Chapter 10: Consolidation: wholly owned subsidiaries

Review questions

5. Explain how the existence of an excess affects the pre-acquisition entries, both in the
year of acquisition and in subsequent years. (LO4)

Explain the meaning of and accounting for an excess as per AASB 3/IFRS 3.

Year of acquisition:
 Excess is shown in the pre-acquisition entry as a gain.

Subsequent years:
 The excess is subsumed into the opening balance of retained earnings. It reduces the
balance recorded by the subsidiary as the parent paid less for the subsidiary than the fair
value of the identifiable assets and liabilities of the subsidiary.

10. Why are some adjustment entries in the previous period’s consolidation worksheet
also made in the current period’s worksheet? (LO5)

The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not
affect the underlying financial statements or the accounts of the parent or the subsidiary. Hence,
if last year’s profits required to be adjusted on consolidation, then potentially retained earnings
needs to be adjusted in the current period.

Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in the
consolidation worksheet for each year that the land remains in the subsidiary. The entry does not
change from year to year. Again the reason is that the adjustment to the carrying amount of the
land is only made in a worksheet and not in the actual records of the subsidiary itself.

Question 10.4

amount differences at acquisition date, bargain purchase ⋆ LO4, 5

Worksheet entries at acquisition date and in subsequent year, no fair value/carrying

On 1 July 2022, John Ltd acquired all the issued shares of Robert Ltd for $153 000. At this
date the equity of Robert Ltd was recorded as follows:

Share capital $ 80 000

General reserve 30 000
Retained earnings 40 000

All the identifiable assets and liabilities were recorded at amounts equal to their fair values.
Required
(a) Prepare the consolidation worksheet entries at 1 July 2022 and 1 July 2023
assuming John Ltd paid $153 000 for the shares in Robert Ltd.
(b) Prepare the consolidation worksheet entries at 1 July 2022 and 1 July 2023
assuming John Ltd paid $148 000 for the shares in Robert Ltd.
(c) Prepare the consolidation worksheet entries at 1 July 2022 assuming John Ltd paid
$145 000 for the shares in Robert Ltd and at that date Robert Ltd had recorded goodwill of
$4000.

(a) Consideration of $153 000:

Acquisition analysis

At 1 July 2022:

Net fair value of identifiable assets

and liabilities of Robert Ltd = ($80 000 + $30 000 + $40 000) (equity)
= $150 000
Consideration transferred = $153 000

Goodwill acquired = $153 000 – $150 000

= $3 000

Worksheet entries at 1 July 2022:

Business combination valuation entries:

Goodwill Dr 3 000
Business combination valuation reserve Cr 3 000

Pre-acquisition entries:

Retained earnings (1/7/22) Dr 40 000

Share capital Dr 80 000
General reserve Dr 30 000
Business combination valuation reserve Dr 3 000
Shares in Robert Ltd Cr 153 000

Worksheet entries at 1 July 2023:

 The entries are the same as those above.

(b) Consideration of $148 000:

Acquisition analysis

At 1 July 2022:
 Net fair value of identifiable assets
and liabilities of Robert Ltd = ($80 000 + $30 000 + $40 000) (equity)
= $150 000
Consideration transferred = $148 000

Gain on bargain purchase = $148 000 – $150 000

= $2 000

Worksheet entries at 1 July 2022:

Pre-acquisition entries:

Retained earnings (1/7/22) Dr 40 000

Share capital Dr 80 000
General reserve Dr 30 000
Gain on bargain purchase Cr 2 000
Shares in Robert Ltd Cr 148 000

Worksheet entries at 1 July 2023:

Retained earnings (1/7/23) Dr 38 000

Share capital Dr 80 000
General reserve Dr 30 000
Shares in Robert Ltd Cr 148 000
(c) Consideration of $145 000 and recorded goodwill of $4000:

Acquisition analysis

At 1 July 2022:

Net fair value of identifiable assets

and liabilities of Robert Ltd = ($80 000 + $30 000 + $40 000) (equity)
- $4 000 (goodwill)
= $146 000
Consideration transferred = $145 000

Gain on bargain purchase = $145 000 – $146 000

= $1 000

Worksheet entries at 1 July 2022:

Business combination valuation reserve entries:

Business combination valuation reserve Dr 4 000

Goodwill Cr 4 000

Pre-acquisition entries:

Retained earnings (1/7/22) Dr 40 000

Share capital Dr 80 000
General reserve Dr 30 000
Business combination valuation reserve Cr 4 000
Gain on bargain purchase Cr 1 000
Shares in Robert Ltd Cr 145 000
Question 10.5

differences at acquisition date ⋆ LO5

Preparation of worksheet subsequent to acquisition, no fair value/carrying amount

On 1 July 2021, Scott Ltd acquired all the issued shares (ex div.) of William Ltd. At this
date the financial statements of William Ltd showed the following balances in its accounts:

Share capital $ 300 000

General reserve 80 000
Retained earnings 160 000
Dividend payable 40 000
Goodwill 20 000

At 1 July 2021, all the identifiable assets and liabilities of William Ltd were recorded at
amounts equal to their fair values.
The financial statements of Scott Ltd and William Ltd at 30 June 2022 contained the
following information:

Scott Ltd William Ltd

Profit for the period 70 000 50 000
Retained earnings (1/7/21) 180 000 160 000
Transfer from general reserve 0 20 000
Retained earnings (30/6/22) 250 000 230 000
Share capital 1 400 000 300 000
General reserve 184 000 60 000
Total equity 1 834 000 590 000
Provisions 60 000 40 000
Payables 30 000 50 000
Long-term loans 100 000 220 000
Total liabilities 190 000 310 000
Total equity and liabilities $ 2 024 000 $ 900 000
Plant 1 200 000 1 640 000
Accumulated depreciation — Plant (590 000) (1 300 000)
Fixtures 600 000 240 000
Accumulated depreciation — Fixtures (360 000) (160 000)
Land 400 000 280 000
Brands 100 000 60 000
Shares in William Ltd 544 000 0
Goodwill 0 20 000
Inventories 90 000 80 000
Cash 10 000 14 000
Receivables 30 000 126 000
Total assets $ 2 024 000 $ 900 000

Required
Prepare the consolidated financial statements at 30 June 2022.
Acquisition analysis

At 1 July 2021:

Net fair value of identifiable assets

and liabilities of William Ltd = ($300 000 + $80 000 + $160 000) (equity)
- $20 000 (goodwill)
= $520 000
Consideration transferred = $584 000 - $40 000 (dividend receivable)
= $544 000
Goodwill acquired = $544 000 – $520 000
= $24 000
Unrecorded goodwill = $24 000 - $20 000
= $4 000

The consolidation worksheet entries at 30 June 2022 are:

Business combination valuation entries:

Goodwill Dr 4 000
Business combination valuation reserve Cr 4 000

Pre-acquisition entries:

Retained earnings (1/7/21) Dr 160 000

Share capital Dr 300 000
General reserve Dr 80 000
Business combination valuation reserve Dr 4 000
Shares in William Ltd Cr 544 000

Transfer from general reserve Dr 20 000

General reserve Cr 20 000
The consolidation worksheet at 30 June 2022 is:

Scott William Adjustments Group

Ltd Ltd Dr Cr
Profit for the period 70 000 50 000 120 000
Retained earnings 180 000 160 000 2 160 000 180 000
(1/7/21)
Transfer from 0 20 000 2 20 000 0
general reserve
Retained earnings 250 000 230 000 300 000
(30/6/22)
Share capital 1 400 000 300 000 2 300 000 1 400 000
General reserve 184 000 60 000 2 80 000 20 000 2 184 000
Business 0 0 2 4 000 4 000 1 0
combination
valuation reserve
Provisions 60 000 40 000 100 000
Payables 30 000 50 000 80 000
Loans 100 000 220 000 320 000
2 024 000 900 000 2 384 000
Plant 1 200 000 1 640 000 2 840 000
Accum. (590 000) (1 300 (1 890
Depreciation 000) 000)
Fixtures 600 000 240 000 840 000
Accum. (360 000) (160 000) (520 000)
depreciation
Land 400 000 280 000 680 000
Brands 100 000 60 000 160 000
Shares in William 544 000 0 544 000 2 0
Ltd
Inventory 90 000 80 000 170 000
Cash 10 000 14 000 24 000
Receivables 30 000 26 000 56 000
Goodwill 0 20 000 1 4 000 24 000
2 024 000 900 000 568 000 568 000 2 384 000
 SCOTT LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2022

Profit for the period $120 000

Other comprehensive income _____0
Comprehensive income $120 000

SCOTT LTD
Consolidated Statement of Financial Position
as at 30 June 2022
Current assets:
Cash $24 000
Receivables 56 000
Inventories 170 000
Total current assets 250 000
Non-current assets:
Plant 2 840 000
Accumulated depreciation (1 890 000)
Fixtures 840 000
Accumulated depreciation (520 000)
Land 680 000
Brands 160 000
Goodwill 24 000
Total non-current assets 2 134 000
Total assets $2 384 000

Equity
Share capital 1 400 000
General reserve 184 000
Retained earnings 300 000
Total equity 1 884 000
Current liabilities:
Provisions 100 000
Payables 80 000
Total current liabilities 180 000
Non-current liabilities: Loans 320 000
Total liabilities 500 000
Total equity and liabilities $2 384 000
Question 10.11

Consolidation worksheet ⋆⋆ LO5

Ethan Ltd acquired all the issued shares (ex div.) of Darren Ltd on 1 July 2020 for $110
000. At this date Darren Ltd recorded a dividend payable of $10 000 and equity of:

Share capital $ 54 000

Retained earnings 36 000
Asset revaluation surplus 18 000

All the identifiable assets and liabilities of Darren Ltd were recorded at amounts equal to
their fair values at acquisition date except for:

Carrying amount Fair value

Inventories $ 14 000 $ 16 000
Machinery (cost $100 000) 92 500 94 000

The machinery was considered to have a further 5-year life. Of the inventories, 90% was
sold by 30 June 2021. The remainder was sold by 30 June 2022.

Both Darren Ltd and Ethan Ltd use the valuation method to measure the land. At 1 July
2020, the balance of Ethan Ltd’s asset revaluation surplus was $13 500.

In May 2021, Darren Ltd transferred $3000 from the retained earnings at 1 July 2020 to a
general reserve.

The tax rate is 30%.

The following information was provided by the two companies at 30 June 2021.

Ethan Ltd Darren Ltd

Profit before tax $ 120 000 $ 12 500
Income tax expense (56 000) (4 200)
Profit for the year 64 000 8 300
Retained earnings (1/7/20) 80 000 36 000
144 000 44 300
Transfer to general reserve (0) (3 000)
Retained earnings (31/7/21) $ 144 000 $ 41 300
Share capital $ 360 000 $ 54 000
Retained earnings 144 000 41 300
General reserve 10 000 3 000
Asset revaluation surplus 18 500 20 000
Liabilities 42 500 13 000
$ 575 000 $ 131 300
Land $ 160 000 $ 20 000
Plant and machinery 360 000 125 600
 Accumulated depreciation — Plant and machinery (110 000) (33 000))
Inventories 55 000 18 700
Shares in Darren Ltd 110 000 0
$ 575 000 $ 131 300

Required
Prepare the consolidated financial statements of Ethan Ltd at 30 June 2021.

Acquisition analysis

At 1 July 2020:

Net fair value of identifiable assets

and liabilities of Darren Ltd = ($54 000 + $36 000 + $18 000) (equity)
+ $1 500 (1 – 30%) (plant)
+ $2 000 (1 – 30%) (inventory)
= $110 450
Consideration transferred = $110 000
Gain on bargain purchase = $450

(a) Worksheet entries at 30 June 2021:

Business combination valuation entries:

Accumulated depreciation Dr 7 500

Plant & machinery Cr 6 000
Deferred tax liability Cr 450
Business combination valuation reserve Cr 1 050

Depreciation expense Dr 300

Accumulated depreciation Cr 300
(1/5 x $1 500)

Deferred tax liability Dr 90

Income tax expense Cr 90
(30% x $300)

Cost of sales Dr 1 800

Income tax expense Cr 540
Transfer from business combination Cr
valuation reserve 1 260

Inventory Dr 200
Deferred tax liability Cr 60
Business combination valuation reserve Cr 140
Pre-acquisition entries:

At 1 July 2020:

Retained earnings (1/7/20) Dr 36 000

Share capital Dr 54 000
Asset revaluation surplus Dr 18 000
Business combination valuation reserve Dr 2 450
Gain on bargain purchase Cr 450
Shares in Darren Ltd Cr 110 000

The entry at 30 June 2018 is affected by:

 sale of inventory
 transfer to general reserve of $3 000.

Retained earnings (1/7/20) Dr 36 000

Share capital Dr 54 000
Asset revaluation surplus Dr 18 000
Business combination valuation reserve Dr 2 450
Gain on bargain purchase Cr 450
Shares in Darren Ltd Cr 110 000

Transfer from business combination

valuation reserve Dr 1 260
Business combination valuation reserve Cr 1 260

General reserve Dr 3 000

Transfer to general reserve Cr 3 000
 Ethan Darren Adjustments Group
Ltd Ltd Dr Cr
Profit before tax 120 000 12 500 1 300 450 2 130 850
1 1 800
Income tax expense (56 000) (4 200) 90 1 (59 570)
540 1
Profit 64 000 8 300 71 280
Retained earnings 80 000 36 000 2 36 000 80 000
(1/7/20)
Transfer from - - 2 1 260 1 260 1 0
BCVR
144 000 44 300 151 280
Transfer to general (0) (3 000) 3 000 2 (0)
reserve
Retained earnings 144 000 41 300 151 280
(30/6/21)
Share capital 360 000 54 000 2 54 000 360 000
BCVR - - 2 2 450 1 050 1 0
140 1
1 260 2
General reserve 10 000 3 000 2 3 000 10 000
514 000 98 300 521 280
Asset revaluation 13 500 18 000 2 18 000 13 500
surplus (1/7/20)
Gains 5 000 2 000 7 000
Asset revaluation 18 500 20 000 20 500
surplus (30/6/21)
532 500 118 300 541 780
Liabilities 42 500 13 000 1 90 450 1 55 920
60 1
575 000 131 300 597 700

Land 160 000 20 000 180 000

Plant & machinery 360 000 125 600 6 000 1 479 600
Accum. (110 000) (33 000) 1 7 500 300 1 (135 800)
depreciation
Inventory 55 000 18 700 1 200 73 900
Shares in Darren 110 000 - 110 000 2 0
575 000 131 300 124 600 124 600 597 700
ETHAN LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2021

Profit before income tax $130 850

Income tax expense (59 570)
Profit for the period $71 280
Other comprehensive income
Gains on revaluation of assets 7 000
Comprehensive income $78 280

ETHAN LTD
Consolidated Statement of Changes in Equity
for financial period ending 30 June 2021

Comprehensive income for the period $78 280

Retained earnings at 1 July 2017 $80 000

Profit for the period 71 280
Retained earnings at 30 June 2018 $151 280

Share capital at 1 July 2017 $360 000

Share capital at 30 June 2018 $360 000

Asset revaluation surplus at 1 July 2017 $13 500

Increments 7 000
Asset revaluation surplus at 30 June 2018 $20 500

General reserve at 1 July 2017 $10 000

General reserve at 30 June 2018 $10 000
ETHAN LTD
Consolidated Statement of Financial Position
as at 30 June 2021

Current Assets
Inventories $73 900
Non-current Assets
Property, plant and equipment:
Land 180 000
Plant & machinery $479 600
Accumulated depreciation (135 800) 343 800
Total Non-current Assets 523 800

Total Assets $597 700

Equity
Share capital $360 000
Retained earnings 151 280
General reserve 10 000
Asset revaluation surplus 20 500
Total Equity 541 780
Liabilities 55 920
Total Equity and Liabilities $597 700