6201 – Financial Accounting
Consolidations Exercise Five
Red Ltd completed a successful takeover of Blue Ltd on 1 April 2009, acquiring 100% of the
issued capital of the company.
Prior to acquisition, the share capital and reserves of Blue Ltd were:
125 000 fully paid shares
Retained earnings
Other reserves
$
160,000
35,000
15,000
At the date of acquisition all the assets of Blue were at fair value with the exception of the
property, plant and equipment, which was revalued up by $25,000.
Red Ltd is partially in the business of buying and selling used motor vehicles. On 1 April
2011, Red Ltd sold a delivery van costing $30,000 to Blue Ltd for $40,000. Blue Ltd uses
the vehicle for its operations. Blue Ltd depreciates all property, plant & equipment at 10% on
cost.
During the year ended 31 March 2011, Red Ltd sold goods for $60,000 to Blue Ltd at a mark
up of 20% on cost. $30,000 of these goods remained on hand 31 March 2011.
During the year ended 31 March 2012:
(1)
Red Ltd sold goods to Blue Ltd for $50,000. $18,000 of these goods remained on
hand at year end. Red Ltd mark up goods by 20% on cost
(2)
Blue Ltd sold goods to Red Ltd for $55,000. Goods to the value of $15 000 remained
on hand at year end. Blue Ltd mark up goods by 25% on cost
At 31 March 2012, goodwill on acquisition is considered to be impaired by $6,000.
Required:
a) Prepare notional consolidation journal entries for the year ended 31 March 2012
b) Enter these journal entries on to the attached worksheet and complete the worksheet.
c) Explain what you would do if the cost of the share in the subsidiary company was
less than the fair value of the equity purchased at the time of the purchase of the
shares.
6201 – Financial Accounting
Red Ltd and Subsidiary Blue Ltd
Consolidation Worksheet for the year ended 31 March 2012
Income Statement section of
SCI
Sales
Financial
Statements
Red Ltd Blue Ltd
$’000’s
$’000’s
4,920
535
Less Cost of Sales
3,032
301
Gross Profit
Plus other income:
Dividends received
1,888
234
Management fee – Blue Ltd
25
1, 973
1,633
234
194
340
113
227
255
40
14
26
39
482
80
120
200
282
65
12
10
22
43
970
282
64
1,224
160
43
35
24
168
2,540
430
1,190
296
894
255
350
88
438
515
385
124
261
2,540
430
Less Expenses
Net Profit before tax
Less Tax Expense
Net Profit after tax
Plus Retained Earnings B/fwd
Less Interim dividend paid
Final dividend paid
Retained earnings c/fwd
Stmt of Financial Position
Paid-in capital
Retained earnings
Asset revaluation surplus
Other reserves
Other liabilities
Property, Plant & Equipment
Less accumulated depreciation
Shares in Blue Ltd
Other investments
Bank
Trade and other receivables
Inventory
60
8
92
69
Consolidation
Journals
Dr
Cr
$’000’s
$’000’s
Consol.
Statements
$’000’s