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Prepare the acquisition analysis
Course:- Accounting Basics
Reference No.:- EM131722948




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Problem - On 1 July 2016, Parrot Ltd acquired 80% of the share capital of Squirrel Ltd for $264 800. On that date, the statement of financial position of Squirrel Ltd consisted of:

Share capital

$250,000

General reserve

10,000

Asset revaluation surplus

15,000

Retained earnings

10,000

Liabilities

180,000


$465,000

Cash

$35,000

Inventories

70,000

Land

65,000

Plant and equipment

300,000

Accumulated depreciation - plant and equipment

(130,000)

Trademark

100,000

Goodwill

25,000


$ 465,000

At 1 July 2016, all identifiable assets and liabilities of Squirrel Ltd were recorded at fair value except for:


Carrying amount

Fair value

Inventories

$ 70,000

$ 80,000

Land

65,000

85,000

Plant and equipment (cost

70,000

90,000

$200 000)



Trademark

100,000

110,000

During the year ended 30 June 2017, all inventories on hand at the beginning of the year were sold, and the land was sold on 28 February 2017 to Outback Ltd for $80 000. The plant and equipment had a further 5-year life beyond 1 July 2016 and was expected to be used evenly over that time. The trademark was considered to have an indefinite life. Any adjustments for differences at acquisition date between carrying amounts and fair values are made in the consolidation worksheet. Parrot Ltd uses the partial goodwill method. The tax rate is assumed to be 30%.

Financial information for Parrot Ltd and Squirrel Ltd for the year ended 30 June 2017 is shown below.


Parrot Ltd

Squirrel Ltd

Sales revenue

$200,000

$172,000

Other income

75,000

30,000


275,000

202,000

Cost of sales

162,000

128,000

Other expenses

53,000

31,000


215,000

159,000

Profit from trading

60,000

43,000

Gains/(losses) on sale of non-current assets

10,000

5,000

Profit before tax

70,000

48,000

Income tax expense

20,000

18,000

Profit for the period

50,000

30,000

Retained earnings (1/7/16)

30,000

10,000

Transfer from general reserve


8,000


80,000

48,000

Interim dividend paid

12,000

10,000

Final dividend declared

6,000

4,000


18,000

14,000

Retained earnings (30/6/17)

$ 62,000

$ 34,000

Asset revaluation surplus (1/7/16)


15,000

Gain on revaluation of specialised plant


5,000

Asset revaluation surplus (30/6/17)


$ 20,000

During the year ended 30 June 2017, Squirrel Ltd sold inventories to Parrot Ltd for $8000. The original cost of these items to Squirrel Ltd was $5000. One-third of these inventories were still on hand at the end of the year.

On 31 March 2017, Squirrel Ltd transferred an item of plant with a carrying amount of $10 000 to Parrot Ltd for $15 000. Parrot Ltd treated this item as inventories. The item was still on hand at the end of the year. Squirrel Ltd applied a 20% depreciation rate to this type of plant.

Required:

1. Prepare the acquisition analysis and all consolidation worksheet entries (narrations not required) necessary for preparation of the consolidated financial statements for Parrot Ltd and its subsidiary for the year ended 30 June 2017.

2. Prepare the consolidated statement of profit or loss and other comprehensive income for Parrot Ltd and its subsidiary at 30 June 2017.




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