Consolidated financial statements, rationale for adjustments
Lead beaters Ltd acquired all the issued shares (cum div.) of Possum Ltd on 1 July 2014. At this
date the shareholders’ equity of Possum Ltd was:
Share capital – 100 000 shares General reserve Asset revaluation surplus Retained earnings | $ | 450 000 45 000 45 000 15 000 |
At 1 July 2014, the accounting records of Possum Ltd contained a dividend payable of $15 000.
This dividend was paid in August 2014. All the identifiable assets and liabilities at acquisition
date were recorded at amounts equal to their fair values except for:
| Carrying amount | Fair value | |
| Plant (cost $290 000) | $220 000 | $227 500 |
| Inventory | 160 000 | 175 000 |
The plant was considered to have a further 4-year life. It was sold on 1 January 2017 for
$118 000. The inventory was all sold by 30 June 2015. Possum Ltd did not record a contingent
liability relating to a lawsuit by a customer for faulty goods. Possum Ltd considered this liability
had a fair value of $18 000. The lawsuit was settled in May 2015 when Possum Ltd was required
to pay damages of $20 000.
Additional information
(a) On 1 July 2015, Lead beaters Ltd sold plant to Possum Ltd at a before-tax profit of $6000.
This class of non-current asset is depreciated at 25% p.a. on cost by Lead beaters Ltd while
Possum Ltd uses a rate of 10% p.a. on cost.
(b) In June 2016 Possum Ltd sold $50 000 worth of inventory to Lead beaters Ltd at a before-tax profit of $5400. At 30 June 2017, inventory on which Possum Ltd had made a profit of $750 on sale to Lead beaters Ltd was still on hand.
(c) On 10 February 2017, Possum Ltd used the whole of the general reserve existing at 1 July
2014 to pay a bonus dividend of three shares for every ten held.
(d) Both Lead beaters Ltd and Possum Ltd use the valuation method to measure land. In June
2017, Lead beaters Ltd recorded revaluation increases of $15 000 while Possum Ltd recorded increases of $12 000.
(e) The tax rate is 30%.
Financial information provided by the companies at 30 June 2017 was as follows:
| Lead beaters Ltd | Possum Ltd | |
| Plant | $ 558 750 | $ 318 000 |
| Accumulated depreciation – plant | (318 000) | (165 000) |
| Land | 531 300 | 397 500 |
| Shares in Possum Ltd | 580 000 | — |
| Inventory | 280 000 | 240 000 |
| Receivables | 43 500 | 22 500 |
| Cash | 37 500 | 15 000 |
| Total assets | $1 713 050 | $ 828 000 |
| Dividend payable | 15 000 | 6 000 |
| Other current liabilities | 52 050 | 60 000 |
| Loans | 150 000 | 60 000 |
| Total liabilities | $ 217 050 | $ 126 000 |
| Share capital | $1 200 000 | $495 000 |
| Asset revaluation surplus | 225 000 | 120 000 |
| Retained earnings (1/7/16) | 22 500 | 18 000 |
| Revenues | 162 000 | 210 000 |
| Expenses | (48 000) | (80 000) |
| Gains/(losses) on sale of non-current assets | 6 000 | 5 000 |
| Tax expense | (52 500) | (60 000) |
| Dividend declared | (15 000) | (6 000) |
| Total equity | $1 500 000 | $ 702 000 |
Required
Prepare the consolidated financial statements for Lead Beaters Ltd at 30 June 2017.
Acquisition analysis
This report reflects the key understanding and analysis of the consolidated financial statement of post-acquisition of company. This report divulges the consolidation analysis and consolidation journal entries, working sheet and rational related to acquisition. In addition to this, acquisition analysis have been made to prepare the consolidated financial statement for Lead Beaters Ltd at 30 June 2017. The acquisition of Lead Beaters Ltd with the Lead Beaters have been done to assess the post-acquisition of pre-acquisition financial statement of Lead Beaters Company.
Prepare the consolidated financial statements for Lead Beaters Ltd at 30 June 2017 by using the acquisition analysis
In order to prepare the consolidated financial statement of Lead Beaters Limited at 30th June 2017 following analysis have been given (Robinson, et al. 2015).
This analysis shows the transactions and issues of share capital by Lead Company to the shareholders of Possum Limited. In addition to this, other further transactions such as goodwill record pre and post profit of Possum Limited have been computed to evaluate the reserve and profit (Erel, Jang, & Weisbach, 2015).
| CALCULATION OF COST OF INVESTMENT IN POSSUM LTD | |
| Share acquired | 595000 |
| Dividend reduce | 15000 |
| Net cost | 580000 |
Computation of the profit in Possum Limited
| CALCULATION OF PROFIT OF POSSUM | |
| PROFIT | $ 99,250.00 |
| RE | $ 18,000.00 |
| REVALUATION | $ 75,000.00 |
Computation of the pre and post profit in Possum Limited
Computation of the share capital
| SHARE CALCULATION | ||
| PARTICULAR | Share | amount |
| Share as on 1 July 2014 | 100000 | 450000 |
| Bonus share | 30000 | 45000 |
| Total share | 130000 | 495000 |
Computation of the Goodwill or capital gain due to acquisition
Therefore, it could be inferred that Possum Company has $ 6850 apart from its assets and liabilities recorded in its books of account.
| CALCULATION OF GOODWILL OR CAPITAL GAIN DUE TO AQUISATION | |||
| PARTICULAR | LEAD BEATERS LTD 100 % HOLDING IN POSSUM LTD. | ||
| PARTICULAR | CAPITAL | REVENUE | TOTAL |
| ESC | 450000 | 0 | 450000 |
| GR | 45000 | 0 | 45000 |
| REVALUATION RESERVE | 45000 | 75000 | 120000 |
| PROFIT | 0 | 99250 | 99250 |
| RE | 15000 | 18000 | 33000 |
| CONTIGENT LIABILITY | -12600 | -20000 | -32600 |
| PROFIT FROM PLANT | 5250 | -29500 | -24250 |
| PROFIT FROM INVENTORY | 10500 | ||
| TOTAL | 558150 | 142750 | |
| COST OF INVESTMENT | 565000 | ||
| GOODWILL | 6850 | ||
| Particular | Dr | Cr |
General reserve account To bonus to equity share capital (General reserve recorded for issue of bonus share) | $ 45000 | $ 45000 |
Bonus account to equity share capital To equity share capital (Adjustment entry for equity share capital ) | $ 45000 | $45000 |
Profit and loss account Dr To unrealised profit in stock (Profit and loss from unrealised profit in stock) | $750 | $750 |
Retained earnings account To proposed dividend (Issue of proposed dividend) | $15000 | $ 15000 |
Proposed dividend account To bank | $15000 | $ 15000 |
Plant revaluation loss Dr To plant (Revaluation loss charged on plant) | $ 7500 | $7500 |
Inventory revaluation loss To inventory (Charged inventory revaluation loss) | $ 15000 | $15000 |
Revaluation surplus Dr To Plant revaluation loss To inventory revaluation loss (Recording of revaluation surplus and inventory revaluation loss) | $22500 | $ 7500 $15000 |
| Particular | Dr | Cr |
Investment in possum ltd Dr Goodwill Dr To bank (Recording of good will and payment | $ 573150 $ 6850 | $580000 |
Bonus account to equity share capital To equity share capital (Issue of share capital) | $ 45000 | $45000 |
| Particular | Dr | Cr |
Accumulated depreciation Dr To Plant and machinery (Depreciation charged on plants and machinery) | $ 39375.0 | $ 393750 |
Bonus account to equity share capital To equity share capital (Issue of share capital) | $ 45000 | $45000 |
Revaluation surplus Dr To Plant revaluation loss To inventory revaluation loss (Recording of revaluation surplus and inventory revaluation loss) | $22500 | $ 7500 $15000 |
Proposed dividend account To bank | $15000 | $ 15000 |
Plant revaluation loss Dr To plant (Revaluation loss charged on plant) | $ 7500 | $7500 |
The cost of investment in possum Limited has been made on the basis of share acquired and divided issued (Kravet, McVay, & Weber, 2018). This amount will be considered as investment amount by Lead Company. The below given table reflects the amount of investment to be made by acquirer company for acquiring of Possum Company (Saunders, Cornett, & McGraw, 2016). The acquisition analysis is undertaken to assess the pre and post-merger of two companies. The rational of intragroup transactions is related to the consolidated entries which are the integral part of accounting close to cut off tracking and anticipating the arbitration in consolidated financial statement. The main explanation of computing the goodwill of Possum Limited was related to identifying the excess money paid by lead Company. It shows that Lead Company has paid higher capital to Possum Limited for buying its assets and liabilities. In addition to this, further entries have been made to prepare the consolidated finaincal statement of Lead Company (Schwarzbichler, Steiner, & Turnheim, 2018).
| CALCULATION OF COST OF INVESTMENT IN POSSUM LTD | |
| Share acquired | $ 595000 |
| Dividend reduce | $ 15000 |
| Net cost | $ 580000 |
(Moilanen, 2016).
Pre and post profit in Possum Limited
After assessing all the details, it could be inferred that possum limited would be having loss of $ 22500 by sale of inventories. The below given table reflects the pre and post profit in Possum Limited (Thomas, et al. 2016).
| CALCULATION OF PRE AND POST PROFIT IN POSSUM LTD | |
| Particular | Amount in $ |
| GR | $ 45,000.00 |
| BONUS SHARE | $ 45,000.00 |
| NET | $ - |
| RETAINED EARNING | $ 15,000.00 |
| DIVIDEND | $ 15,000.00 |
| NET | $ - |
| REVALUTION SURPLUS | $ 45,000.00 |
| PLANT CAPITAL LOST | $ 7,500.00 |
| INVENTORY REVALUTON LOSS | $ 15,000.00 |
| NET | $ 22,500.00 |
| COST OF MACHINE | $ 290,000.00 |
| CARRYING COST AS ON 2014 | $ 220,000.00 |
| DEPERCIATION | $ 72,500.00 |
| NET VALUE ON JAN 2017 | $ 147,500.00 |
| SOLD IN 2017 | $ 118,000.00 |
| LOSS FROM SALE | $ 29,500.00 |
| CONTIGENT LIABILITY | $ 20,000.00 |
| STOCK RESERVE | $ 750.00 |
(Masadeh, et al. 2017).
Intragroup sales of inventory:
Profit in ending inventory Sales Dr $ 750
Cost of sales Cr $ 5400
To inventory sales$ 55150
| Consolidated financial statement of Lead Beaters Ltd at 30 June 2017 | |
| Consolidated Statement of Financial Position of Lead Beaters Ltd at 30 June 2017 after acquisition | |
| Non-Current Asset: | |
| Fixed assets) | $ 393750 |
| Land | $ 9288000 |
| Goodwill | $ 6850 |
| Current Asset: | |
| Inventory | $ 5195250 |
| Debtors | $66000 |
| Bank | $52500 |
| Investment | $467500 |
| Total assets | $ 2490300 |
| Equity: | |
| Ordinary Shares | $1695000 |
| Retained Profit | $452250 |
| Long term borrowing | $210000 |
| Dividend Payable | $21000 |
| Other Current liabilities | $112050 |
| Total liabilities and equity | $2490300 |
(Walton, 2010).
This report has reflected that Lead Beaters has paid higher capital to Possum Company as compared to its assets and liabilities value. This excess capital is considered as Goodwill and will be shown as goodwill in the consolidated financial statement of company. However, consolidated financial statement is prepared to showcase the post-acquisition financial statement of company. In addition to this, the cost of investment in possum Limited has been made on the basis of share acquired and divided issued. Lead Company has issued share capital to the investors of Possum Company to compensate the shares which they are holding in Possum Company.
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