Reference no: EM132990550
Question - Ruby Ltd acquired 60% of the shares of Topaz Ltd on 1 July 2017 for $135,000 when the equity of Topaz Ltd consisted of:
Share capital $100,000
Retained earnings 50,000
General reserve 22,000
All identifiable assets and liabilities of Topaz Ltd are recorded at fair value at this date except for the following:
Carrying Amount Fair value
Machinery (cost $100,000) $60,000 $90,000
Inventory 20,000 30,000
The machinery had a further 6-year life with depreciation based on the straight-line method. The inventory was sold by 30 June 2018. Selected financial information for both companies at 30 June 2020 is as follows:
Ruby Ltd Topaz Ltd
Sales revenue $700,000 $500,000
Expenses (450,000) (350,000)
Profit before tax 250,000 150,000
Tax expense (75,000) (40,000)
Profit for the period 175,000 110,000
Retained earnings at 1/7/19 125,000 90,000
300,000 200,000
Dividend paid (10,000) (4,000)
Dividend declared (20,000) (15,000)
Retained earnings at 30/6/20 270,000 181,000
Share capital 200,000 100,000
General reserve 30,000 22,000
Total equity 500,000 303,000
Dividend payable 20,000 15,000
Other liabilities 80,000 12,000
Total equity and liabilities 600,000 330,000
Shares in Topaz Ltd 135,000 -
Other assets 465,000 330,000
Total assets 600,000 330,000
The company income tax rate is 30%.
Ruby Ltd uses the partial goodwill method.
The following transactions took place between Ruby Ltd and Topaz Ltd:
During the year ending 30 June 2020, Topaz Ltd sold some items of inventory to Ruby Ltd for $20,000, recording a profit before tax of $8,000. Ruby Ltd has since resold three-quarters of these items.
During the year ending 30 June 2020, Ruby Ltd sold some items of inventory to Topaz Ltd for $15,000, recording a profit before tax of $3,000. Topaz Ltd has since resold all this inventory.
During the year ending 30 June 2019, Ruby Ltd sold some items of inventory to Topaz Ltd. On 30 June 2019, Topaz Ltd still had some of this inventory on hand on which Ruby Ltd had recorded a before-tax profit of $6,000. Topaz Ltd has since resold all this inventory.
Required -
(a) Prepare the acquisition analysis and the consolidation worksheet journal entries necessary for the preparation of consolidated financial statements by Ruby Ltd on 30 June 2020.
(b) Assume that Ruby Ltd recognised a gain on bargain purchase in its acquisition of Topaz Ltd. Explain how Ruby Ltd would account for the gain on bargain purchase in the preparation of the consolidated financial statements for the years ending 30 June 2018, 2019, and 2020.