Question

Ethan Ltd acquired all the issued shares (ex div.) of Darren Ltd on l July 2017 for $110 000. At this date Darren Ltd recorded a dividend payable of $10 000 and equity of: Share capital Retained earnings Asset revaluation surplus $54000 36000 18000 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 $14000 92500 $16000 Inventories Machinery (cost $100 000) 94000 The machinery was considered to have a further 5-year life. Of the inventory, 90% was sold by 30 June 2018. The remainder was sold by 30 June 2019. Both Darren Ltd and Ethan Ltd use the valuation method to measure the land. At 1 July 2017, the balance of Ethan Ltd's asset revaluation surplus was S13 500. In May 2018, Darren Ltd transferred $3000 from the retained earnings at 1 July 2017 to a general reserve. The tax rate is 30%. The following information was provided by the two companies at 30 June 2018. Darren Ltd Ethan Ltd Profit before tax 120000 S 12500 (56000) (4200) income tax expense 64000 80000 Profit for the year Retained earnings (1/7/17) 8300 36 000 44 300 144000 Transfer to general reserve (3000 $ 144000 $ 41300 Retained earnings (31/7/18) $360000 144 000 10000 $ 54000 Share capital Retained earnings General reserve 41300 3000 Asset revaluation surplus 18 500 20000 42500 Liabilities 13000 575000 $131300 $ 20000 125600 33000) Land S 160000 Plant and machinery Accumulated depreciation- Plant and machinery Inventories 360000 (110000) 55000 110000 18700 Shares in Darren Ltd $575000 $131300 Required: 1- Acquisition Analysis at 30 June 2018. 2- Worksheet Adjustment journal entries at 30 June 2018 3- Complete Worksheet.

Answer 1

1. 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)

2. Worksheet Adjustment entries:

1. Business Combination Valuation entries

Accumulated Depreciation	Dr.	7,500
Machinery	Cr.		6,000
Deferred Tax Liability	Cr.		450
Business combination valuation reserve	Cr.		1,050
Depreciation Expense.	Dr.	300
Accumulated Depreciation	Cr.		300
(1,500 * 1/5)
Deferred Tax Liability	Dr.	90
Income Tax Expense	Cr.		90
(300 * 30%)
Cost of Sales	Dr.	1,800
Income Tax Expense	Cr.		540
Transfer from Business combination valuation reserve	Cr.		1,260
Inventory	Dr.	200
Deferred Tax Liability	Cr.		60
Business combination valuation reserve	Cr.		140

2. Pre - acquisition entries

Retained Earnings	Dr.	36,000
Share Capital	Dr.	54,000
Asset Revaluation Surplus	Dr.	18,000
Business combination valuation reserve	Dr.	2,450
Goodwill	Cr.		450
Shares in Darren Ltd.	Cr.		110,000
Transfer from Business combination valuation reserve	Dr.	1,260
Business combination valuation reserve	Cr.		1,260
General Reserve	Dr.	3000
Transfer to general reserve	Cr.		3000

3. Worksheet

	Ethan Ltd.	Darren Ltd.		Adjustments			Consolidation Total
				Dr.	Cr.
Profit before tax	120,000	12,500	1	300	450	2	130,850
			1	1,800
Income tax expenses	56,000	4,200			90	1	59,570
					540	1
Profit	64,000	8,300					71,280
Retained Earnings (1/7/2017)	80,000	36,000	2	36,000			80,000
Transfer from Business combination valuation reserve	-	-	2	1,260	1,260	1	-
	144,000	44,300					151,280
Transfer to general reserve	-	3,000			3,000	2	-
Retained Earnings (30/6/2018)	144,000	41,300					151,280
Share Capital	360,000	54,000	2	54,000			360,000
Business combination valuation reserve	-	-	2	2,450	1,050	1	-
					140	1
					1,260	2
General Reserve	10,000	3,000	2	3,000			10,000
	514,000	98,300					521,280
Asset Revaluation Surplus (1/7/2017)	13,500	18,000	2	18,000			13,500
Gains	5,000	2,000					7,000
Asset Revaluation Surplus (30/6/2018)	18,500	20,000					20,500
	532,500	118,300					541,780
Liabilities	42,500	13,000	1	90	450	1	55,920
					60	1
	575,000	131,300					597,700
Land	160,000	20,000					180,000
Machinery	360,000	125,600			6,000	1	479,600
Acc. Depreciation	(110,000)	(33,000)	1	7,500	300	1	(135,800)
Inventory	55,000	18,700	1	200			73,900
Shares in Darren Ltd.	110,000	-			110,000	2	-
	575,000	131,300					597,700