Problem - On 1 July 2015, Victoria Ltd acquired 70% of the shares of Melbourne Ltd for $526,000 on a cum div. basis. Victoria Ltd had acquired 30% of the shares of Melbourne Ltd two years earlier for $180,000. This investment, classified as an available-for-sale investment, was recorded at a fair value on 1 July 2015 of $226,000. At 1 July 2015, the equity and liability sections of Melbourne Ltd's statement of financial position showed the following balances:
|
Share Capital
|
460,000
|
|
General Reserve
|
50,000
|
|
Retained Earnings
|
100,000
|
|
Other liabilities
|
100,000
|
|
Dividend payable
|
30,000
|
At acquisition date, all the identifiable assets and liabilities of Melbourne Ltd were recorded at amounts equal to fair value except for:
|
Carrying Amount
|
Fair Value
|
|
Land
|
95,000
|
100,000
|
|
Vehicle (@ cost 40,000)
|
35,000
|
39,000
|
|
Equipment (@ cost 420,000)
|
294,000
|
309,000
|
|
Inventory
|
98,000
|
101,000
|
The Vehicle, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2018. The equipment had a further five year life at acquisition date and was expected to be used evenly over that time. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation.
Melbourne Ltd had not recorded an internally developed patent. Victoria Ltd valued this patent at $90,000 and was assumed to have a ten year life. In May 2017, Melbourne sold this patent to an external party for $100,000. It also had a contingent liability of $19,000 that Victoria Ltd considered to have a fair value of $15,000. This liability was settled in July 2017.
The dividend liability was paid on 1 September 2015. All inventories on hand at acquisition date were sold by June 2016. The land was sold on 1 June 2018 to Peters Ltd. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed.
On 30 May 2017, Melbourne Ltd transferred $8,000 from the general reserve (pre-acquisition) to retained earnings. A bonus dividend of $10,000 was paid in December 2017 out of pre-acquisition profits.
Goodwill was tested annually for impairment. For the year ended 30 June 2017, an impairment loss on goodwill of $4,000 was recorded.
Additional information:
(i) Melbourne Ltd sold a warehouse with a carrying amount of $82,000 to Victoria Ltd for $100,000. The transaction took place on 1 January 2017. Victoria Ltd charges depreciation at 5% p.a. on a straight-line basis.
(ii) On 31 March 2017, Victoria Ltd sold some land to Melbourne Ltd. The land had originally cost Victoria Ltd $64,000, but was sold to Melbourne Ltd for $63,000. To help Melbourne Ltd pay for the land, Victoria Ltd gave Melbourne Ltd an interest-free loan of $29,000. Melbourne Ltd has as yet made no repayments on the loan.
(iii) In April 2017, Victoria Ltd sold inventory to Melbourne Ltd for $12,000, at a mark-up of 20% on cost. One quarter of this inventory was unsold by Melbourne Ltd at 30 June 2017. The remaining inventory was sold in the following three months.
(iv) On 1 October 2017, Victoria Ltd issued 1,000 15% debentures of $100 at nominal value. Melbourne Ltd acquired 400 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities' accounts.
(v) On 18 February 2018, interim dividend was paid by Melbourne Ltd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends.
(vi) On 1 April 2018, Melbourne Ltd transferred an item of plant with a carrying amount of $32,000 to Victoria Ltd for $41,000. Victoria Ltd treated this item as inventory. The item was still on hand at the end of the year. Melbourne Ltd applied a 20% depreciation rate to this plant.
(vii) During the year ending 30 June 2018, Melbourne Ltd sold inventory to Victoria Ltd for $60,000, recording a before-tax profit of $16,000. One quarter of this inventory was unsold by Victoria Ltd at 30 June 2018.
(viii) The tax rate is 30%.
On 30 June 2018 the trial balances of Victoria Ltd and Melbourne Ltd were as follows:
|
Victoria Ltd
|
Melbourne Ltd
|
|
Cost of sales
|
338,000
|
307,000
|
|
Other expenses
|
80,000
|
72,000
|
|
Income tax expense
|
41,000
|
40,000
|
|
Interim dividend paid
|
21,000
|
14,000
|
|
Final dividend declared
|
22,000
|
15,000
|
|
Cash
|
181,000
|
105,000
|
|
Dividend receivable
|
20,000
|
-
|
|
Other receivables
|
206,000
|
227,000
|
|
Inventory
|
244,000
|
132,000
|
|
Deferred tax assets
|
35,000
|
-
|
|
Trucks
|
82,000
|
72,000
|
|
Plant & equipment
|
648,000
|
380,000
|
|
Land
|
130,000
|
123,000
|
|
Warehouses
|
180,000
|
90,000
|
|
Debentures in Victoria Ltd
|
-
|
40,000
|
|
Shares in Melbourne Ltd
|
722,000
|
-
|
|
Goodwill
|
74,000
|
30,000
|
|
Loan to Melbourne Ltd
|
29,000
|
-
|
|
3,053,000
|
1,647,000
|
|
|
|
|
Sales
|
480,000
|
437,000
|
|
Other revenue & income
|
79,000
|
56,000
|
|
Share capital
|
874,000
|
470,000
|
|
Share options
|
80,000
|
-
|
|
General reserve
|
84,000
|
72,000
|
|
Retained earnings (1/7/2017)
|
490,000
|
228,000
|
|
Final dividend payable
|
22,000
|
15,000
|
|
Current tax liabilities
|
8,000
|
12,000
|
|
Other liabilities
|
96,000
|
60,000
|
|
Debentures
|
400,000
|
-
|
|
Loan from Victoria Ltd
|
-
|
29,000
|
|
Accumulated depreciation - P & E
|
388,000
|
228,000
|
|
Accumulated depreciation - Trucks
|
25,000
|
22,000
|
|
Accumulated depreciation - Warehouses
|
27,000
|
18,000
|
|
3,053,000
|
1,647,000
|
Required -
Prepare the acquisition analysis as at 1 July 2015.
Prepare the BVCR and pre-acquisition worksheet entries ONLY as at 30 June 2016.
Prepare full consolidation worksheet entries as at 30 June 2018.