Question

Accounting for Consolidation

Carina Ltd has acquired all the shares of Finn Ltd on 1 July 2019 for $ 225 000. The accountant for Carina Ltd, having studied the requirements of AASB 3 Business Combinations, realises that all the identifiable assets and liabilities of Finn Ltd must be recognised in the consolidated financial statements at fair value. Although he is happy about the valuation of these items, he is unsure of a number of other matters including pre-acquisition entries and business combination valuation reserves associated with accounting for these assets and liabilities. He has approached you and asked for your advice.

The financial statements of Finn Ltd showed the equity of Finn Ltd at acquisition date to be:

Share capital — 20 000 $5.10 shares $102 000
General reserve     40 000
Retained earnings     60 000

All the assets and liabilities of Finn Ltd were recorded at amounts equal to their fair values at that date.

During the year ending 30 June 2020, Finn Ltd undertook the following actions:
• On 10 September 2019, paid a dividend of $20 000 from the profits earned prior to 1 July 2019.
• On 28 June 2020, declared a dividend of $20 000 to be paid on 15 August 2020.
• On 1 January 2020, transferred $15 000 from the general reserve existing at 1 July 2019 to retained earnings.

Required
Write a report for the accountant at Carina Ltd advising on the following issues:

1. Should the adjustments to fair value be made in the consolidation worksheet or in the accounts of Finn Ltd?     


2.     What is the purpose of the pre-acquisition entries in the preparation of consolidated financial statements? Explain.     


3.      How to prepare the pre-acquisition entries at 1 July 2019.   


4.      How to prepare the pre-acquisition entries at 30 June 2020.     

Answer 1

1. Adjustments to the fair value should be made in consolidation worksheet as per the AASB3 Business combination,

while consolidating balance sheet of subsidiary.

2. Purpose of Pre acquisition entries in preparation of financial statements is to recognise goodwill/ Bargain purchase at the time of acquisition of subsidiary.

Goodwill/Bargin purchase to be calculated on acquisition is to be calculated by firstly calcuting cost of control then compaare it with cost of investment by company.

For calculating cost of control pre acuisition profits need to be adjusted properly, to calculate value of cost of control.

3. Pre acquisition entries prepared at the time of acquisition on 1 july 2019 by recognising all identifable assests and liablities of acquired company at fair value, to be used in consolidation statement by the amount which is recognised at the time of acuisition.

By making all adjustment to profit existing at time of acquisition for items related to acquisition before.

Cost of investment: $ 225000

(-) Cost of control* $ 202000

Goodwill: $ 23000

* Cost of control = share capital + grneral reserve + retained earning at time of acquisition.

4. Pre acquisition entries made at 30 june 2020 is by taking all the income after acquisition date of subsidiary into account of parent company after adjusting all subsequent cost after acquisition date like dividend expenditure..

depreciation on revised fair value etc.

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