Question

On 1 July 2015, Fluffy Ltd acquired all the issued shares of Glider Ltd. Fluffy Ltd paid $30 000 in cash and 20 000 shares in Fluffy Ltd valued at $3 per share. At this date, the equity of Glider Ltd consisted of $66 000 share capital and $6000 retained earnings.

At 1 July 2015, all the identifiable assets and liabilities of Glider Ltd were recorded at amounts equal to their fair values except for:

Carrying amount Fair value Plant (cost $ 150 000) $120 000 $123 000 Patents $105 000 $90 000 Inventory $18 000 $22 500 The plant was considered to have a further 5-year life. The patents were sold for $120 000 to an external entity on 18 August 2015. The inventory was all sold by 30 June 2016.

Additional information

1. (a) Fluffy Ltd sells certain raw materials to Glider Ltd to be used in its manufacturing process. At 1 July 2016, Glider Ltd held inventory sold to it by Fluffy Ltd in the previous year at a profit of $600. During the 2016–17year, Fluffy Ltd sold inventory to Glider Ltd for $21 000. None of this was on hand at 30 June 2017.

2. (b) Glider Ltd also sells items of inventory to Fluffy Ltd. During the 2016–17year, Glider Ltd sold goods to Fluffy Ltd for $4500. At 30 June 2017, inventory which had been sold to Fluffy Ltd at a profit of $300 was still on hand in Fluffy Ltd’s inventory.

3. (c) On 1 July 2016, Glider Ltd sold an item of plant to Fluffy Ltd for $15 000. This plant had a carrying amount in the records of Glider Ltd of $14 000 at time of sale. This type of plant is depreciated at 10% p.a. on cost.

4. (d) On 1 January 2015, Fluffy Ltd sold an item of inventory to Glider Ltd for $18 000. The inventory had cost Fluffy Ltd $16 000. This item was classified by Glider Ltd as plant. Plant of this type is depreciated by Glider Ltd at 20% p.a.

5. (e) On 1 March 2017, Glider Ltd sold an item of plant to Fluffy Ltd. Whereas Glider Ltd classified this as plant, Fluffy Ltd classified it as inventory. The sales price was $9000 which included a profit to Glider Ltd of $1500. Fluffy Ltd sold this to another entity on 31 March for $9900

6. (f) The tax rate is 30%.

At 30 June 2017, the following financial information was provided by the two companies:

Required
Prepare a consolidation worksheet for the preparation of the consolidated financial statements of Fluffy Ltd at 30 June 2017.

Answer 1

Answer:

Acquisition Analysis

At 1 July 2015:

.

     Net fair value of identifiable assets

     and liabilities of Glider Ltd................ =      $66 000 + $6 000 (equity)

.......................................................... + $4 500 (1 - 30%) (inventory)

.............................................................. + $15 000 (1 - 30%) (patents)

.............................................................. + $3 000 (1 - 30%) (plant)

.............................................................=      $87 750

     Consideration transferred.................=      $90 000

     Goodwill............................................ =      $2 250

1. Business combination valuation entries

.

        Accumulated depreciation                                          Dr           30 000

                 Plant                                                                 Cr                            27 000

                 Deferred tax liability                                          Cr                                  900

                 Business combination valuation reserve           Cr                               2 100

.

        Depreciation expense                                                 Dr                600

        Retained earnings (1/7/16)                                          Dr                600

                 Accumulated depreciation                                 Cr                               1 200

        (1/5 x $3000 p.a. for 2 years)

.

        Deferred tax liability                                                    Dr                360

                 Income tax expense                                           Cr                                  180

                 Retained earnings (1/7/16)                                 Cr                                  180

.

           Goodwill                                                                  Dr             2 250

                 Business combination valuation reserve          Cr                                2 250

2. Pre-acquisition entries

        At 1/7/15:                                                  

.

        Retained earnings (1/7/15)                                          Dr             6 000

        Share capital                                                              Dr           66 000

        Business combination valuation reserve                   Dr           18 000

                  Shares in Glider Ltd                                           Cr                              90 000

         At 30/6/17:

.

        Retained earnings (1/7/16)*                                        Dr           19 650

        Share capital                                                              Dr           66 000

        Business combination valuation reserve                   Dr           4 350

                  Shares in Glider Ltd                                          Cr                              90 000

.

             (* = $6000 + $3 150 + $10 500)

.

3. Sales and profit in closing inventory

        Sales revenue                                                     Dr           21 000

                  Cost of sales                                            Cr                                 21 000

.

        Sales revenue                                                     Dr             4 500

                  Cost of sales                                            Cr                                   4 200

                  Inventory                                                Cr                                      300

.

        Deferred tax asset                                              Dr                  90

                  Income tax expense                                 Cr                                        90

.

4. Profit in opening inventory of Glider Ltd

.

        Retained earnings (1/7/16)                                 Dr                420

        Income tax expense                                           Dr                180

                  Cost of sales                                            Cr                                      600

..

5. Sale of Plant - current period

.

        Proceeds on sale of plant                                   Dr           15 000

                  Carrying amount of plant sold                 Cr                                 14 000

                  Plant                                                         Cr                                   1 000

.

        Deferred tax asset                                              Dr                300

                  Income tax expense                                 Cr                                      300

.

        Accumulated depreciation - plant                      Dr                100

                   Depreciation expense                              Cr                                      100

        (10% x $1000)

.

        Income tax expense                                           Dr                  30

                   Deferred tax asset                                   Cr                                        30

.

6. Sale of Inventory classified as Plant : prior period

.

        Retained earnings (1/7/16)                                 Dr             1 400

        Deferred tax asset                                              Dr                600

                  Plant                                                        Cr                                   2 000

.

        Accumulated depreciation                                 Dr                600

                  Depreciation expense                              Cr                                      400

                  Retained earnings (1/7/16)                       Cr                                      200

        (20% x $2000 p.a. for 1.5 years)

.

        Income tax expense                                           Dr                120

        Retained earnings (1/7/16)                                 Dr                  60

                  Deferred tax asset                                    Cr                                      180

.

7. Sale of Plant classified as Inventory: current period

.

        Proceeds on sale of plant                                   Dr             9 000

                  Carrying amount of plant sold                 Cr                                   7 500

                  Cost of sales                                             Cr                                   1 500

.

.

Step by Step Explanation:

.

Glider Group Fluffy Lid 64 500 Sales revenue 78 000 117 000 3 3 Adjustments Dr Cr 21 000 4 500 21 000 4 200 600 1 500 Cost of sales 30 900 46 350 49 950 3 3 4 31 650 Gross profit Trading expenses Orice expenses Depreciation 33 600 4 800 7950 1 800 9000 4 050 3 900 67 050 13 800 12 000 1 600 100 5 800 400 6 14 550 19 050 9000 16 950 14 700 15 000 31 600 35 450 0 5 7 IS 000 9 000 7 500 14 000 0 Profit from trading Proceeds from sale of plant Carrying amount of plant sold Gain/loss on sale of machinery Profit before tax Tax expense 14 000 7500 5 7 1500 1 000 0 20 550 11 100 IS 700 7 300 35 450 18 160 180 30 120 180 90 300 1 3 5 6 Profit Retained earnings (1/7/16) 9450 48 000 8 400 31 500 17 290 57 750 1 180 200 . 6 600 19 6.50 420 1 400 60 6 57 450 39 900 75 040 Retained earnings (30/6/17) Share capital BCVR 96 000 66 000 66 000 4350 96 000 0 2 100 2 250 1 1 Total 153 +50 105 900 171 040 1 360 900 1 Current liabilities Deferred tax liability Total liabilities Total equity and liabilities 21 100 11 000 32 100 185 550 10 500 15 000 25 300 131 400 31 600 26 540 58 140 229 180

Group Fluffy Ltd 57 000 Glider Ltd 107 250 Plant 134 250 Adjustments Dr Cr 27 000 1 000 2 000 30 000 1 200 100 600 1 5 6 1 (18 300) Accumulated depreciation (33 450) (22 250) 1 5 6 11 100 Intangibles Shares in Glider Ltd Deferred tax asset 12 000 90 000 8 100 9 450 23 100 0 18 330 3 5 6 90 000 30 180 90 300 600 2 5 6 300 3 Inventory Receivables Goodwill Total assets 28 500 8 250 0 185 550 24 600 12 450 0 131 400 1 52 800 20 700 2 250 229 180 2 250 177 210 177 210