Question

The accountant of Park Ltd needs to prepare consolidated financial statements for Park Ltd at the end of financial year. Following information was available on 30 June 2020:

Park Ltd acquired 100 per cent interest in Sun Ltd for $850,000 on 1 July 2015. All assets and liabilities were fairly valued on the acquisition date. At the date of acquisition, the equity of Sun Ltd included:

Share capital                                 $320,000

Reserve                                        $160,000

Retained earnings                         $280,000

The balance of the investment account was $850,000 as shown in the Statement of Financial Position of Park Ltd on 30 June 2020.

1. The directors of Park Ltd believed that goodwill acquired was impaired by 20 per cent for the year ended 30 June 2020.
2. On 17 February 2020, Sun Ltd paid $60,000 in management fees to Park Ltd.
3. On 3 March 2020, Park Ltd sold inventory to Sun Ltd at a value of $48,000.
4. The above inventory had a cost of $29,000 for Park Ltd to produce. All inventories remained unsold in Sun Ltd on 30 June 2020. Park Ltd and Sun Ltd adopt the perpetual inventory system for inventory accounting. The income tax rate is 30%.

Required: (Narrations are required in this question)     

1. Describe the measurement of goodwill acquired in this question according to AASB 3.
2. Prepare relevant consolidation journal entries on 30 June 2020.

Answer 1

As per aasb 3
In a business combination achieved without the transfer of consideration, the acquirer must substitute the
acquisition-date fair value of its interest in the acquiree for the acquisition-date fair value of the
consideration transferred to measure goodwill or a gain on a bargain purchase

Calculation of goodwill as per aasb 3

The Amount of goodwill acquired = Amount invested - Fair Value of the net assets of Sun Ltd on the date of Acquisition - attributable costs on the date of acquisition

= 850,000- (320,000+160,000+280,000)-60,000

= 190,000

Consolidation journal entries as follows

Date	Accounts and explanation	Debit	Credit
June 30, 2020	Sales	$ 48,000
	Cost of Goods sold		$ 48,000
	(being sale of inventory by park Ltd after )
June 30, 2020	Cost of Goods sold	$ 19,000
	Inventory		$ 19,000
	(being profit on sale of inventory for park ltd)
June 30, 2020	Equity in earnings	$ 28,500
	Investment in Subsidiary(190000*15/100)		$ 28,500
	(being Impairment of goodwill @ 15%)
June 30, 2020	Share Capital - Subsidiary	$   320,000
	Reserve - Subsidiary	$   160,000
	Retained Earnings - Subsidiary	$ 280,000
	Goodwill	$ 161,500
	Investment		$ 921,500
	(being acquisition by park Ltd recorded in books of accounts )