Question

Hitech Ltd acquired all of the issued share capital of Lotech Ltd on 30 June 2016 for a cash consideration of $400,000

At that time the net assets of Lotech Ltd were represented as follows:

Share capital	300,000
Retained earnings	50,000
Net assets	350,000

When Hitech acquired its investment in Lotech the following information applied:

• Land held by Lotech had a fair value $10,000 greater than the carrying value
• A contingent liability relating to an unsettled legal claim with a fair value of $3,000 was recorded in the notes to Lotech’s financial statements

The tax rate is 30%

Required:                                                                                                      

(a)   Analyse the situation and provide consolidation journal entries (narrations are required)                                                                                                      

(b)   Provide the consolidated statement of financial position for the above entities as at 30 June 2017.                                                                                         

write your answer here:

	Hitech Ltd.	Lotech Ltd.	Adjustments		Group
			DR	CR
Sales revenue	70,000	24,000
Cost of goods sold	20,000	6,000
Gross profit	50,000	18,000
Other expenses	7,143	3,714
Profit before tax	42,857	14,286
Income tax expenses	12,857	4,286
Net profit after tax	30,000	10,000
Openingretained earnings	70,000	50,000
Closing retained earnings	100,000	60,000
Share capital	600,000	300,000
BCVR
Creditors	160,000	120,000
Deferred Tax Liability
Provision for legal claim
Total	860,000	480,000
Cash in bank	460,000	190,000
Inventory	-	10,000
Deferred Tax Asset
Land	-	200,000
Building		80,000
Investment in Lotech Ltd	400,000	-
Goodwill	-	-
Total	860,000	480,000

Answer 1

Answer:

a) Journal entries

Business Combination A/c Dr _____________4,00,000

To Lotech Ltd _________________________________________4,00,000

( Being Business combination entered)

Identifiable Net assets A/c Dr _____________3,57,000

Goodwill A/c Dr_____________________________43,000

To Business Combination A/c_____________________________4,00,000

( Being net assets acquired)

Lotech Ltd A/c Dr _______________________4,00,000

To Cash A/c ________________________________________4,00,000

(Being consideration paid)

Draft Consolidated financial statement -

Net Assets __________________________________ 3,57,000

Goodwill _____________________________________43,000

Total Assets_________________________________ 4,00,000

Equity ________________________________________ 3,00,000

Reserve and surplus ________________________ 50,000

Other Liabilities_______________________________ 50,000 ( Balancing figure)

Total Equities ________________________________ 4,00,000

Since balance sheet of HItech not provided draft consolidation financial statement could be made.