Question

Financial Information for Lotus Limited and its 100% owned subsidiary, Troy Limited, for the period ended 31 December 2018 is shown in the table below:

	Lotus Limited	Troy Limited
	$	$
Sales Revenue	50000	47200
Dividend Revenue	2000	0
Gain On Sale of Property, Plant and Equipment	2000	4000
Other Income	2000	4000
Total Income	56000	55200
Cost of Sales	42000	36000
Other Expenses	6000	2000
Total Expenses	48000	38000
Profit Before Income Tax	8000	17200
Income Tax Expense	2700	3900
Profit for the Period	5300	13300
Retained earnings ( 1 January 2018)	12000	6000
	17300	19300
Interim Dividend Paid	5000	2000
Retained earnings (31 December 2018)	12300	17300

ADDITIONAL INFORMATION:

Lotus Limited acquired the shares in Troy Limited at 1 January 2018, buying the 10000 shares in Troy Limited for $40000. At that date, Troy Limited recorded share capital of $20000. The shares were bought on acumulation div basis. Troy Limited had declared prior to the acquisition a dividend of $6000 that was paid in March 2018.

At 1 January 2018, all identifiable assets and liabilities of Troy Limited were recorded at fair value, except for inventories, for which the carrying amount was $800 less than fair value. A number of inventories have been difficult to sell, and 10% of it is still in hand at 31 December 2018.

Inventories on hand in Troy Limited at 31 December 2018 also include some items acquired from Lotus Limited during the period ended 31 December 2018. These were sold by Lotus Limited for $10000, at a profit before tax of $2000.

Half of the goodwill was written off as the result of an impairment test on 31 December 2018.

During March 2018, Lotus Limited provided management services to Troy Limited at a fee of $1000 paid by 31 December 2018.

On 1 July 2018, Troy Limited sold machinery to Lotus Limited at a gain of $4000. This machinery had a carrying amount to Troy Limited of $40000. Lotus considered that this machinery had a 5 year life.

By 31 December 2108, the financial assets acquired by Lotus Limited and Troy Limited from external entities increased $2000 and $1300 respectively, with gains and losses being recognised in other comprehensive income.

The TAX RATE is 30%

Questions

1. Prepare the acquisition analysis as at 1 January 2018.

2.Prepare the business combination valuation entries and pre-acquisition entries as at 1 January 2018.

Answer 1

1. Group Structure

Loutus- 100% of Troy

Minority interest- nill

Date of Aquisition -1st jan 2018

2. Aquisition analysis

1.Calculation of value of troy as on 1 jan 2018

(in $)

Share capital 20000

Retain Earning 6000

Increase in value of inventories 560(800*70%)

Value of troy 26560

Payment made by lotus to buy troy 40000

Less Dividend -6000

Cost of Investment 34000

Goodwill 7200

2. Pre acquisition entries

Share capital 20000

Retain earning 6000

business combination valuation reserve 560

Deffered tax Assets 240

Good will 7200

To share in troy 34000

-on Impair ment of goodwil

Impairment expenses a/c dr 3600

To Goodwill 3600

for futher year

Retain Earning a/c dr 3720

To Goodwill-accumulated impairement loss 3720

:-Entries for inventory

Opening inventory sales

Retain Earning a/c dr 504

Income tax Ex penses 216

To business combination valuation reserve 504

To Deffered tax Assets 216

Retain Eraning a/c dr

1.

Sales Revenue a/c dr 10000

To Cost of good sold 8000

To inventory 2000

2.

Deffered tax assets 600

To income tax expenses 600

:- Sales of machinery entry

Retain earning a/c dr 2800

Deffered tax assets 1200

To Machinery 4000

Depreciation entry

Accumulated depreciation a/c dr 400

To Depreciation 400

Income tax Expenses 120

To Deffered tax Liabilities 120

Increase in assets value of lotus

Assets a/c dr 2000

To gain on assets 1400

To Deffered tax liabilities 600

Increase in assets value of troy

Assets a/c dr 1300

To Deffered tax 390

to Retain Earning 910