Reference no: EM132983227

Re: Accounting Issues: Year Ending 30 June 2021

From: Himanshu Gupta ([email protected])

Sent: 8 July 2021

To: Shaun Arnold ([email protected])

Dear Shaun,

As discussed, our chief accountant is currently on leave and I need to understand the following transactions and events to present to the board regarding the financial impacts from our recent takeover. The chief accountant left me a note, but I need a more detailed explanation just in case the board request further information. Please remember the board of directors have varying degrees of accounting knowledge so please limit the use of technical accounting terms. Recently Sunshine Ltd acquired 80% of the issued shares of Valley Ltd for $800,000 (Valley Ltd's owner's equity at the time of purchasing was $700,000 made up of share capital of $500,000 and retained earnings of $200,000). One of the liabilities of Valley Ltd was $50,000 for dividend payable but not yet paid and our accountant informed me that the shares were acquired based on cum-dividend. In addition, one of the assets in the statement of financial position of Valley Ltd was $35,000 for goodwill. Having prepared the acquisition analysis as part of preparing the consolidated financial statements for Sunshine Ltd, can you explain how does the recorded goodwill of $35,000 by the subsidiary Valley Ltd affect the group's goodwill? I believe the goodwill for Sunshine Ltd should be $100,000 (being $800,000 less $700,000). Is this correct? In addition, will the dividend payable by the subsidiary entity Valley Ltd impact the acquisition analysis? Please explain? The accountant told me that she had eliminated transactions incurred between the companies Sunshine Ltd and Valley Ltd. The sales are legitimate, we have exchanged invoices and contracts, so can you explain why we need to eliminate the inter-company transactions? I have extracted two examples below.

Can you please examine the following journal entries for errors. If incorrect, explain why and provide me with the corrected journal entries

Problem 1) Last year on 1 March 2020, Sunshine Ltd sold an item of machinery for $260,000 to Valley Ltd. At the date of sale, Sunshine Ltd had recorded the asset at a carrying amount of $135,000 (cost was $150,000 depreciated at 10% for one year). Is it correct to debit Gain on Sale of Machinery for $125,000 and credit Machinery for $125,000 on 30 June 2021? Do we need to do anything else?

Problem 2) On 1 June 2021, Valley Ltd sold inventory to Sunshine Ltd for $15,000, recording a before-tax profit of $3,000. On the 30 June 2021, Sunshine Ltd has sold one-third of the inventory to other entities for $6,000 but still holds two-third of these inventories as of 30 June 2021. Can we debit Sales for $15,000, credit Cost of Sales for $15,000 on 30 June 2021? Do we need to do anything else?