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On 1 July 2020 Mango Ltd acquired all the issued shares (cum div.) of Cream Ltd...

On 1 July 2020 Mango Ltd acquired all the issued shares (cum div.) of Cream Ltd for $450,000. At date of acquisition the equity of Cream was recorded at:

  • Share Capital              $200,000
  • Reserves                     $100,000
  • Retained earnings      $100,000

The fair value of land was $220,000 (carrying amount $200,000).

The fair value of equipment was $230,000 (cost $240,000 and carrying amount $210,000).

On this date the records of Cream Ltd showed goodwill at cost of $10,000 and dividends payable of $15,000. All other assets and liabilities were carried at amounts equal to fair values.

The land was sold on 1 January 2021 and equipment has a useful life of 5 years.

The dividend was paid on 31 August 2020.

Assume a tax rate of 30%

Required:

  1. Prepare the acquisition analysis to determine goodwill or gain on bargain purchase on 1 July 2020.
  2. Prepare the consolidation worksheet entries immediately after the combination on 1 July 2020.  
  3. Prepare the consolidation entries for the equipment on 30 June 2021.

Solutions

Expert Solution

1.

At July 1, 2020

Net Fair value of identifiable assets and liabilites of Cream Ltd

Equity = $200,000+$100,000+$100,000 = $400,000

Land = $20,000*(1-30%) = $14,000

Equipment = $20,000*(1-30%) = $14,000

(-) Goodwill = ($10,000)

= $418,000

Consideration Transfered = $450,000-$15,000 (Dividend receivable)

= $435,000

Goodwill = $17,000

Recorded Goodwill = $10,000

Unrecorded Goodwill = $7,000

2.

Consolidation worksheet entries on 1st July 2020

Share Capital $200,000

Reserves $100,000

Retained Earnings $100,000

Business Valuation reserve       $35,000

To Shares in Cream Ltd $435,000

Dividend Payable $15,000

To Dividend Receivable $15,000

On 30th June 2021

The entry of acquisition effected by

-Payment of dividend in prior period

- Sale of land

Reatined Earnings $114,000

Share Capital $200,000

Reserves $100,000

Business Valuation reserve $21,000

To Shares in Cream Ltd $435,000

3.

Consolidation Entries for the Equipment on 30th June 2021

Equipment $20,000

To Deferred Tax liability $6,000

To Business Combination valuation reserve $14,000

Deferred Tax Liability $6,000

To income Tax expense $6,000

Depreciation Expense ($20,000/5) $4,000

To Accumulated Depreciation    $4,000

ekkarill92 answered 2 years ago
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