On 1 July 2020, Kent Ltd acquired all the share capital (Ex-dividend) of Sub Ltd for $500,000. The financial statements of Kent Ltd showed the equity of Sub Ltd at that date to be: Share capital — 60 000 $5 shares $300 000 General reserve 40 000 Retained earnings 90 000 All the assets and liabilities of Sub Ltd were recorded at amounts equal to their fair values at that date except the following: Carrying Amount Fair value Land $150 000 $170 000 Plant (Cost $400 000) $300 000 $350 000 Inventory $75 000 $80 000 Additional information: On 10 September 2020, Sub Ltd paid interim cash dividend of $10,000. At acquisition date, 1 July 2020, Sub Ltd has an unrecorded Patent that has a fair value of $20,000, and a Contingent Liability that has a fair value of $15 000. Plant has expected to have a further 5-year life. The tax rate is 30%. Required: a) Prepare the acquisition analysis as at 1 July 2020. b) Prepare the consolidation entries (i.e., BCVR and pre-acquisition elimination entries) at 30 June 2021.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On 1 July 2020, Kent Ltd acquired all the share capital (Ex-dividend) of Sub Ltd for $500,000. The financial statements of Kent Ltd showed the equity of Sub Ltd at that date to be:

Share capital — 60 000 $5 shares $300 000

General reserve 40 000

Retained earnings 90 000

All the assets and liabilities of Sub Ltd were recorded at amounts equal to their fair values

at that date except the following:

	Carrying Amount	Fair value
Land	$150 000	$170 000
Plant (Cost $400 000)	$300 000	$350 000
Inventory	$75 000	$80 000

Additional information:

On 10 September 2020, Sub Ltd paid interim cash dividend of $10,000.
At acquisition date, 1 July 2020, Sub Ltd has an unrecorded Patent that has a fair value of $20,000, and a Contingent Liability that has a fair value of $15 000.
Plant has expected to have a further 5-year life.
The tax rate is 30%.

Required:

a) Prepare the acquisition analysis as at 1 July 2020.

b) Prepare the consolidation entries (i.e., BCVR and pre-acquisition elimination entries) at 30 June 2021.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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