ACC711: ADVANCED ACCOUNNTING PRACTICE & REPORTING II

Tutorial 5: Consolidation Practice Questions

1. On 1 July 2021, Rove Ltd acquired all the issued shares of Tandai Ltd for $200 000. The
financial statements of Tandai Ltd showed the equity of Tandai Ltd at that date to be:

Share capital — 20,000 $5 shares $100,000

General reserve $40,000
Retained earnings $60,000

All the assets and liabilities of Tandai Ltd were recorded at amounts equal to their fair values
at that date.
During the year ending 30 June 2022, Tandai Ltd undertook the following actions.
 On 10 September 2021, paid a dividend of $20,000 from the profits earned prior to 1 July
2021.
 On 28 June 2022, declared a dividend of $20,000 to be paid on 15 August 2022.
 On 1 January 2022, transferred $15,000 from the general reserve existing at 1 July 2021
to retained earnings.

Required
A. Prepare the pre-acquisition entries at 1 July 2021.
Acquisition Analysis:
At 1 July 2021:
Net fair Value of identifiable assets
And liabilities of acquired = ($100,000 + $40,000 + $60,000) (Equity)
= $200,000
Consideration transferred = $200,000
Goodwill = $0

Retained earnings (1/7/21) Dr $60,000

Share Capital Dr $100,000
General Reserve Dr $40,000
Shares in Tandai Ltd Cr $200,000

B. Prepare the pre-acquisition entries at 30 June 2022.

Retained earnings (1/7/21) Dr $60,000
Share Capital Dr $100,000
General Reserve Dr $40,000
Shares in Tandai Ltd Cr $200,000

Retained earnings (1/7/21) Dr $15,000

General Reserve Cr $15,000
Note that neither of the dividend transactions have any effect on the pre-acquisition
entries regardless of whether the dividends are paid/declared from pre- or post-
acquisition equity

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2. Gizo Ltd acquired all the issued shares (ex div.) of Lata Ltd on 1 July 2020 for $110,000. At
this date Lata Ltd recorded a dividend payable of $10,000 and equity of:

Share capital $54,000

Retained earnings $36,000
Asset revaluation surplus $18,000

All the identifiable assets and liabilities of Lata Ltd were recorded at amounts equal to their
fair values at acquisition date except for:
Carrying amount Fair Value
Inventory $14,000 $16,000
Machinery (cost $100,000) $92,500 $94,000

The machinery was considered to have a further 5-year life. Of the inventory, 90% was sold
by 30 June 2021. The remainder was sold by 30 June 2022.

Both Lata Ltd and Gizo Ltd use the valuation method to measure the land. At 1 July 2020,
the balance of Lata Ltd’s asset revaluation surplus was $13,500.

In May 2021, Lata Ltd transferred $3,600 from the retained earnings at 1 July 2020 to a
general reserve.

The tax rate is 30%.

The following information was provided by the two companies at 30 June 2021.
Gizo Ltd Lata Ltd
Profit before tax $120,000.00 $12,500.00
Income tax expense -$56,000.00 -$4,200.00
Profit for the year $64,000.00 $8,300.00
Retained earnings (1/7/20) $80,000.00 $36,000.00
$144,000.00 $44,300.00
Transfer to general reserve $0.00 -$3,000.00
Retained earnings (1/7/21) $144,000.00 $41,300.00
Share capital $360,000.00 $54,000.00
Retained earnings (1/7/21) $144,000.00 $41,300.00
General reserve $10,000.00 $3,000.00
Asset revaluation surplus $18,500.00 $20,000.00
Liabilities $42,500.00 $13,000.00
$575,000.00 $131,300.00
Land $160,000.00 $20,000.00
Plant and Machinery $360,000.00 $125,600.00
Accumulated depreciation -$110,000.00 -$33,000.00
Inventory $55,000.00 $18,700.00
Shares in Lata Ltd $110,000.00 $0.00
$575,000.00 $131,300.00

Required
Prepare the consolidated financial statements of Gizo Ltd at 30 June 2021

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 Acquisition Analysis:
At 1 June 2020:
Net fair Value of identifiable assets
And liabilities of Lata Ltd = ($54,000 + $36,000 + $18,000) (Equity)
= $1,050 ($94,000 - $92,500 = $1,500 × 70%) (Plant)
= $1,400 ($16,000 - $14,000 = $2,000 × 70%) (Inventory)
= $110,450
Consideration transferred = $110,000
Gain on bargain purchase = $450

Worksheet entries
1. Business combination valuation entries
Accumulated depreciation ($100,000 – $92,500) Dr $7,500
Plant & Machinery ($100,000 – $94,000) Cr $6,000
Deferred tax liability ($7,500 – $6,000 = $1,500 × 30%) Cr $450
Business combination valuation reserve ($1,500 × 70%) Cr $1,050

Depreciation expense Dr $300

Accumulated depreciation (1/5 × $1,500) Cr $300

Deferred tax liability Dr $90

Income tax expense (30% × $300) Cr $90

Cost of sale ($16,000 – $14,000 = $2,000 × 90%) Dr $1,800

Income tax expense ($1,800 × 30%) Cr $540
Transfer from business combination valuation reserve ($1,800 × 70%) Cr $1,260

Inventory ($2,000 × 10%) Dr $200

Deferred tax liability ($200 × 30%) Cr $60
Business combination valuation reserve ($200 × 70%) Cr $140

2. Pre-acquisition entries
At 1 July 2020:
Retained earnings (1/7/20) Dr $36,000
Share Capital Dr $54,000
Asset revaluation surplus Dr $18,000
Business combination valuation reserve ($1,050 + $1,260 + $140) Dr $2,450
Gain on bargain purchase Cr $450
Shares in Lata Cr $110,000

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 The entry at 30 June 2021 is affected by:
Sale of inventory
Transfer to general reserve of $3,600

Retained earnings (1/7/20) Dr $36,000

Share Capital Dr $54,000
Asset revaluation surplus Dr $18,000
Business Combination valuation reserve Dr $2,450
Gain on bargain purchase Cr $450
Share in Lata Ltd Cr $110,000

Transfer from business combination

Valuation reserve Dr $1,260
Business combination valuation reserve Cr $1,260

General Reserve Dr $3,600

Transfer to general reserve Cr $3,600

Gizo Ltd Lata Ltd Adjustments Group

Dr Cr
Profit before tax $120,000 $12,500 1 $300 $450 2 $130,850
1 $1,800
Income tax expense $56,000 $4,200 $90 1 $59,570
$540 1
Profit $64,000 $8,300 $71,280
Retained earnings (1/7/20) $80,000 $36,000 2 $36,000 $80,000
Transfer from BCVR 2 $1,260 $1,260 1 $0
$144,000 $44,300 $151,280
Transfer to General Reserve $0 $3,000 $3,000 2 $0
Retained earnings (30/6/21) $144,000 $41,300 $151,280
Share Capital $360,000 $54,000 2 $54,000 $360,000
BCVR 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 (30/6/20) $13,500 $18,000 2 $18,000 $13,500
Gains $5,000 $2,000 $7,000
Asset revaluation Surplus (30/6/21) $18,500 $20,000 $20,500
$532,500 $118,300 $541,780

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Liabilities $42,500 $13,000 1 $90 $450 1 $55,920
$60 1
$575,000 $131,000 $597,700

Land $160,000 $20,000 $180,000

Plant & Machinery $360,000 $125,600 $6,000 1 $479,600
Accumulated Depreciation -$110,000 -$33,000 1 $7,500 $300 1 -$135,800
Inventory $55,000 $18,700 1 $200 $73,900
Shares in Lata $110,000 $0 $110,000 2 $0
$575,000 $131,000.00 $124,600 $124,600 $597,700

GIZO LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for Financial year ended 30 June 2021

Profit before income tax $130,850

Income Tax expense $59,570
Profit for the period $71,280
Other comprehensive income
Gains on revaluation of assets $7,000
Comprehensive income $78,280

GIZO LTD
Consolidated Statement of Changes in Equity
for Financial period ending 30 June 2021

Comprehensive income for the period $78,280

Retained earnings at 1 July 2020 $80,000

Profit for the period $71,280
Retained earnings at 30 June 2021 $151,280

Share Capital at 1 July 2020 $360,000

Share Capital at 30 June 2021 $360,000

Asset revaluation surplus at 1 July 2020 $13,500

Increments $7,000
Asset revaluation surplus at 30 June 2021 $20,500

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General reserve at 1 July 2020 $10,000
General reserve at 30 June 2021 $10,000

GIZO LTD
Consolidated Statement of Financial Position
as at 30 June 2021

Current Assets
Inventories $73,900
Non-Current Assets
Property, Plant & Equipment:
Land $180,000
Plant & Machinery $479,600
Accumulated Depreciation -$135,800 $343,800
Total Non-Current Assets $523,800

Total Assets $597,700

Equity
Share Capital $360,000
Retained Earnings $151,280
General reserve $10,000
Asset revaluation surplus $20,500
Total Equity $541,780
Liabilities $55,920
Total Equity and Liabilities $597,700

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3. Bokona Ltd owns all of the shares of Borokua Ltd. In relation to the following intragroup
transactions, all parts of which are independent unless specified, prepare the consolidation
worksheet adjusting entries for preparation of the consolidated financial statements as at 30
June 2016.

Assume an income tax rate of 30%.

(a) In April 2016, Bokona Ltd sells inventory to Borokua Ltd for $12,000. This inventory
had previously cost Bokona Ltd $8,000, and it remains unsold by Borokua Ltd at the end
of the period.
Sales revenue Dr $12,000
Cost of sales Cr $8,000
Inventory Cr $4,000

Deferred tax asset Dr $1,200

Income tax expense (30% × $4,000) Cr $1,200

(b) All the inventory in (a) is sold to Savo Ltd, an external party, for $16,500 on
19 June 2016.
Sales revenue Dr $12,000
Cost of sales Cr $12,000

(c) Half the inventory in (a) is sold to Gela Ltd, an external party, for $7,200 on 20 June
2016. The remainder is still unsold at the end of the period.
Sales revenue Dr $12,000
Cost of sales Cr $10,000
Inventory ($4,000 × ½) $2,000

Deferred tax asset Dr $600

Income tax expense (30% × $2,000) Cr $600

(d) Bokona Ltd, in January 2016, sold inventory for $8,000. This inventory had been sold to
it by Borokua Ltd in the previous year. It had originally cost Borokua Ltd $4,800, and
was sold to Bokona Ltd for $9,600.
Retained earnings (1/7/15) ($4,800 × 70%) Dr $3,360
Income tax expense ($4,800 × 30%) Dr $1,440
Cost of sales Cr $4,800

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