Question

On 1 July 2012 Sarah Ltd acquires all the shares in Jane Ltd for $707,000 cash

The financial statements of Jane Ltd as at 1 July 2012 shows the following:

                        Retained earnings    197,000

                        Share capital             259,000

The tax rate is 30%

At the date of acquisition all the net assets of Jane Ltd are at fair value except for the following:

	Carrying amount	Fair value
Equipment (cost $257,000)	$101,000	$142,000

The equipment has a further 18 years of useful life.

All consolidation entries on 30 June 2017 are shown below:

Dr. Retained earnings	$197,000
Dr. Share capital	$259,000
Dr. BCVR
Dr. Goodwill
Cr. Investment in Jane Ltd		$707,000

Dr. Accumulated depreciation	257,000 – 101,000
Dr.(or Cr.) Equipment
Cr. BCVR		( 142,000 – 101,000 ) x 70%
Cr. DTL		( 142,000 – 101,000 ) x 30%

Dr. Retained earnings	xxx
Dr. Depreciation expense	( 142,000 – 101,000 ) / 18
Cr. Accumulated depreciation

Dr. DTL
Cr. Income tax expense		( 142,000 – 101,000 ) x 30% / 18
Cr. Retained earnings

Complete the consolidation journals above and enter the amount of xxx (retained earnings) in the answer block below:

Answer 1

As per Full Goodwill method

Acquisition analysis

1 July 2012,

Net fair value of identifiable assets and liabilities of Jane Ltd = ($197000 + $259 000)+$41 000 (1 – 30%) (equipment) = $484000

Consideration transferred = $707000

Goodwill = $707000 – $484000 = $222300

Consolidation Worksheet Entries - 1 July 2012

Dr. Retained earnings	$197,000
Dr. Share capital	$259,000
Dr. BCVR	$28700
Dr. Goodwill	$222300
Cr. Investment in Jane Ltd		$707,000

Dr. Accumulated depreciation	257,000 – 101,000=156,000
Dr.(or Cr.) Equipment		115,000
Cr. BCVR		( 142,000 – 101,000 ) x 70%=28,700
Cr. DTL		( 142,000 – 101,000 ) x 30%=12,300

Dr. Retained earnings	(11,390-2,278)= 9,112
Dr. Depreciation expense	( 142,000 – 101,000 ) / 18=2,278
Cr. Accumulated depreciation (1/18 x $41,000 p.a. for 5 years)	(2,278 x 5) = 11,390

Dr. DTL	(683+683) = 1,366
Cr. Income tax expense	( 142,000 – 101,000 ) x 30% / 18= 683
Cr. Retained earnings	(2,278 x 30%) = 683

Hence it is proved that the amount of retained earning is 9,112

(Please ask in comment section if any quaries)