Question

On 1 July 2019, Batman Ltd acquired all the issued shares (cum div.) of Robin Ltd for $150 000. At this date the equity of Robin Ltd consisted of:

Share capital $75 000
Retained earnings $22 500

At this date, Robin Ltd had recorded a dividend payable of $22 500 which was paid in August 2019. All the identifiable assets and liabilities of Robin Ltd were recorded at amounts equal to fair values except for inventory for which the fair value was $3 000 greater than carrying amount. Only 10% of the inventory on hand at 1 July 2019 remained unsold by 30 June 2020. The tax rate is 30%.

During the 2019–20 period, the following transactions occurred.

(a) Batman Ltd sold inventory to Robin Ltd for $90 000 at a profit before tax of $18 000. At 30 June 2020, inventory which was sold to Robin Ltd for $37 500 at a profit before tax of $7 500 was still on hand in the records of Robin Ltd.

(b) On 1 January 2020, Batman Ltd sold machinery to Robin Ltd at a gain of $15 000. The machinery was considered to have a further 5-year life.

(c) During the period Robin Ltd rented a warehouse from Batman Ltd, paying $3 750 in rent to Batman Ltd.

(d) During the period Batman Ltd recorded gains from revaluation of land, which is measured using the fair value method. These gains increased the asset revaluation surplus by $6 000 to give a balance of $42 000 at 30 June 2020.

(e) In June 2020, an impairment test was conducted on Robin Ltd and resulted in the recognition of impairment losses on goodwill of $24 000 (recognised in other expenses)

The following financial information was provided by the companies at 30 June 2020:

	Batman Ltd	Robin Ltd
Sales revenue	$187 500	$177 000
Dividend revenue	7 500	—
Other income	7 500	15 000
Gains on sale of non-current assets	7 500	15 000
Total income	210 000	207 000
Cost of sales	(157 500)	(135 000)
Other expenses	(22 500)	(7 500)
Total expenses	(180 000)	(142 500)
Profit before income tax	30 000	64 500
Income tax expense	(10 125)	(14 625)
Profit for the year	19 875	49 875
Retained earnings (1/7/19)	45 000	22 500
	64 875	72 375
Dividend paid	(18 750)	(7 500)
Retained earnings (30/6/20)	$46 125	$64 875

  

Required:

A.   Prepare the acquisition analysis and journals at 1 July 2019.

Answer 1

Computation of Synergy-
Purchase consideration	150,000
Less:
Share capital acquired	(75,000)
Retained earnings acquired	(22,500)
Dividend payable	(22,500)
Fair value gainof inventory	(3,000)
Goodwill	27,000

The Company has incurred 27,000 for synergy benefit and shall account as the Goodwill in its books.

Date	General Ledger Account	Debit	Credit
1/7/2019	Dividend Payble in Robin Ltd---Dr	22,500
	To Retained Earnings in Robin Ltd A/c		22,500
	(Being dividend reversed in consol since money will be received by Parent and will get accounted in retained earnings)
1/7/2019	Inventory A/c---Dr	3,000
	To Retained Earnings in Robin Ltd A/c		3,000
	(Being inventory recorded at fair value in consol
1/7/2019	Share capital in Robin Ltd---Dr	75,000
	Retained earnings in Robin Ltd---Dr	48,000
	Goodwill A/c---Dr	27,000
	To Investments A/c		150,000
	(Being Robins Limited consolidated)