Reference no: EM132756497

Intragroup transactions and Business Combinations

On 1 July 2017, Bow Ltd acquired 100% of the equity in Arrow Ltd. The following intragroup transactions need to be considered in the preparation of the group's consolidated financial statements for the year ended 30 June 2019:

a) At 1 July 2018, there was a profit in inventory of Bow Ltd of $7,000 on goods acquired from Arrow Ltd in the previous period. All this inventory was sold by 30 June 2019.

b) On 1 July 2018 Bow Ltd sold an item of plant to Arrow Ltd for $16,000. This plant had a carrying amount in the records of Bow Ltd of $14,000 at the time of sale. This type of plant is depreciated at 20% per year on cost.

c) On 1 January 2019, Bow Ltd sold equipment to Arrow Ltd for $50,000. At the time of sale, the equipment had a carrying amount of $40,000. Bow Ltd depreciated the equipment at 10% per year on cost, whereas Arrow Ltd classified the equipment as inventory. The equipment was sold by Arrow Ltd on 30 June 2019.

Required:

Problem 1. Prepare the consolidation journal entries at 30 June 2019 to adjust for the effects of the above intragroup transactions.

Problem 2. With reference to relevant accounting standards, why is it important to identify an acquirer in a business combination?