Question

QUESTION 1

Anna Ltd is a tropical fruit wholesaler in Sydney, Australia. Anna Ltd decides to expand its business by acquiring one of its most successful customers, Lucy Ltd, which squeezes and packs the fruit juice for different companies, and also for its own brand, “Lucy”.

On 1 July 2018, Anna Ltd purchased 80% of Lucy Ltd’s shares for $1,150,000 cash.

On acquisition date, Lucy Ltd’s statement of financial position was as follows:

Statement of Financial Position of Lucy Ltd as at 1 July 2018
Cash	25,000	Loans	650,000
Accounts receivable	40,000	Accounts payable	90,000
Inventory	85,000		740,000
Buildings	400,000	Share Capital	900,000
Plant	330,000	Retained Earnings	240,000
Land	1,000,000		1,140,000
Total	1,880,000	Total	1,880,000

Additional information:

• On acquisition date, all the assets and liabilities of Lucy Ltd are recorded at their fair values in Lucy Ltd’s statement of financial position, except an internally generated brand name, “Lucy” whose fair value was estimated to be $100,000.
• During the 2018-2019 financial year, Anna Ltd has sold to Lucy Ltd inventory for $110,000. This inventory had originally cost Anna Ltd $70,000. On 30 June 2019, 25% of this inventory was still in Lucy Ltd’s closing inventory.
• During the 2018-2019 financial year, Lucy Ltd paid dividends of $150,000.
• The tax rate is 30%.

REQUIRED:

1. Calculate the amount of goodwill or gain on bargain purchase arising from Anna Ltd’s acquisition of Lucy Ltd. Show all workings necessary to derive your answer.
2. Provide the consolidation journal entries required to prepare the consolidated financial statements for the year ended 30 June 2019. Journal entries allocating equity to non-controlling interests are not required. Show all workings necessary to derive your answer.
3. Create an example of a business combination which results in a gain on bargain purchase and show the calculation of the gain on bargain purchase.

Answer 1

Calculation of Purchase Consideration
Cash	25,000
Accounts receivable	40,000
Inventory	75,000
Buildings	400,000
Plant	330,000
Land	1,000,000
Total	1,870,000
less
Loans	650,000
Accounts payable	90,000
	1,130,000
80% OF SHARES VALUE	904,000
LESS CONSIDERATION PAID	1,150,000
CAPITAL PREOFIT (GOOD Will)	(246,000)

Cash   A/C DR	25,000
Accounts receivable A/C DR	40,000
Inventory A/C DR	75,000
Buildings   A/C DR	400,000
Plant   A/C DR	330,000
Land   A/C DR	1,000,000
Good will	246,000
To Loan A/c		650,000
To Accounts Payable A/c		90,000
To Consideration A/c		1,150,000
To 20 Non Contrilling Interest		226,000
Being Asset And Lianbility Incorpration books of A/cs And Consideration Paid Balnce Good Will A/c

Consideration A/c DR	1,150,000
To CASH A/c		1,150,000
Being Cash Paid To Discharge Consideration

Note Calculation of Inventory Value
Inventory	85000
25% of 110000 27500
Profit Margin 70000*.25=17500
27500-17500	10000
Inventory	75000

Example Consideration Paid in cash Is 800000 for 80 % Assume
Calculation of Purchase Consideration
Cash	25,000
Accounts receivable	40,000
Inventory	75,000
Buildings	400,000
Plant	330,000
Land	1,000,000
Total	1,870,000
less
Loans	650,000
Accounts payable	90,000
	1,130,000
80% OF SHARES VALUE	904,000
LESS CONSIDERATION PAID	800,000
CAPITAL PREOFIT (GOOD Will)	104,000
in This Situaqtion 104000 IS Bargaining Profit / Gain