CONSOLIDATION
On 1 January 2017, PAR NV acquired a controlling interest of 100% in SUB NV for
€900,000. SUB reported shareholders’ equity of €800,000 on 1 January 2017, consisting of
Share capital of €300,000, a General Reserve of €50,000, and Retained Earnings of €450,000,
respectively.
The fair values of assets and liabilities reported by SUB on 1 January 2017 were not
significantly different from their carrying values, except for Land and Machines. The Land
account had a carrying value of €200,000, and a fair value of €250,000, whereas Machines
had a carrying value of €200,000 and a fair value of €250,000. The original cost of the
machine was €300,000. The remaining useful life of Machines was 20 years on 1 January
2017.
Furthermore, on 1 January 2017, SUB was the defendant in an ongoing court case. With
respect to this court case a contingent liability was disclosed in SUB’s 2016 financial
statements. From this note disclosure it becomes clear that SUB assessed the chances of
being found guilty at roughly 20%. In this case, estimated damages of €300,000 would have
to be paid. Based on this information, PAR estimated the fair value of this contingent liability
at €60,000 (20% * €300,000) on 1 January 2017.
The following information is available for 2017 and 2018:
1 July 2017:
SUB sells land with a book value of €100,000 and a fair value of
€150,000 for €160,000.
1 December 2017: PAR sold goods with a cost price of €10,000 to SUB for a total price of
€12,000. All inventory is sold by the end of 2018 to external parties.
5 February 2018: The provision is derecognized as the lawsuit has been settled in the favor
of the group. SUB does not need to pay any damages.
1 April 2018:
PAR transfers €20,000 of SUB’s General Reserve to its Retained
Earnings. The transferred amount is part of the pre-acquisition equity of SUB.
30 June 2018:
SUB declares a dividend of €10,000 to its shareholders. The dividend
will be paid on 1 January 2019.
1 July 2018: SUB sells inventory with a cost price of €50,000 to PAR for €60,000. Half of
the inventory is sold by PAR to external parties for €35,000 by the end of 2018.
31 December 2018: The machine is sold for €230,000.
Business combination valuation reserves are transferred to retained earnings in the
consolidated financial statements upon realization.
The tax rate is 30%.
REQUIRED:
1. Prepare the acquisition analysis for company PAR’s acquisition of 100% of the shares in
company SUB on 1 January 2017.
2. Prepare the consolidation adjustment entries for the preparation of the 31
December 2018 consolidated financial statements.
SOLUTION:
1. ACQUISITION ANALYSIS
Consideration paid:
900
FV acquired: Equity:
300 + 50 + 450 +
FV adjustments:
(1 – 30%) * (50 + 50 – 60) = 828
Goodwill:
72 (= 900 – 828)
2. BUSINESS COMBINATION VALUATION ENTRIES
Land:
No entry as has been sold in the prior year.
Machines:
Add the machine to the balance sheet
Acc. Depr.
100
Machines
DTL
BCVR
50
15
35
Add prior and current depreciation + tax effects
Depreciation Expense
2.5
Retained Earnings
2.5
Acc. Depr.
5
DTL
1.5
Income Tax Expense
Retained Earnings
0.75
0.75
Reduce sales profit and counterbook extra depreciation and book value
CA machines for SUB: 200 – 2*(200/20) = 180
CA machines for group: 250 – 2*(250/20) = 225
 Gain on sale is lower by 45
Gain on sale
Machines
45
50
Accumulated depreciation
Tax effects: reversal of DTL
DTL
Income Tax Expense
=15 – 1.5 (alternatively: 45*0.3)
BCVR transfer
BCVR
Transfer from BCVR (RE)
95
13.5
13.5
35
35
Contingent Liability:
Put contingent liability on balance sheet
DTA
18
BCVR
42
Provision for guarantee
60
Derecognize provision and tax effects
Provision for guarantee
60
Gain on derecognition
60
Income tax expense
Deferred tax asset
18
18
BCVR transfer
Transfers from BCVR (RE)
BCVR
42
Goodwill:
Goodwill
BCVR
72
3. PRE-ACQUISITION ENTRIES
Acquisition date
Share Capital
General Reserve
Retained Earnings
BCVR
Shares in Subsidiary
42
72
300
50
450
100
[((1 – 30%) * (50 + 50 – 60))+72]
900
1 July 2017
Transfer from BCVR (RE)
35
BCVR
((1 – 30%) * 50) = realization of BCVR on land
35
2018 entries
Transfer from BCVR (RE)
35
BCVR
35
((1 – 30%) * 50)= realization of BCVR on machine
BCVR
42
Transfers from BCVR (RE)
42
((1 – 30%) * 60)= realization of BCVR on contingent liability
Transfers from General Reserve (RE) 20
General Reserve
20
4. OTHER ELIMINATION ENTRIES/INTRAGROUP TRANSACTIONS
30 June 2018
Dividend Payable
10
Dividend Declared
10
Dividend Revenue
Dividend Receivable
10
10
1 July 2018
Unrealised profit in ending inventory for sale on 1 July 2018
Sales
60
Cost of sales
55
Inventory
5
Deferred tax asset
Income tax expense
1.5
Profit in opening inventory for 2018
Retained earnings
1.4
Income tax expense
0.6
Cost of sales
1.5
2