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Topic 2: Consolidation: Intra-group transactions On 1 July 2015, Ping Pong Ltd acquired all the issued...

Topic 2: Consolidation: Intra-group transactions

On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders’ equity of Sing Song Ltd consisted of share capital $120,000; general reserve $25,000 and retained earnings $55,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values, except for the following assets:

Carrying amount

Fair value

$

$

Land

100,000

130,000

Inventories

78,500

86,100

Machinery (cost $86,000)

52,000

56,000

Vehicles (cost $58,000)

47,000

53,000

The assets of Sing Song Ltd at acquisition date included goodwill recorded at $15,000 arising from a business combination transaction in 2011. As at the date of acquisition, the vehicles and machinery were expected to have a further useful life of 6 and 8 years respectively, with benefits to be received evenly over those periods. Inventories on hand on 1 July 2015 was all sold by 31 January 2016. The land owned at 1 July 2015 was sold in September 2016 for $150,000. The machinery on hand at 1 July 2015 was sold on 1 January 2018 for $38,000.

Adjustments for the differences between carrying amount and fair values of assets and liabilities on hand at acquisition date are recognised on consolidation. When assets are sold or derecognised, any related valuation reserves are transferred to retained earnings.

At 1 July 2015, Sing Song Ltd owned but had not recorded an internally generated brand name, an identifiable asset included as part of the business combination transaction. This brand name was considered by Ping Pong Ltd to have a fair value of $29,000 and an indefinite useful life. An impairment test conducted with respect to the brand name on 30 June 2018 concluded that its recoverable amount at that date was $2,000 less than its carrying amount.

In June 2017, Sing Song Ltd paid a share dividend worth $20,000 from the general reserve on hand at 1 July 2015.

The trial balances of both companies at 30 June 2018 showed the following balances:

Ping Pong Ltd

Sing Song Ltd

Dr ($)

Cr ($)

Dr ($)

Cr ($)

Sales revenue

450,000

320,000

Dividend revenue

17,000

-

Other income

11,400

17,000

Proceeds on sale of equipment

18,000

-

Proceeds on sale of machinery

-

38,000

Cost of sales

210,000

192,550

Income tax expense

30,000

32,000

Depreciation and other expenses

39,000

36,000

Carrying amount of equipment sold

21,000

-

Carrying amount of machinery sold

-

30,500

Dividend paid

10,000

5,000

Dividend declared

20,000

12,000

Transfer to general reserve

10,000

5,000

Share capital

200,000

140,000

General reserve

35,000

10,000

Retained earnings (1 July 2017)

51,300

67,500

Accounts payable

69,500

36,000

Loan payable (due 30 June 2022)

25,000

15,000

Dividend payable

20,000

12,000

Provisions

12,500

9,300

Current tax liability

43,000

34,000

Deferred tax liability

11,800

5,000

Accumulated depreciation-vehicles

16,400

60,000

Accumulated depreciation-equipment

-

34,500

8%Debentures (matures 30 June 2021)

25,000

-

Cash

2,500

1,250

Receivables

27,000

13,000

Inventories

39,700

24,500

Other current assets

15,200

8,200

Deferred tax assets

7,500

3,500

Vehicles

88,000

158,000

Equipment

-

42,000

Land

140,000

180,000

Financial assets

68,000

14,800

Goodwill

28,000

15,000

Shares in Sing Song Ltd

250,000

-

Debentures in Ping Pong Ltd

-

25,000

1,005,900

1,005,900

798,300

798,300

Additional information:

On 1 January 2018, Ping Pong Ltd sold an item of equipment to Sing Song Ltd for $18,000. The equipment had a carrying amount at the date of sale of $21,000. Both companies depreciate equipment at 20% on a straight line basis.

On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for $7,800. The machine had a carrying amount of $7,000 at the date of sale. Ping Pong Ltd recorded the machine as inventories. The inventories item was sold to an external party in November 2017 for $8,200.

All interests on the 8% debentures has been paid and brought to account in the records of both companies.

During the 2017-2018 financial year, Ping Pong Ltd sold inventories to Sing Song Ltd for $75,000. The cost of these inventories to Sing Song Ltd was $70,000. Of these inventories, 25% is still on hand at 30 June 2018.

The transfer to the general reserve recorded by Sing Song Ltd in the current year was from retained earnings recorded at 1 July 2015.

The tax rate is 30%.

Required:

Prepare an acquisition analysis.

Prepare the consolidation worksheet entries necessary to prepare the consolidated financial statements for the year ending 30 June 2018 for the group comprising Ping Pong Ltd and Sing Song Ltd.

Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements.

Solutions

Expert Solution

1 Requirement
Acquistion Analysis
As at 1 st July 2015
Net fair Value of identifiable assets,Liabilities and contingent liabilities of Sing Song ltd
=
($120000+$25000+$55000 Equity)+$6000(1-30%)(BCVR-Vehicles)
+
$4000(1-30%)(BCVR-Machinery)
+
$30000(1-30%)(BCVR-Land)
+
$7600(1-30%)(BCVR-Inventory)
+
$29000(1-30%)(BCVR-Brand Name)
-
15000-Goodwill
Net fair Value Required $238,620
Consideration Transferred $250,000
Goodwill $11,380
Recorded Goodwill $11380-$15000
Adjustment Required ($3,620)
2 Requirement
CONSOLIDATION WORKSHEET ENTRIES for the yr Ended 30th June 2018
Date Particulars Dr Amount Cr Amount
a Business Combination Entries
Accumulated Depreciation -VehiclesA/C $11,000
Vehicles A/C $5,000
Deferred tax Liability $1,800
Business Combination Valuation reserve $4,200
Depreciation Expenses $1,000
Retained earnings(1/7/15) $2,000
Accumulated Depreciation-Vehicles $3,000
(1/6 *$6000 pa for 3 yrs)
Deferred tax Liability $900
Income Tax Expense $300
Retained earnings (1/7/15) $600
Depreciation Expense $250
Carrying amount of machinery sold $2,750
5.5 yrs *$500 pa
Income Tax Expense $900
Retained earnings(1/7/15) $700
Transfer from BCVR $2,800
(1/8 *$4000 pa for 2.5 yrs prior to sale)
Brand Name $29,000
Deferred tax Liability $8,700
Income Tax Expense $2,000
Business Combination valuation reserve $20,300
Impairment Loss $2,000
Accumulated Impairment Loss $2,000
Deferred tax Liability $600
Income Tax Expense $600
Business Combination valuation reserve $3,620
Goodwill $3,620
b Preaquisition Entries
Retained earnings(1/7/15)
($55000+$5320(BCVR-Inventory)+$21000(BCVR-Land) $81,320
Share Capital
$120000+$20000 $140,000
General Reserve $5,000
Business Combination Valuation Reserve $23,680
Shares in Sing Song Ltd $250,000
Transfer from Business combination valuation reserve $2,800
Business Combination Valuation Reserve $2,800
transfer from sale of machinery
General Reserve $5,000
Transfer to General Reserve $5,000
c Dividend Paid
Dividend Revenue $5,000
Dividend Paid $5,000

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