Question

Hahndorf Ltd acquired 100% of the shares of Sarina Ltd on 1 July 2015 for $700,000, when the equity of Sarina Ltd consisted of:

Share Capital                                  $500,000

General Reserve                                 80,000

Retained Earnings                             30,000

All identifiable assets and liabilities of Sarina Ltd were fairly valued at acquisition except the machinery, which had a fair value of $140,000. The machinery had a further 7-year life with depreciation based on the straight-line method.

Selected financial information for both companies at 30 June 2018 is as follows:

	Hahndorf Ltd	Sarina Ltd
Sales revenue	$1,000,000	$800,000
Cost of sales	(600,000)	(600,000)
Gross profit	400,000	200,000
Dividend received from Sarina Ltd	30,000	-
Management fee received	26,500	-
Gain on sale of plant	35,000	-
Admin expenses	55,800	28,700
Depreciation	29,500	56,800
Management fee paid	-	26,500
Other expenses	306,200	8,000
Profit before tax	100,000	80,000
Tax expense	(30,000)	(24,000)
Profit for the period	70,000	56,000
Retained earnings at 1/7/17	230,000	120,000
	300,000	176,000
Dividend paid	(20,000)	(10,000)
Dividend declared	(40,000)	(20,000)
Retained earnings at 30/6/18	240,000	146,000
Share capital	900,000	500,000
General reserve	60,000	80,000
Total equity	1,200,000	726,000
Dividend payable	40,000	20,000
Other liabilities (note 1)	120,000	30,000
Total equity and liabilities	1,360,000	776,000
Shares in Sarina Ltd	700,000	-
Dividends Receivable	20,000	-
Inventory	40,000	50,000
Other assets (note 2)	600,000	726,000
Total assets	1,360,000	776,000

  

                                                                                                                            

                                                                                                                        

                                                                                                               

Notes

1. Other liabilities include deferred tax liabilities

2. Other assets include Land, Machinery, Equipment, and Accumulated depreciation and Impairment losses, and Deferred Tax asset.

Note:

The carrying value of machinery which had fair value of $140,000, at the time of acquisition is $ 40,000

i.e Cost $ 240,000 Less Accumulated Depreciation $ 200,000.

Other information:

During the 2017-18 period, Sarina Ltd sold some items of inventory to Hahndorf Ltd for $92,000, recording a profit before tax of $12,000. Hahndorf Ltd has since resold half of these items.

During the 2016-17 period, Hahndorf Ltd sold some items of inventory to Sarina Ltd. At 30 June 2017, Sarina Ltd still had inventory on hand on which Hahndorf Ltd had recorded a before-tax profit of $16,000. All this inventory has been sold during the 2017/18 financial year.

During the year, Hahndorf Ltd made total sales to Sarina Ltd of $60,000. Sarina Ltd sold all these goods to customers outside the group.

On 1 July 2017 Hahndorf Ltd sold an item of plant to Sarina Ltd for $116,000 when its carrying value in Hahndorf Ltd’s accounts was $81,000 (cost $135,000, accumulated depreciation $54,000). This plant is assessed as having a remaining useful life of five years. The Group has a policy of measuring its property, plant and equipment using the ‘cost model’.

Sarina Ltd paid $26,500 in management fees to Hahndorf Ltd.

The company income tax rate is 30%.

Required

(a)       Prepare the consolidation journal entries for the above entities as at 30 June 2018, excluding those already done in Part B of this assessment task. Use reference numbers starting at (f) to number the journals.                 

(b)       Prepare the consolidated worksheet for the year ended 30 June 2018. Post all consolidation journal entries to the consolidated worksheet. Use the reference numbers (a) to (e) for the journals of Part B and (f) onwards for the journals in Part C when posting these journals to the consolidated worksheet.    

Note:

The carrying value of machinery which had fair value of $140,000, at the time of acquisition is $ 40,000

i.e Cost $ 240,000 Less Accumulated Depreciation $ 200,000.

Answer 1