Question

On 1 July 2021, Atlantic Ltd acquired 100% of the share capital of Pacific Ltd for a cash consideration of $750,000. All identifiable assets and liabilities of Pacific Ltd were recorded at amounts equal to fair value, except as follows:

	Carrying amount	Fair value
Plant (cost $260,000)	$130,000	$150,000

Also, the assets of Pacific Ltd included a goodwill previously recorded of $20,000.

On 1 July 2021, the equity of Pacific Ltd consisted of:

Share capital	$500,000
Retained earnings	$200,000

Additional information:

• The following intragroup transactions took place between Atlantic Ltd and Pacific Ltd during the financial year ended 30 June 2022:

1. On 1 January 2022, Atlantic Ltd sold inventory to Pacific Ltd for $12,000, paid in cash. The original cost to Atlantic Ltd of this inventory was $7,000. By 30 June 2022, 60% of these goods had been sold by Pacific Ltd to external parties; the rest is still on hand. The remaining inventory are sold the following period.

• The following intragroup transactions took place between Atlantic Ltd and Pacific Ltd during the financial year ended 30 June 2023:1.

1. On 1 July 2022, Atlantic Ltd sold an equipment to Pacific Ltd for $30,000 in cash when it had a carrying amount of $21,000. At the date of sale it was expected that the equipment had a remaining useful life of 3 years, and no residual value. The equipment was not then sold to external parties.

• The tax rate is 30%.

Required

a) Prepare the acquisition analysis at 1 July 2021.

b) Prepare the business combination valuation entries in the consolidation journal of Atlantic Ltd’s group at 1 July 2021. Exclude journal narrations.

c) Prepare the pre-acquisition entries in the consolidation journal of Atlantic Ltd’s group at 1 July 2021. Exclude journal narrations. (3.5 marks)

d) Prepare the entries to eliminate the effects of intragroup transactions in the consolidation journal of Atlantic Ltd’s group at 30 June 2023. Exclude journal narrations.

e) Assume now Atlantic Ltd acquired only 80% of the share capital of Pacific Ltd for a cash consideration of $600,000 on 1 July 2021.

With all other condition unchanged, prepare the acquisition analysis at 1 July 2021 using the partial goodwill method including showing the value of non-controlling interests (NCI).

Answer 1

1		Acquisition analysis on 01 July
		Purchase consideration	750,000
		Less:
		Share capital acquired	(500,000)
		Retained earnings acquired	(200,000)
		Fair value reserve acquired	(20,000)	20,000 on plant
		Write off of standalone goodwill	20,000
		Goodwill	50,000
		The Company has incurred 50,000 for synergy benefit and shall account as the Goodwill in its books.

2

2	Business Combintion valuation entries on 1 July
	Date	General Ledger Account	Debit	Credit
	1/7/2019	Plant A/c---Dr	20,000
		To Fair value reserve A/c		20,000
	1/7/2019	Retained Earnings of Pacific--Dr	20,000
		To Goodwill A/c		20,000

3.

3		Pre-acquisition entries
	1/7/2019	Share Capital A/c---Dr	500,000
		Retained Earnings A/c---Dr	180,000
		Fair value reserve A/c--- Dr	20,000
		Goodwill A/c---Dr	50,000
		To Investment A/c		750,000

4.

4	Journal entries to eliminate effect of inter company transactions-
	Date	General Ledger Account	Debit	Credit
	30/6/22	Retained Earnings A/c---Dr	2,000
		To Inventory		2,000
	30/6/23	Inventory A/c---Dr.	2,000
		To Retained Earnings A/c		2,000
	30/6/23	Retained Earnings A/c---Dr	6,000
		To Equipment A/c		6,000
		Out of profit of 9,000, 3,000 has been realised through depreciation write off and hence 6,000 has been eliminated
		Deferred Tax Assets A/c---Dr	1,800
		To Retained Earnings A/c		1,800
		Deferred tax assets created

5		Acquisition analysis on 01 July
		Purchase consideration	600,000
		Less:
		Share capital acquired	(400,000)	80% share
		Retained earnings acquired	(160,000)	80% share
		Fair value reserve acquired	(16,000)	20,000 on plant
		Write off of standalone goodwill	16,000	80% share
		Goodwill	40,000
		Value of NCI-
		Share capital	100,000	20% share
		Retained earnings	40,000	20% share
		Fair value reserve	4,000	20% share
		Write off goodwill	(4,000)	20% share
		Total NCI value	140,000