Butter Ltd acquired 80% of the share capital of Scotch Ltd for $330,000 (cum div.) on 1 July 2015. The statement of financial position at acquisition date of Scotch Ltd, including comparative information on fair values for assets is shown below:
Carrying amount Fair value
Current assets
Cash 5,000
Inventory 60,000 67,000
Accounts receivable 40,000
Allowance for doubtful debts 5,000 35,000 35,000
Total current assets 100,000
Non-current assets
Plant and machinery (at cost) 200,000
Accumulated depreciation – plant and machinery (125,000) 75,000 90,000
Vehicles (at cost) 80,000
Accumulated depreciation – vehicles (10,000) 70,000
Buildings (at cost) 120,000
Accumulated depreciation – buildings (5,000) 115,000 115,000
Trademark (at valuation) 100,000 100,000
Other assets 40,000
Goodwill 20,000
Total non-current assets 420,000
Total assets 520,000
Current liabilities
Accounts payable 40,000
Dividend payable 20,000
Total current liabilities 60,000
Non-current liabilities
Debentures 155,000
Total non-current liabilities 155,000
Total liabilities 215,000
Equity
Retained earnings 55,000
Share capital 200,000
Asset revaluation surplus 50,000
Total equity 305,000
Total equity and liabilities 520,000
The depreciable assets had the following remaining useful lives at 1 July 2015:
Plant and machinery 4 years
Vehicles 10 years
Buildings 10 years
All the inventory on hand at 1 July 2015 was sold by Scotch Ltd by 30 June 2016. Adjustments for differences between fair values and carrying amounts at acquisition date are made on consolidation.
Additional information:
a) The dividend payable in the records of Scotch Ltd at 1 July 2015 was paid in August 2015.
b) On 1 January 2018, one of the machines that was on hand in Scotch Ltd at 1 July 2015 was sold at a gain of $6,000. At 1 July 2015, the machine was recorded at cost of $50,000 with accumulated depreciation of $30,000, and had a fair value of $23,000. Any related revaluation surplus was transferred on consolidation to retained earnings.
c) During the 2018 financial year, Scotch Ltd transferred $10,000 from the asset revaluation surplus (on hand at 1 July 2015) to retained earnings, and transferred $20,000 to general reserve from retained earnings.
d) Information on dividends paid and declared during the 2018 financial year is as follows:
– paid a $7,000 dividend declared in the previous period;
– paid a $4,000 interim dividend;
– declared, in June 2018, an $3,000 dividend.
Butter Ltd recognises dividends prior to receipt.
e) Information on inventory sold by Scotch Ltd to Butter Ltd at a mark-up of 20%:
– At 1 July 2017 Butter Ltd had $15,000 of inventory on hand which was sold by 30 June 2018.
– During the 2017–2018 period, $30,000 worth of inventory was sold, with 25% still on hand at Butter Ltd on 30 June 2018.
f) On 1 July 2016, Scotch Ltd sold a vehicle to Butter Ltd at a profit before tax of $5,000. Butter Ltd depreciates vehicles at a rate of 10% per year on cost while Scotch Ltd applies a rate of 20% per year on cost.
g) The retained earnings balance at 30 June 2017 in Scotch Ltd was $60,000. The total comprehensive income for the year ended 30 June 2018 was $28,000, including $3,000 due to revaluation of land measured using the revaluation model. The asset revaluation surplus balance at 30 June 2017 for Scotch Ltd was $54,000.
h) The tax rate is 30%.
Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method. (3 marks)
2. Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-controlling interest at 1 July 2015 was $68,000. (4 marks)
3. Prepare the consolidation journal entries for Butter Ltd using the full goodwill method at 1 July 2015, immediately after acquisition. (8 marks)
4. Prepare the consolidation journal entries for Butter Ltd using the full goodwill method at 30 June 2018. (20 marks)
MODEL ANSWER BELOW TO WHAT THE RESPONSE SHOULD LIKE:
PLATYPUS LTD – WOMBAT LTD
75%
Platypus Ltd Wombat Ltd
Platypus Ltd 75%
1: PARTIAL GOODWILL METHOD NCI 25%
Acquisition analysis
At 1 July 2008:
Net fair value of identifiable assets and liabilities of Wombat Ltd
=
($20 000 + $2 000 + $10 000) (equity)
= + $10 000 (1 – 30%)(machinery)
+ $4 000 (1 – 30%) (inventory)
– $2 000 (1 – 30%) (receivables)
$40 400
(a) Consideration transferred = $40 000
(b) Non-controlling interest =
= 25% x $40 400
$10 100
Aggregate of (a) and (b) = $50 100
Goodwill = $50 100 – $40 400
= $9 700
i. Business combination valuation entries at 30/6/13
Depreciation expense Dr 1 000
Carrying amount of machinery sold Dr 1 000
Retained earnings (1/7/12) Dr 5 600
Income tax expense Cr 600
Transfer from business combination
valuation reserve Cr 7 000
(Depreciation is 20% x $10 000 per annum)
ii. Pre-acquisition entries at 30/6/13
Pre-acquisition entries at 1/7/08
Retained earnings (1/7/08) Dr 7 500
Share capital Dr 15 000
Business combination valuation reserve Dr 6 300
General reserve Dr 1 500
Goodwill Dr 9 700
Shares in Wombat Ltd Cr 40 000
Pre-acquisition entry at 30/6/13:
Retained earnings (1/7/12) * Dr 8 550
Share capital Dr 15 000
Business combination valuation reserve Dr 5 250
General reserve Dr 1 500
Goodwill
Shares in Wombat Ltd Dr
Cr 9 700
40 000
* 75%[$10 000 + $2 800 (inventory) – $1 400 (receivables)]
Transfer from business combination
valuation reserve Dr 5 250
Business combination valuation reserve Cr 5 250
(75% x $7000)
iii. NCI share of equity at 1/7/08
Retained earnings (1/7/12) Dr 2 500
Share capital Dr 5 000
Business combination valuation reserve Dr 2 100
General reserve
NCI Dr
Cr 500
10 100
iv. NCI share of equity: 1/7/08 – 30/6/12
Retained earnings (1/7/12) Dr 1 100
Asset revaluation surplus (1/7/12) Business combination valuation reserve Dr Cr 500
350
NCI Cr 1 250
RE: 25% ($20 000 – $10 000 – $5600)
BCVR: 25% (70% [$4000 – $2000]) ARS: 25% x $2000
v. NCI share of equity: 1/7/12 – 30/6/13
NCI share of profit NCI
(25%($15 600 – ($1000 + $1000 – $600))) Dr Cr 3 550
3 550
General reserve
Transfer to general reserve (25% x $1000) Dr Cr 250
250
Gains/Losses: asset revaluation surplus NCI
(25% x $500) Dr Cr 125
125
Transfer from business combination valuation reserve
Dr
1 750
Business combination val’n reserve (Sale of machinery: 25% x $7000) Cr 1 750
NCI
Interim dividend paid (25% x $8000) Dr Cr 2 000
2 000
NCI
Final dividend declared Dr Cr 1 000
1 000
(25% x $4000)
vi. Interim dividend paid
Dividend revenue Dr 6 000
Interim dividend paid Cr 6 000
(75% x $8000)
vii. Final dividend declared
Dividend payable
Dr
3 000
Final dividend declared (75% x $4000) Cr 3 000
Dividend revenue
Dividend receivable Dr Cr 3 000
3 000
