This memorandum is with reference to purchase of majority shares of Soletta Ltd. and few issues, which might be faced on the decision to purchase the majority shares on discussion with the executive team of Soletta Ltd.
The purpose of consolidated financial statement is to present to the various stakeholders of the company, the results of the operations and the financial position of the group consisting of the parent and its subsidiaries as if they were a single entity. (Principles of consolidation)
A group is a composite of parent and subsidiaries corporations that functions as a single economic entity having common control.
A Parent company is a company which controls another entity.
A subsidiary corporation or a daughter corporation is a company that is owned or controlled by another company referred to as parent company. (Corporate Finance Institute)
A group can have multiple parent companies like for example there can be a parent company which holds first tier subsidiaries directly and then an ultimate parent company which controls second and lower tiers of subsidiaries indirectly through first tier subsidiaries.
Adjustments are made for intra group transactions as these are internal to the group and do not reflect transactions with external parties. (Course Hero, 2018) This is also in line with the entity concept of consolidation, which says transactions within the group must be adjusted as within the same economic entity.
Intra group transaction does not reflect an economic activity for earning some gain but is like transaction with oneself considering group as a single entity.
Profits realized in relation to inventories are transferred within the group when the inventory is on-sold to an external entity not forming part of the group.
Acquisition Analysis as on 1st July, 2019
|
Sl. No. |
Particulars |
$ |
$ |
|
1 |
Purchase Consideration paid to Soletta Ltd. for issue of Shares |
1,000,000 |
|
|
2 |
Fair Value of business Acquired |
||
|
Net Assets Acquired |
|||
|
– Share Capital |
650,000 |
||
|
– General Reserve |
20,000 |
||
|
-Retained Earnings |
250,000 |
920,000 |
|
|
3 |
Upward valuationof Equipment |
50,000 |
|
|
4 |
Recognition of Fair Value of Law suit |
(40,000) |
|
|
5 |
Positive Good Will ( Balancing Figure) |
70,000 |
Business Combination JE
Books of Paldivia Ltd as at 1st July, 2019
|
Date |
Particulars |
LF |
DR |
CR |
|
01/07/2019 |
AssetEquipment |
$ 50,000 |
||
|
Revaluation Surplus |
$ 50,000 |
|||
|
(Being Equipment revalued upward by $50,000) |
||||
|
01/07/2019 |
Revaluation Surplus |
$ 40,000 |
||
|
Prov for Suits |
$ 40,000 |
|||
|
(Being fairprice valuation done) |
||||
|
01/07/2019 |
Retained earnings |
$ 250,000 |
||
|
General reserve |
$ 20,000 |
|||
|
Share capital |
$ 650,000 |
|||
|
Revaluation Surplus |
$ 80,000 |
|||
|
Investment |
$ 1,000,000 |
|||
|
01/07/2019 |
Goodwill |
$ 70,000 |
||
|
Revaluation Surplus |
$ 70,000 |
|||
|
01/07/2019 |
Solletta shares Ltd |
$ 1,000,000 |
||
|
To Cash |
$ 1,000,000 |
|||
|
( Being settlement done in cash) |
Entries in the books of Patagonia Ltd
|
Date |
Particulars |
LF |
DR |
CR |
|
Question 3 (a) |
||||
|
30/06/2018 |
Elimination of Intra Group Sales |
$ |
$ |
|
|
Sales |
6,000 |
|||
|
To CGS |
5,750 |
|||
|
To Inventory |
250 |
|||
|
Profit elimination tax recognition effect |
||||
|
DTA(Deferred Tax Asset) |
75 |
|||
|
ITA(Income Tax Expenses) |
75 |
|||
|
30/06/2019 |
In case of further period sales, no entry is required as the profit has been “realised”. (All accounts will close to retained earnings) |
|
Question 3 (b) |
||||
|
Reduction of assets to written down value and elimination of profit unrealised |
$ |
$ |
||
|
30/06/2018 |
Retained Earnings |
2,800 |
||
|
DTA |
1,200 |
|||
|
Tractor |
4,000 |
|||
|
Depreciation excess charged to be eliminated |
||||
|
30/06/2020 |
Accumulated Depreciation |
922 |
||
|
To Depreciation Expenses |
342 |
|||
|
To Retained Earnings |
580 |
|||
|
(Refer sheet for calculations) |
||||
|
Transactions effect on Income Tax |
||||
|
30/06/2020 |
ITA |
103 |
||
|
Retained Earnings |
174 |
|||
|
To DTA |
277 |
|
Question 3 (C) |
||||
|
30/06/2018 |
Sales within Intra group elimination |
$ |
$ |
|
|
Sales |
400 |
|||
|
Purchase |
400 |
|||
|
Balances elimination of Intra group |
||||
|
Patagonia Ltd – Accounts Receivable |
100 |
|||
|
Salto Ltd – Accounts Payable |
100 |
|||
|
Adjustment of overstated inventory |
||||
|
Cost of Goods Sold (COGS) . |
100 |
|||
|
Inventory A/c. |
100 |
|||
|
Elimination of Profit tax effect |
||||
|
DTA. |
30 |
|||
|
To ITA |
30 |
|||
|
30/06/2019 |
In case of further period sales, no entry is required as the profit has been “realised”. (All accounts will close to retained earnings) |
|||
|
30/06/2019 |
In case of further period sales, no entry is required as the profit has been “realised”. (All accounts will close to retained earnings) |
|
Question 3 (D) |
||||
|
$ |
$ |
|||
|
30/06/2020 |
Management revenue services |
3,000 |
||
|
Management expenses services |
3,000 |
|||
|
30/06/2020 |
Salto Ltd – Accounts Receivable |
3,000 |
||
|
Patagonia Ltd – Accounts Payable |
3,000 |
|
Question 3 (E) |
||||
|
$ |
$ |
|||
|
30/06/2019 |
Payable Loan |
50,000 |
||
|
Receivable Loan |
50,000 |
|||
|
(Being assumption of Interest paid) |
||||
|
30/06/2020 |
Payable Loan |
50,000 |
||
|
Receivable Loan |
50,000 |
|||
|
(Assumed Interest Paid) |
||||
|
30/06/2019 |
Interest Revenue |
3,000 |
||
|
Interest Expenses |
3,000 |
|||
|
30/06/2019 |
Interest Revenue |
3,000 |
||
|
Interest Expenses |
3,000 |
|||
|
Question 3 (F) |
||||
|
30/06/2020 |
Revenue On Dividend |
1,500 |
||
|
Expenses On Dividend |
1,500 |
|||
|
Question 3 (G) |
||||
|
30/06/2020 |
Revenue On Dividend |
3,000 |
||
|
Expenses On Dividend |
3,000 |
|||
|
Intragroup balances elimination |
||||
|
30/06/2020 |
Dividend Payable |
3,000 |
||
|
Dividend Receivable |
3,000 |
|||
Computation
|
Part3 (a) |
||
|
Stock SP |
$ 6,000 |
|
|
Cost Mark up |
20% |
|
|
CP |
$ 5,000 |
|
|
Stock as on 30/06/2018 |
$ 1,250 (5000/4) |
|
|
Unrealised Profit |
$ 250 (1250*20%) |
|
Part 3 (b) |
||||
|
Cost Price |
Sale Price |
Excess |
||
|
Assetcost 01/01/2018 |
$ 16,000 |
$ 20,000 |
||
|
Depreciation till 30/06/2018 @ 10% |
$ 800 (16000*10%*6/12) |
$ 1,000 |
$ 200 |
|
|
Net Asset Value |
$ 15,200 |
$ 19,000 |
||
|
Depreciation till 30/06/2019 @ 10% |
$ 1,520 (15200*10%) |
$ 1,900 |
$ 380 |
|
|
Net Asset Value |
$ 13,680 |
$ 17,100 |
||
|
Depreciation till 30/06/2019 @ 10% |
$ 1,368 (13680*10%) |
$ 1,710 |
$ 342 |
|
|
Net Asset Value |
$ 12,312 |
$ 15,390 |
||
|
Total Excess Charged |
$ 922 |
|
Part 3 (C) |
||
|
Stock SP |
$ 400 |
|
|
Cost Mark up |
100% |
|
|
CP(400/200*100) |
$ 200 |
|
|
Stock as on 30 June 2018(200/2) |
$ 100 |
|
|
UnrealisedProfit(100*100%) |
$ 100 |
|
Part 3 (e) |
||
|
Value of Loan |
$ 50,000 |
|
|
Interest rate |
6% |
|
|
Period |
5 Years |
|
|
Date of Loan |
1-Jul-18 |
|
|
Calculation Of Interest |
||
|
31-Dec-18 |
$ 1,500 |
|
|
30-Jun-19 |
$ 1,500 |
|
|
31-Dec-19 |
$ 1,500 |
|
|
30-Jun-20 |
$ 1,500 |
References:
Corporate Finance Institute. (n.d.). What is a Subsidiary. Retrieved September 10, 2018, from corporatefinanceinstitute.com: https://corporatefinanceinstitute.com/resources/knowledge/finance/subsidiary-definition/
Course Hero. (2018). Why is it necessary to make adjustments for intragroup transactions? Retrieved September 10, 2018, from www.coursehero.com: https://www.coursehero.com/file/18010019/SOLUTION-CHAPTER-20/
Principles of consolidation. (n.d.). Retrieved September 10, 2018, from accionistaseinversores.bbva.com:https://accionistaseinversores.bbva.com/microsites/bbva2015/en/C/2.html
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