Task
You are required to complete all three questions below. A total of 100 marks are allocated to these questions, which will be converted to a final mark out of 25%. All workings, when appropriate, must be shown to substantiate your answers. Question 1 [35 marks] Consolidation: Principles and accounting requirements; and intra-group transactions Square Ltd acquired all the issued shares of Navy Ltd on 1 January 2012. At the acquisition date, the equity of Navy Ltd was: $ Share capital (190,000 shares) 380,000 General reserve 52,000 Retained earnings 40,000 All the identifiable net assets of Navy Ltd were recorded at fair value at the date of acquisition, except for some plant and machinery. This plant and machinery which cost $220,000 had carrying amount of $187,000 and a fair value of $199,000.
The estimated remaining useful life was 10 years. Adjustments for fair values are made on consolidation. 1 year after acquisition, Navy Ltd used $38,000 from general reserve on hand at acquisition date to partly pay the balance unpaid on the issued shares. Five years after acquisition, the trial balances of Square Ltd and Navy Ltd at 31 December 2016 are as shown below: Additional information: (a) Square Ltd sold inventory to Navy Ltd for $44,000 during the current financial year. This inventory had an original cost to Square Ltd of $36,800. By 31 December 2016, half of this inventory was held by Navy Ltd during the year. (b) On 1 July 2012, Navy Ltd sold an item from its inventory to Square Ltd for $52,000. Square Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Square Ltd and depreciation charged at 10% p.a. The cost of that item to Navy Ltd was $39,000. (c) On 1 January 2016, Navy Ltd sold a machine to Square Ltd for $84,000. This item had a carrying amount at time of sale to Navy Ltd of 98,000. Both entities use a depreciation rate of 8% per year on cost for this item. (d) On 1 November 2015, Navy Ltd sold inventory costing $10,000 to Square Ltd at a transfer price of $18,000. On 1 September 2016, Square Ltd sold half of these goods to a third party at a loss of $400 and remainder are still held by Square Ltd by 31 December 2016. (e) The tax rate is 30%.
Required:
A. Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 31 December 2016 for the group comprising Square Ltd and Navy Ltd.
B. Complete a detailed consolidation worksheet for the year ending 31 December 2016.
Comments