Reference no: EM132762650
On 1 July 2020, Maine Ltd acquired all the issued shares (cum div.) of Lion Ltd for $450,000. At this date the equity of Lion Ltd consisted of:
Share capital $250,000
Retained earnings 75,000
On 1 July 2020, Lion Ltd had recorded a dividend payable of $22,500 which was paid in July 2020.
All of the identifiable assets and liabilities of Lion Ltd were recorded at amounts equal to their fair values except for the following:
Carrying amount Fair value
Inventory $200,000 260,000
Plant (accumulated depreciation of $90,000) 700,000 750,000
- Of the inventory on hand at 1 July 2020, only 20% remained unsold by 30 June 2021.
- The plant on hand at the date of acquisition was expected to have a further useful life of 5 years. The companies in the group use the straight-line method of depreciation.
- The tax rate is 30%.
During the 2020-21 year, the following transactions occurred:
1. Maine Ltd sold inventory to Lion Ltd for $60,000. This inventory had originally cost Maine Ltd $50,000. Half of this inventory was still on hand at 30 June 2021.
2. Maine Ltd charged Lion Ltd management fees of $15,000. This amount was unpaid at the end of the year.
3. On 1 January 2021, Maine Ltd sold machinery to Lion Ltd for $40,000, with a gain on sale of $6,000. The machinery was considered to have a further 5-year life.
4. At 30 June 2021, an impairment test was conducted on Lion Ltd and this resulted in the recognition of an impairment loss on the goodwill on acquisition of $5,000 (this has no tax effect).
5. At 30 June 2021, the directors of Lion Ltd declared a dividend of $2,500. This dividend remained unpaid at the end of the year.
Required:
Problem i) Prepare the acquisition analysis as at 1 July 2020.
Problem ii) Prepare the journal entries necessary to prepare consolidated financial statements as at the date of acquisition.
Problem iii) Prepare the journal entries necessary to prepare consolidated financial statements as at 30 June 2021.
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