquisition date, Son Ltd reported a dividend payable of $50,000 and its assets included $100, 000 of recorded goodwill. The dividend payable at the acquisition date was subsequently paid in August 2017. On 1 July 2017, all the identifiable assets and liabilities of Son Ltd were recorded at amounts equal to fair value except for the following: Carrying amount $500,000 20,000 250 000 Fair value $650,000 30,000 300,000 Land Inventory Plant (cost $350 000) The land on hand at the acquisition date was sold in March 2018. Of the inventory on hand in Son Ltd at 1 July 2017, 60 percent was sold in November 2017 and the remainder was sold in July 2018. The plant was estimated to have a further 5-year life with zero residual value. Son Ltd was involved in a court case that could potentially result in the company paying damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this liability to be $30,000, even though Son Ltd had not recorded any provision for damages (liability). On 29 June 2019 Son Ltd reassessed the liability in relation to the court case as the chance of winning the case had improved. The fair value on 29 June 2019 was considered to be $10,000. The company applies the partial goodwill method. The income tax rate is 30 %. During the period 1 July 2017 to 30 June 2019, the following intragroup transactions have oCcurred between Parent Ltd and Son Ltd: (T1) At 30 June 2019, Parent Ltd approved and declared a final dividend of $80,000 and Son 2

Answer 1

Question a:

	Amount ($)	Amount ($)
Cost of acquisition		3,230,000.00
Book Value of assets
Equity share capital	1,200,000.00
General Reserve	500,000.00
Retained earnings	900,000.00
Total Book Value of assets (A)	2,600,000.00
Fair Value adjustments
After Tax increase in land	105,000.00
After Tax increase in Inventory	7,000.00
After Tax increase in Plant	35,000.00
After Tax recognition of provision for damages	(7,000.00)
Total Fair Value adjustments (B)	140,000.00
FVINA (A+B)	2,740,000.00
percentage acquired	100%	2,740,000.00
Gain on Bargain purchase		490,000.00

Question b:

BVCR entries

	Particulars	Debit ($)	Credit ($)
1-Jul-17	BVCR entries
	Inventory	20000
	DTL		6000
	BVCR		14000
	Land	500000
	DTL		150000
	BVCR		350000
	Accumulated Depreciation	100,000
	Plant		50000
	DTL		15000
	BCVR		35,000
30-Jun-19	Cost of sales	20000
	Income tax expense		6000
	Transfer from BCVR (RE)		14000
	Land	500000
	DTL		150000
	BVCR		350000
	Accumulated Depreciation	100,000
	Plant		50000
	DTL		15000
	BCVR		35,000
	Depreciation expense	10,000
	Accumulated Depreciation		10,000
	Deferred Tax Liability	3000
	Income Tax Expense		3000

Pre-acquisition entries

30-Jun-19	Pre-acquisition entries
	Retained earnings	900,000
	General Reserve	500,000
	Equity Share Capital	1,000,000
	Revaluation Surplus*	105,000
	Goodwill	725,000.00
	Shares in subsidiary		3,230,000.00

Intragroup transaction entries

T1	Dividend payable	50,000
	Dividend Declared		50,000
	Dividend Revenue	50,000
	Dividend Receivable		50,000
T2	Interest Revenue	25000
	Interest Expense		25000
T3	Proceeds on sale of equipment	100000
	Equipment	20,000
	Carrying amount of equipment sold		80,000
	Deferred Tax Asset	6000
	Income Tax expense		6000
	Accumulated Depreciation	2000
	Depreciation expense		2000
	Income Tax expense	600
	Deferred Tax Asset		600
	Gain on sale of equipment	20,000
	Loss recognised on sale of equipment		20,000
T4	Proceeds on sale of furniture	70,000
	Furniture	30,000
	Carrying amount of furniture sold		100,000
	Deferred Tax Asset	9000
	Income Tax expense		9000
	Accumulated Depreciation	6000
	Depreciation expense		6000
	Income Tax expense	9000
	Deferred Tax Asset		9000
	Gain on sale of equipment	30,000
	Loss recognised on sale of equipment		30,000

Question c:

The first entry is made to reduce the sales with 96000. The inventory is credited with the amount of mark up and balance is transferred in cost of sales. Then in the next entry, DTA is created with 30%.