Question:
On 1 July 2019, Diana Ltd acquired 100% of the issued shares of Charles Ltd for $320,000. At the date of acquisition, the shareholders’ equity of Charles Ltd consisted of:
| Share capital | $200,000 |
| General reserve | $50,000 |
| Retained earnings | $30,000 |
| Total | $280,000 |
At 30 June 2023, the accounts of the two companies are presented below.
Income Statement
| Diana Ltd | Charles Ltd | |
|---|---|---|
| Sales | $360,000 | $195,000 |
| Cost of goods sold | ($230,000) | ($120,000) |
| Gross profit | $130,000 | $75,000 |
| Dividends revenue | $14,000 | – |
| Interest revenue | $3,000 | $5,000 |
| Total revenue | $147,000 | $80,000 |
| Less Expenses | ||
| Depreciation | $11,000 | $7,000 |
| Financial expenses | $9,000 | $9,000 |
| Selling expenses | $8,000 | $10,000 |
| Profit before tax | $119,000 | $54,000 |
| Tax expense | $48,000 | $20,000 |
| Profit after tax | $71,000 | $34,000 |
| Retained earnings 1 July 2022 | $60,000 | $10,000 |
| Total retained earnings | $131,000 | $44,000 |
| Interim dividend paid | $10,000 | $6,000 |
| Final dividend proposed | $30,000 | $10,000 |
| Retained earnings 30 June 2023 | $91,000 | $28,000 |
Statement of Financial Position
| Diana Ltd | Charles Ltd | |
|---|---|---|
| Shareholders’ equity | ||
| Retained earnings | $91,000 | $28,000 |
| Share capital | $350,000 | $200,000 |
| General reserve | $30,000 | $50,000 |
| Liabilities | ||
| Accounts payable | $45,000 | $5,000 |
| Dividend payable | $30,000 | $10,000 |
| Accrued interest – Diana Ltd | – | $1,000 |
| Loan – Diana Ltd | – | $40,000 |
| Other liabilities | $40,000 | $10,000 |
| Total liabilities and equity | $586,000 | $344,000 |
| Assets | ||
| Cash at bank | $2,000 | $1,000 |
| Deposits | $65,000 | – |
| Inventory | $40,000 | $30,000 |
| Interest receivable | $1,000 | – |
| Loan – Charles Ltd | $40,000 | – |
| Investment in Charles Ltd | $320,000 | – |
| Plant and equipment | $110,000 | $180,000 |
| Accumulated depreciation | ($45,000) | ($40,000) |
| Land and buildings | $120,000 | $102,000 |
| Accumulated depreciation | ($5,000) | ($14,000) |
| Other assets | $3,000 | $20,000 |
| Total assets | $586,000 | $344,000 |
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Additional information:
- The identifiable net assets of Charles Ltd were recorded at fair value at the date of acquisition.
- In applying the impairment test for goodwill in the current year, the directors have determined that a write-down of $10,000 is required for consolidation purposes. The cumulative goodwill impairment write-downs for prior years amounted to $15,000.
- An item of plant and equipment owned by Charles (cost $30,000 and accumulated depreciation of $15,000) was sold to Diana Ltd for $13,000 on 1 July 2020. Charles depreciated the asset at 10% per annum straight-line on original cost (assuming a 10-year economic life). Diana, assuming a further economic life for the plant and equipment of five years from its date of acquisition, has applied a depreciation rate of 20% straight-line from the date of transfer of the asset.
- The opening inventory of Charles Ltd includes an unrealised profit of $2,000 on inventory transferred from Diana Ltd during the prior financial year. All of this inventory was sold by Charles Ltd to parties external to the group during the year ended 30 June 2023.
- During the current financial year, Charles Ltd purchased inventory from Diana Ltd for $30,000. The inventory had previously cost Diana Ltd $24,000. One-third of this inventory was sold to outsiders by Charles during the year.
- Charles Ltd borrowed $40,000 from Diana Ltd during the financial year. Charles paid $2,000 interest on this loan during the year. In addition, a further $1,000 in interest has been recognised as an accrued expense in Charles Ltd’s accounts and as interest receivable in Diana Ltd’s accounts. Interest expense is included in Charles Ltd’s accounts under the financial expenses heading.
- On 15 July 2022, Charles Ltd paid a final dividend of $8,000 to Diana Ltd from profits for the prior financial year.
- Charles also paid an interim dividend of $6,000 to Diana Ltd on 1 February 2023. In addition, Charles Ltd has provided for a final dividend amounting to $10,000. Diana Ltd has not recognised this dividend as a receivable before receipt.
- The tax rate is 30%.
Required
- Prepare an acquisition analysis.
- Prepare the consolidation journal entries necessary to prepare consolidated accounts for the year ending 30 June 2023 for the group comprising Diana Ltd and Charles Ltd.
- Prepare the consolidation worksheet for the preparation of the consolidated financial statements for the period ending 30 June 2023.
- Why is it important to identify intragroup transactions as current or previous period transactions?
- In what circumstances is a tax-effect adjustment required when making an adjustment for an intragroup transaction? Provide two examples of intragroup transactions that would require a tax-effect adjustment and one example of an intragroup transaction that would not require a tax-effect adjustment.