Question

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.

Answer 1

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