Reference no: EM132963005
On 1 July 2017, Pacific Ltd acquired all the shares of Ascot Ltd for $5,000,000. The equity of Ascot Ltd at 1 July 2016 was:
Share capital $3,400,000
Retained earnings $680,000
General reserve $315,000
Other reserve $170,000
At this date, all identifiable assets and liabilities of Ascot Ltd were recorded at fair value except for a building which had a carrying amount of $300,000 and a fair value of $350,000. The building had original cost of $600,000. The building will be used for a further five (5) years and then demolished for future expansion. Both companies use straight-line depreciation. Goodwill is tested annually for impairment and at 30 June 2020, the value of goodwill was not impaired. The tax rate is 30%.
The following information about transactions between the two entities is provided below:
- The beginning inventory of Ascot Ltd included inventory bought from Pacific Ltd in the previous year for $30,000. This was $6,000 above the original cost to Pacific Ltd.
- The ending inventory of Pacific Ltd included goods bought from Ascot Ltd costing $16,000. The original cost to Ascot Ltd was $12,000. 30% of this batch of inventory sold before 30 June 2020.
- During the year Ascot Ltd undertook an advertising campaign for Pacific Ltd. Pacific Ltd was charged and paid $3,000 Ascot Ltd for this service.
- Pacific Ltd received an interim dividend of $6,000 during the year ended 30 June 2020.
Required:
Problem 1: Prepare the acquisition analysis at 1 July 2017.
Problem 2: Prepare the business combination valuation entries and pre-acquisition entries at 1 July 2017.
Problem 3: Prepare the business combination valuation entries and pre-acquisition entries at 30 June 2020.
Problem 4: Prepare the journal entries to eliminate the effects of intragroup transactions at 30 June 2020.
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