In: Accounting
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.
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 |