Accounting -On 1 July 2015, Black Ltd acquired 70% of the shares of White Ltd for $526,000 on a cum div. basis.

| January 30, 2017

Question
On 1 July 2015, Black Ltd acquired 70% of the shares of White Ltd for $526,000 on a cum div. basis. Black Ltd had acquired 30% of the shares of White 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 White Ltd‘s statement of financial position showed the following balances:

Share Capital$400,000

Share Options60,000

General Reserve50,000

Retained Earnings100,000

Other Liabilities82,000

Dividend Payable30,000

At acquisition date, all the identifiable assets and liabilities of White Ltd were recorded at amounts equal to fair value except for:

Carrying Fair

Amount Value

Land$75,000$80,000

Truck (cost $30,000)25,00029,000

Equipment (cost $420,000)294,000309,000

Goodwill48,00072,000

Inventory88,00091,000

The truck, 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.

White Ltd had not recorded an internally developed trademark. Black Ltd valued this at $90,000 and was assumed to have a ten year life. It also had a contingent liability of $19,000 that Black 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 June 2017, White 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)White Ltd sold a warehouse with a carrying amount of $82,000 to Black Ltd for $100,000. The transaction took place on 1 January 2017. Black Ltd charges depreciation at 5% p.a. on a straight-line basis.

(ii)On 31 March 2017, Black Ltd sold some land to White Ltd. The land had originally cost Black Ltd $64,000, but was sold to White Ltd for $73,000. To help White Ltd pay for the land, Black Ltd gave White Ltd an interest-free loan of $29,000. White Ltd has as yet made no repayments on the loan.

(iii)In April 2017, Black Ltd sold inventory to White Ltd for $12,000, at a mark-up of 20% on cost. One quarter of this inventory was unsold by White Ltd at 30 June 2017. The remaining inventory was sold in the following three months.

(iv)On 1 October 2017, Black Ltd issued 1,000 15% debentures of $100 at nominal value. White 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 White 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, White Ltd transferred an item of plant with a carrying amount of $32,000 to Black Ltd for $41,000. Black Ltd treated this item as inventory. The item was still on hand at the end of the year. White Ltd applied a 20% depreciation rate to this plant.

(vii)During the year ending 30 June 2018, White Ltd sold inventory to Black Ltd for $50,000, recording a before-tax profit of $16,000. One quarter of this inventory was unsold by Black Ltd at 30 June 2018.

(viii)The tax rate is 30%.

On 30 June 2018 the trial balances of Black Ltd and White Ltd were as follows:

Black LtdWhite Ltd

Cost of sales $338,000$307,000

Other expenses80,00072,000

Income tax expense41,00040,000

Interim dividend paid21,00011,000

Final dividend declared22,00015,000

Cash181,00090,000

Dividend receivable15,000-

Other receivables206,000227,000

Inventory244,000132,000

Deferred tax assets35,000-

Trucks82,00072,000

Plant & equipment648,000380,000

Land130,000123,000

Warehouses180,000 90,000

Debentures in Black Ltd-40,000

Shares in White Ltd722,000-

Goodwill74,00048,000

Loan to White Ltd29,000-

3,048,0001,647,000

Sales480,000437,000

Other revenue & income74,00056,000

Share capital874,000410,000

Share options80,00060,000

General reserve84,00072,000

Retained earnings (1/7/2017)490,000228,000

Final dividend payable22,00015,000

Current tax liabilities8,0007,000

Other liabilities96,00065,000

Debentures400,000-

Loan from Black Ltd- 29,000

Accumulated depreciation – P & E 388,000228,000

Accumulated depreciation – Trucks25,00022,000

Accumulated depreciation – Warehouses27,00018,000

3,048,0001,647,000

Required

a)Prepare the acquisition analysis at 1 July 2015.

b)Prepare the BVCR and pre-acquisition worksheet entries ONLY at 30 June 2016.

c)Prepare the consolidation worksheet entries (Inc. BCVR, pre-acquisition entries and inter-group transactions) at 30 June 2018.

d)Complete the worksheet below.

Financial Statements

Black

Ltd

White

Ltd

Adjustments

Group

Dr

Cr

Sales revenue

480,000

437,000

Other revenue & income

74,000

56,000

554,000

493,000

Cost of sales

338,000

307,000

Other expenses

80,000

72,000

418,000

379,000

Profit before tax

136,000

114,000

Tax expense

41,000

40,000

Profit

95,000

74,000

Retained earnings

(1/7/2017)

490,000

228,000

Transfer from BCV reserve

585,000

302,000

Dividend paid

21,000

11,000

Dividend declared

22,000

15,000

43,000

26,000

Retained earnings

(30/6/2018)

542,000

276,000

Share capital

874,000

410,000

Share options

80,000

60,000

General Reserve

84,000

72,000

BCVR

Total Equity

1,580,000

818,000

DTL

Dividend Payable

22,000

15,000

Current Tax Liabilities

8,000

7,000

Other liabilities

96,000

65,000

Debentures

400,000

Loan from Black Ltd

29,000

Total Liabilities

526,000

116,000

Total Liabilities + Equity

2,106,000

934,000

Black

Ltd

White

Ltd

Adjustments

Group

Dr

Cr

Cash

181,000

90,000

Dividend receivable

15,000

Other receivables

206,000

227,000

Inventory

244,000

132,000

Deferred tax assets

35,000

Land

130,000

123,000

Trucks

82,000

72,000

Accumulated depreciation – Trucks

(25,000)

(22,000)

Plant & equipment

648,000

380,000

Accumulated depreciation – Plant & Equipt.

(388,000)

(228,000)

Warehouses

180,000

90,000

Accumulated depreciation – Warehouses

(27,000)

(18,000)

Trademark

Accumulated amortisation – Trademark

Debentures in Black Ltd

40,000

Shares in White Ltd

722,000

Goodwill

74,000

48,000

Accumulated impairment losses

Loan to White Ltd

29,000

Total assets

2,106,000

934,000

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