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ACC-ACF2100 Topic 7 Presentation Question Solution

1) Hawk Ltd acquired Magpie Ltd on July 1, 2017 for $1.2 million. Magpie Ltd had assets including plant, land, and inventory that were recorded at fair value upon acquisition, with the exceptions noted. 2) Entries are made to record the business combination value realized for the plant and land based on changes in their carrying amounts since acquisition. An entry is also made for the sale of inventory during the period. 3) Pre-acquisition entries transfer Magpie Ltd's pre-acquisition equity balances to Hawk Ltd's books and close the acquisition against the consideration transferred and resulting goodwill.

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199 views3 pages

ACC-ACF2100 Topic 7 Presentation Question Solution

1) Hawk Ltd acquired Magpie Ltd on July 1, 2017 for $1.2 million. Magpie Ltd had assets including plant, land, and inventory that were recorded at fair value upon acquisition, with the exceptions noted. 2) Entries are made to record the business combination value realized for the plant and land based on changes in their carrying amounts since acquisition. An entry is also made for the sale of inventory during the period. 3) Pre-acquisition entries transfer Magpie Ltd's pre-acquisition equity balances to Hawk Ltd's books and close the acquisition against the consideration transferred and resulting goodwill.

Uploaded by

Dan
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© © All Rights Reserved
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ACC/ACF2100 Financial Accounting

Topic 7 Consolidation: Wholly Owned Subsidiaries Presentation Question

On 1 July 2017, Hawk Ltd acquired all the issued shares (cum div.) of Magpie Ltd for
$1,200,000. At this date the equity of Magpie Ltd consisted of:

Share capital $850 000


General reserve $55 000
Retained earnings $245 000

At acquisition date, Magpie Ltd reported a dividend payable of $2 000. All the identifiable
assets and liabilities of Magpie Ltd were recorded at amounts equal to their fair values
except for:
Carrying amount Fair value
Plant (cost $250 000) $200 000 $220 000
Land 320 000 350 000
Inventory 58 000 64 000

The plant was considered to have a further five year life. All inventory was sold by 30 June
2018. The dividend payable recorded at acquisition date was paid in July 2017.

Required
Prepare the acquisition analysis and consolidation worksheet entries for the preparation by
Hawk Ltd of its consolidated financial statements at 30 June 2018. Explain why each entry is
required.

Prepared by Dr Lisa Powell


ACC/ACF2100 Financial Accounting
Topic 7 Consolidation: Wholly Owned Subsidiaries Presentation Question
Solution
STEP 1: Acquisition analysis at 1 July 2017:

FVINA of Magpie Ltd = ($850 000 + $55 000 + $245 000) (equity)
+ $20 000 (1 30%) (plant BCVR)
+ $30 000 (1 30%) (land BCVR)
+ $6 000 (1 30%) (inventory BCVR)
= $1 189 200
Consideration transferred = $1 200 000 2 000 dividend receivable
= $1 198 000
Goodwill = $8 800

Worksheet entries at 30 June 2018 (1 year since acquisition)

STEP 2: BCVR entries (plant and land on hand, inventory sold in current year)

Accumulated depreciation plant Dr 50 000


Plant Cr 30 000
DTL (30%) Cr 6 000
BCVR Cr 14 000

CA of plant increased by $20 000 (TTD), so depn increases (20 000/5) $4 000 p.a.

Depreciation expense Dr 4 000


Accumulated depreciation Cr 4 000

CA of plant (TTD) reduced by $4 000, so reverse (4 000 x 30%) $1 200 from DTL

DTL Dr 1 200
Income tax expense Cr 1 200

Land Dr 30 000
DTL (30%) Cr 9 000
BCVR Cr 21 000

Cost of sales Dr 6 000


Income tax expense (30%) Cr 1 800
Transfer from BCVR (RE) Cr 4 200

Prepared by Dr Lisa Powell


STEP 3: Pre-acquisition entries

At 30 June 2018 (1 year since acquisition), the pre-acquisition entries would be

Need to consider
- inventory sold in current year
- dividend payable at acquisition has been paid dividend payable and receivable
accounts closed off hence no entry required

Retained earnings (1/7/16) Dr 245 000


Share capital Dr 850 000
General reserve Dr 55 000
BCVR Dr 39 200
Goodwill Dr 8 800
Shares in Magpie Ltd Cr 1 198 000

Transfer from BCVR (RE) Dr 4 200


BCVR Cr 4 200
(Sale of inventory)

Prepared by Dr Lisa Powell

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