Question

Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,000, when the equity of Sarina Ltd consisted of: Share Capital $500,000 General Reserve 80,000 Retained Earnings 30,000 All identifiable assets and liabilities of Sarina Ltd were fairly valued at acquisition except the machinery, which had a fair value of $140,000. The machinery had a further 7-year life with depreciation based on the straight-line method. Selected financial information for both companies at 30 June 2018 is as follows: Hahndorf Ltd Sarina Ltd Sales revenue $1,000,000 $800,000 Cost of sales (600,000) (600,000) Gross profit 400,000 200,000 Dividend received from Sarina Ltd 30,000 - Management fee received 26,500 - Gain on sale of plant 35,000 - Admin expenses 55,800 28,700 Depreciation 29,500 56,800 Management fee paid - 26,500 Other expenses 306,200 8,000 Profit before tax 100,000 80,000 Tax expense (30,000) (24,000) Profit for the period 70,000 56,000 Retained earnings at 1/7/17 230,000 120,000 300,000 176,000 Dividend paid (20,000) (10,000) Dividend declared (40,000) (20,000) Retained earnings at 30/6/18 240,000 146,000 Share capital 900,000 500,000 General reserve 60,000 80,000 Total equity 1,200,000 726,000 Dividend payable 40,000 20,000 Other liabilities (note 1) 120,000 30,000 Total equity and liabilities 1,360,000 776,000 Shares in Sarina Ltd 700,000 - Dividends Receivable 20,000 - Inventory 40,000 50,000 Other assets (note 2) 600,000 726,000 Total assets 1,360,000 776,000 Notes 1. Other liabilities include deferred tax liabilities 2. Other assets include Land, Machinery, Equipment, and Accumulated depreciation and Impairment losses, and Deferred Tax asset. Other information: During the 2017-18 period, Sarina Ltd sold some items of inventory to Hahndorf Ltd for $92,000, recording a profit before tax of $12,000. Hahndorf Ltd has since resold half of these items. During the 2016-17 period, Hahndorf Ltd sold some items of inventory to Sarina Ltd. At 30 June 2017, Sarina Ltd still had inventory on hand on which Hahndorf Ltd had recorded a before-tax profit of $16,000. All this inventory has been sold during the 2017/18 financial year. During the year, Hahndorf Ltd made total sales to Sarina Ltd of $60,000. Sarina Ltd sold all these goods to customers outside the group. On 1 July 2017 Hahndorf Ltd sold an item of plant to Sarina Ltd for $116,000 when its carrying value in Hahndorf Ltd’s accounts was $81,000 (cost $135,000, accumulated depreciation $54,000). This plant is assessed as having a remaining useful life of five years. The Group has a policy of measuring its property, plant and equipment using the ‘cost model’. Sarina Ltd paid $26,500 in management fees to Hahndorf Ltd. The company income tax rate is 30%. Required (a) Prepare the consolidation journal entries for the above entities as at 30 June 2018, excluding those already done in Part B of this assessment task. Use reference numbers starting at (f) to number the journals. (18.5 marks) (b) Prepare the consolidated worksheet for the year ended 30 June 2018. Post all consolidation journal entries to the consolidated worksheet. Use the reference numbers (a) to (e) for the journals of Part B and (f) onwards for the journals in Part C when posting these journals to the consolidated worksheet. (11.5 marks)

Answer 1

Answer
To begin with we need to plot the Income Statement of both the companies as per below
Income Statement as on June 30, 2018
				Hahndorf Ltd	Sarina Ltd
Sales				1000000	800000
Less: Cost of Sales				600000	600000
Gross Profit				400000	200000
Other Income
Dividend received from Sarina Ltd				30000
Management Fees received				26500
Gain on sale of Plant				35000
Total Income			A	491500	200000
Depreciation				29500	56800
Admin Expenses				55800	28700
Management Fees paid					26500
Other expenses				306200	8000
Total Expenses			B	391500	120000
Net Profit before tax			C=A-B	100000	80000
Tax			D	30000	24000
Profit after tax			E=C-D	70000	56000
After plotting the Income Statement we need to plot the Balance Sheet of both the
companies as per information given. Once all the given information in entered properly then
we can begin entering the eliminations that is part b of the question
Q. b) eliminations as per below together with the consolidated worksheet
Consolidated Statement of financial position as on June 30, 2018
				Hahndorf Ltd	Sarina Ltd	Eliminations		Consolidated
						Debit	Credit
				$	$	$	$	$
Share Capital				900000	500000	-500000		900000
General Reserve				60000	80000	-80000		60000
Retained Earnings
Op. balance pn 01/07/2017				230000	120000	-120000		230000
Add:
Profit transferred from Income Statement				70000	56000	-16000	-12000	98000
Sub-total				300000	176000	-136000	-12000	328000
Less:
Dividends paid				-20000	-10000			-30000
Dividends declared				-40000	-20000			-60000
Closing balance on 30/03/2018				240000	146000	-136000	-12000	238000
Total Equity				1200000	726000	-716000	-12000	1198000
Dividend Payable				40000	20000			60000
Other Liabilities				120000	30000		-35000	115000
Accumulated other comprehensive
gain/loss							80000	80000
Total Equity & Liabilities				1360000	776000	-716000	33000	1453000
Assets
Shares in Sarina Ltd				700000			-700000	0
Dividends receivable				20000				20000
Inventory				40000	50000	-16000	-12000	62000
Other assets				600000	726000	80000	-35000	1371000
								0
Total Assets				1360000	776000	64000	-747000	1453000
				0	0	-780000	780000	0
Workings for adjustment of fari value of Plant in Sarina Ltd
Adjustment for fair value of Sarina Assets
Plant as on July 1, 2015				140000	Balance 7 years useful life
Less: Depreciation July 2015-June 2016				20000	Depreciaiton = 140000/7)
Plant as on July 1, 2016				120000
Less: Depreciation July 2016-June 2017				20000
Plant as on July 1, 2017				100000
Less: Depreciation July 2017-June 2018				20000
Plant as on June 30, 2018				80000
The consolidated worksheet above comes from the below eliminating consolidated Journals which
form part of Q a)
Q. a) Consolidation Journals as below -
Date	Particulars					Debit	Credit
						$	$
30-06-2018	Share Capital in Sarina Ltd				Dr	500000
	General Reserves in Sarina Ltd				Dr	80000
	Retained Earnings of Sarina Ltd				Dr	120000
	- To Shares in Sarina Ltd of Hahndorf Ltd						700000
	(Being eliminations of investments
	made in Sarina Ltd by Hahndorf Ltd)
30-06-2018	General Reserves in consolidation				Dr	16000
	General Reserves in consolidation				Dr	12000
	Inventory in Sarina Ltd						16000
	Inventory in Hahndorf Ltd						12000
	(Being inter-company profits eliminated
	on consolidation)
30-06-2018	Other assets (Plant)				Dr	80000
	Accumulated other comprehensive
	gain/loss						80000
	(Being adjustment made for fair value
	of plant in Sarina Ltd)
30-06-2018	Other Liabilities				Dr	35000
	Other assets (Plant)						35000
	(Being elimination of profit on sale
	of plant sold between companies
	eliminated
	$ 116000 sale when cost is $ 81000)