Question

Question 1 King Ltd acquired 80% of the shares of Queen Ltd on 1 July 2005 for S 325,000 when the equity of Queen Ltd consisted of Share Capital Retained Earnings General Reserve $250,000 45,000 35,000 All identifiable assets and liabilities of Queen Ltd are recorded at fair value at this date except for the following: Carrying Amount: Fair Value: Inventory Plant (cost $200,000) $50,000 $150,000 $60,000 $180,000 Queen Ltd had not recorded an intermally generated Trademark. King Ltd valued this Trademark at $60,000. The Trademark was considered to have an indefinite life. All of this inventory was sold by Queen Ltd before 30 June 2007. The plant had a further 10- year life with depreciation based on the straight-line method. The tax rate is 30%. Selected financial information for both companies at 30 June 2010 is as follows: King LtdQueen Ltd 400,000 $220,000 290,000) (180.000) 40,000 5,000 35,000 Sales Revenue Cost of Sales 110,000 Profit before tax Tax Expense 30,000 Profit for the period Retained Earnings at 1/7/09 Interim Dividend Paid 80,000 60,000 (8,000) 75,000 110,000 140,000 10,000) (8,000) (15,000) Final Dividend Declared Retained Earnings at 30/6/10 Share Capital 124,000 85,000 600,000 250,000 50,000 General Reserve 15,000 325,000 Investment in Queen Ltd Dividend Payable 8,000 15,000

Answer 1

Below are the assumptions considered in answering: -

(a) Additional depreciation arising from valuation of assets on acquisition date has been already provided.

(b) Trade mark has not been tested for impairment or has not been impaired as of June 2010.

(c) Only adjustments journal entries are listed below, consolidated P&L not drawn.

Below are the journal entries: -

Consolidated P&L A/C ---DR	2,000
To Inventory A/C ------CR	2,000

Being Profit portion lying in closing inventory of Queen ltd. nullified. ( 4,000*50%)

Consolidated P&L A/C---Dr	2,400
Minority Interest A/C---Dr	600
To Inventory A/C	3,000

Being profit portion of closing inventory in king ltd. nullified, also bifurcation made between minority interest ( 3000*20%)

Minority Interest A/C----Dr	2,400
Consolidated P&L A/C ---Dr	9,600
To Property plant and equipment	12,000

Being Fixed assets difference adjusted to exclude self profit.( 80,000-68,000) Refer note 1

Dividend Payable A/C --Dr	12,000
To Consolidated P&L A/C ---Cr	12,000

Being DIvidend receivable from Queen Ltd, nullified.

Note 1

July 2008 - 1,00,000	July 2008 - 85,000
Less Dep - (10,000)	Less Dep - (8,500)
June 2009 - 90,000	June 2009 - 76,500
Less Dep - (10,000)	Less Dep - (8,500)
June 2010 - 80,000	June 2010 - 68,000
Difference ( 80,000 - 68,000) = 12,000