Question

Consolidation: Intra-group transactions

On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders’ equity of Sing Song Ltd consisted of share capital $150,000; general reserve $20,000 and retained earnings $10,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values at the date of acquisition. At 30 June 2019, four years after acquisition, the accounts of the two companies appear as follows:

	Ping Pong Ltd	Sing Song Ltd
	$	$
Sales	340,000	140,000
Cost of sales
Opening inventory at 1 July 2018	20,000	5,000
Purchases	200,000	73,000
	220,000	78,000
Closing inventory 30 June 2019	(25,000)	(15,000)
Cost of sales	195,000	63,000
Gross profit	145,000	77,000
Depreciation expenses	32,000	23,000
Interest expense	9,000	1,000
Management fee expense	–	7,000
Other expenses	43,000	34,000
Total expenses	84,000	65,000
Gross profit less total expenses	61,000	12,000
Other income
Dividend revenue	5,000	–
Interest revenue		3,000
Management fee revenue	7,000
Total other income	12,000	3,000
Operating profit before tax	73,000	15,000
Income tax expense	28,000	5,000
Operating profit after tax	45,000	10,000
Retained earnings 1 July 2018	35,000	5,000
Available for appropriation	80,000	15,000
Interim dividend paid	10,000	2,000
Final dividend proposed	30,000	3,000
Dividends paid and proposed	40,000	5,000
Retained earnings 30 June 2019	40,000	10,000
Share capital	400,000	150,000
General reserve	20,000	30,000
Accounts payable	40,000	20,000
Dividend payable	30,000	3,000
12% unsecured notes	50,000	–
Other liabilities	16,000	15,000
	596,000	228,000
Assets
Accounts receivable	50,000	26,000
Inventory	25,000	15,000
Dividend receivable	3,000	–
Unsecured notes – Ping Pong Ltd	–	25,000
Investment in Sing Song Ltd	200,000	–
Other assets	318,000	162,000
	596,000	228,000

Additional information:

1. The directors have decided that goodwill should be written off completely, no writedowns for goodwill impairment losses were made in prior years.
2. During the current financial year, Sing Song Ltd paid management fees of $7,000 to Ping Pong Ltd.
3. On 1 June 2019, Ping Pong Ltd sold inventory to Sing Song Ltd for $30,000. All of this inventory has been sold by Sing Song Ltd to parties external to the group during June 2019. This intra-group sale was made on credit terms, and $10,000 remains owing to Ping Pong at 30 June 2019.
4. Sing Song Ltd holds half of the unsecured notes issued by Ping Pong Ltd. Interest at a rate of 12% has been paid on these notes during the year.

5. On 25 January 2019, Sing Song Ltd paid an interim dividend of $2,000 to Ping Pong Ltd.

6. Sing Song Ltd declared a final dividend of $3,000 on 20 June 2019. Ping Pong Ltd has recognised this dividend as a receivable at 30 June 2019.

7. The tax rate is 30%.

Required:

1. Prepare an acquisition analysis.

2. Prepare the consolidation worksheet entries necessary to prepare the consolidated financial statements for the year ending 30 June 2019 for the group comprising Ping Pong Ltd and Sing Song Ltd.

Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements.

Answer 1

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