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 of the two entities as at 1 July 2015 were as follows:

                                                   Hahndorf Ltd                    Sarina Ltd

Retained earnings at 30/6/15                 240,000                           30,000

Share capital                                          700,000                         500,000

General reserve                                       60,000                           80,000

Total equity                                       1,000,000                         610,000                  

Land                                                      350,000                         400,000

Machinery at cost                                                                        240,000

Accumulated depreciation                                                         (200,000)

Equipment at cost                                                                        250,000

Accumulated depreciation and                                                    (75,000)

impairment losses

Cash                                                         40,000                           20,000

Investment in Sarina Ltd                       700,000                                     -

Inventory                                                 40,000                           35,000

Liabilities                                              130,000                           60,000

Net assets                                           1,000,000                         610,000

The company income tax rate is 30%.

Required

Prepare the consolidation journal entries resulting from the acquisition on 1 July 2015 as they will be carried forward as at 30 June 2018. (Tip: do the journals related to the revaluation of the machinery as they would have appeared on 1 July 2015 and then do all the consolidation journal entries related to the acquisition and the revaluation of the machinery as at 30 June 2018, i.e. 3 years later).

Answer 1

Machinery acquisition cost

= fair value + accumulated depreciation =$140000+200,000 =$340,000

Journal entries in the book of hahndrof

Date	journal entry	amount $
1july 2015	for acquisition Dr machinary Cr Sarina ltd	340000 340000
31 /12/2016	when depreciation charged to asset Dr depreciation account Dr Sarina ltd Cr machinery account	24286 315714 340000
31/12/2017	Dr depreciation Dr sarina Cr mahine	48571 267143 315714
31/12/1018	Dr depreciation Dr Sarina ltd Cr. Machinary	24286 242856 267143

Depreciation = (asset value - scrap)/estimated life

=$340000-0/7=$48571 ronded

For Six months( frmo July to Dec)= 48571/2=$24286

Asset worth at end =340000 - 24286-48571-24286 =$242856