Question

(b) Melbourne Ltd owns 100 per cent of the shares of Bendigo Ltd, acquired on 1 July, 2019 for $900,000 when the shareholders’ funds of Bendigo Ltd were: Share capital $450,000, Retained earnings $225,000 and Revaluation surplus $100,000. All assets of Bendigo Ltd are fairly stated at the acquisition date. The goodwill has been impaired by 10% in the year 2020. The following intra-group transactions took place during the 2020 financial year: Bendigo Ltd paid $60,000 dividend to Melbourne Ltd. Melbourne Ltd sells inventory to Bendigo Ltd at a sales price of $50,000. The inventory had previously cost Melbourne Ltd $40,000. Twenty five (25%) inventory is still on hand with Bendigo Ltd. Melbourne Ltd provided a management consultancy services to Bendigo during the year. Bendigo Ltd paid $7,500 in management fees to Melbourne Ltd. Melbourne Ltd sold plant costing $20,000 to Bendigo Ltd for $24,000. Melbourne Ltd had not charged any depreciation on the asset before the sale as it just purchased it from an external entity. Both entities depreciate items of plant at 20% p.a. on cost. The plant is still held by Bendigo Ltd. The tax rate is 30 per cent.

Required: Prepare the relevant consolidated journal entries for the year ended 30 June 2020 (including tax effects where relevant.

Answer 1

Net assets of Bendigo Ltd on date of consolidation.

Share capital- $450,000

Retained Earnings- $225,000

Revaluation Surplus-. $100,000

Total= $775,000

Purchase consideration -$900,000

Goodwill= $(900,000-775,000) =$125,000

Entry:

Net Assets dr 775000

Goodwill dr 125000

To Purchase Consideration 900000

Goodwill has been impaired by 10% i.e. $12,500

Entry

Impairment Dr 12,500

To Goodwill 12,500

Dividend paid by Bendigo has to be eliminated.

Dividend dr 60000

To p/l account 60000

There is an element of unrealised profit in stock unsold

Profit percentage - 10000/40000 = 25%

Stock unsold = 25% of 50000 = 12500

Element of profit = 25% of 12500 = 3125

Entry

P/ l account dr 3125

To stock 3125

Consultancy fees is income for Melbourne Ltd and expense for Bendigo Ltd. So they should be net off

Income(consultancy) dr 7500

To expenses (consultancy) 7500

Depriciation will be charged on 24000 @20% and it should be done post tax to arrive on net effect amount = 24000*20%*(100-30)%

= 3,360

Depriciation dr 3360

To asset 3360