Reference no: EM132656343
On 1 July 2020, Maxwell Ltd acquired 80% of the issued shares of Smart Ltd for $470,000. At this date, the equity of Smart Ltd consisted of:
Share capital Asset revaluation surplus Retained earnings
$ 300,000 40,000 160,000
At 1 July 2020, all of the identifiable assets and liabilities of Smart Ltd were recorded at amounts equal to their fair values except for:
Carrying amount $ Fair value $
Plant (cost $180,000) 100,000 120,000
Land 375,000 425,000
Inventory 40,000 45,000
In relation to these assets:
- The plant had an expected useful life of 5 years.
- The inventory was all sold by 30 June 2021.
Additional information:
a) Maxwell Ltd uses the full goodwill method. At 1 July 2020 the market value of Smart Ltd was $115,000.
b) During the year ended 30 June 2021, Smart Ltd made an after tax profit of $16,000, and paid a dividend of $5,000. During the year ended 30 June 2022 it made an after tax profit of $19,000, and did not declare a dividend.
c) During the year ended 30 June 2021, Smart Ltd recognised a gain on the revaluation of land in "Other Comprehensive Income" (after tax $7,000).
d) During the year ended 30 June 2021, Smart Ltd sold inventory to Maxwell Ltd for $12,000, making a profit before tax of $2000. At year ended 30 June 2021 half of this inventory was still on hand. It was then sold during the year ended 30 June 2022.
e) On 31 March 2022, Maxwell Ltd sold an item of machinery to Smart Ltd for $70,000, making a pre-tax gain of $10,000. This machinery was still on hand at 30 June 2022, and Smart depreciated it at the rate of 20% per annum.
f) During the year ended 30 June 2022, Maxwell sold inventory to Smart for $50,000 on the basis of cost plus 25%. One quarter of this inventory was still held by Smart at 30 June 2022.
g) The tax rate is 30%.
Required:
Question a) Prepare the acquisition analysis at 1 July 2020.
Question b) Prepare the consolidation journal entries necessary for the preparation of consolidated financial statements by Maxwell Ltd at 30 June 2022.