Chapter 28: Consolidation: Wholly Owned entities (part 2)

Exercise 28.8

Pre-acquisition dividends, previously recorded goodwill

On 1 January 2024, Taringa Ltd acquired all the issued shares (cum div.) of Darkan Ltd
for $550 000. At that date the equity of Darkan Ltd was recorded as follows.

Share capital $ 330 000

General reserve 40 000

Retained earnings 140 000

On 1 January 2024, the records of Darkan Ltd showed that the company had previously
recorded a goodwill at cost of $20 000. Further, Darkan Ltd had a dividend payable of
$30 000, the dividend to be paid in March 2024. All other assets and liabilities of
Darkan Ltd were carried at amounts equal to their fair values at 1 January 2024.

Required
1. Prepare the acquisition analysis at 1 January 2024.
2. Prepare the consolidation worksheet entries for Taringa Ltd’s group at 1 January
2024.
3. Prepare the consolidation worksheet entries for Taringa Ltd’s group at 30 June
2024.
4. Discuss how the entries for parts 2 and 3 would change if the consideration
transferred by Taringa Ltd for Darkan Ltd’s shares was $510 000.
(LO3, LO4 and LO5)

1. Acquisition analysis at 1 January 2024:

Net fair value of identifiable assets

and liabilities of Darkan Ltd =
Net consideration transferred
Goodwill acquired
Recorded goodwill
Unrecorded goodwill
($330 000 + $40 000 + $140 000) (equity)
– $20 000 (goodwill)
= $490 000
= $550 000 – $30 000 (dividend)*
= $520 000
= $520 000 – $490 000
= $30 000
= $20 000
= $30 000 – $20 000
= $10 000

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*As the dividend was declared prior to the acquisition and the acquisition is cum div., the
dividend is recognised as a refund of the consideration transferred. That also means that the
investment account recognised by Taringa Ltd as “Shares in Darkan Ltd” will be recognised
as $520 000 (net consideration transferred) and not $550 000.

2. Consolidation worksheet entries at 1 January 2024:

Business combination valuation entries:

The BCVR entries only record the previously not recorded goodwill.
Goodwill Dr 10 000
Business combination valuation reserve Cr 10 000

Pre-acquisition entries:

Retained earnings (1/1/24) Dr 140 000

Share capital Dr 330 000
General reserve Dr 40 000
Business combination valuation reserve Dr 10 000
Shares in Darkan Ltd Cr 520 000

Dividend payable Dr 30 000

Dividend receivable Cr 30 000

As the dividend was declared prior to the acquisition out of pre-acquisition equity and it is
recognised by Taringa Ltd as receivable (the acquisition is cum div.), the dividend payable
and the dividend receivable related to it are eliminated in the pre-acquisition entry.

3. Consolidation worksheet entries at 30 June 2024:

The entries are the same as in 2 above except that the dividend payable/receivable entry will
no longer be required as the dividend has been paid by Darkan Ltd.

4. If the consideration transferred was $510 000, then the entries may change as the goodwill
changes and it may even become a gain on bargain purchase. To identify the changes, a new
acquisition analysis will need to be performed as at 1 January 2024:

Net fair value of identifiable assets

and liabilities of Darkan Ltd = ($330 000 + $40 000 + $140 000) (equity)
– $20 000 (goodwill)
= $490 000
Net consideration transferred = $510 000 – $30 000 (dividend)
= $480 000
Gain on bargain purchase = $490 000 – $480 000
= $10 000
Recorded goodwill = $20 000
Goodwill written off = $20 000

If, as a result of the acquisition analysis it is determined that there is a gain on bargain
purchase and not goodwill, at 1 January 2024, the previously recorded goodwill needs to be

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written-off in the BCVR entries by debiting the BCVR account. In the pre-acquisition entries
at 1 January 2024, the gain on bargain purchase needs to be recognised and the BCVR needs
to be eliminated by crediting the account.

Business combination valuation entries:

Business combination valuation reserve Dr 20 000

Goodwill Cr 20 000

Pre-acquisition entries:

Retained earnings (1/1/24) Dr 140 000

Share capital Dr 330 000
General reserve Dr 40 000
Gain on bargain purchase Cr 10 000
Business combination valuation reserve Cr 20 000
Shares in Darkan Ltd Cr 480 000

Dividend payable Dr 30 000

Dividend receivable Cr 30 000

The entries at 30 June 2024 will not include the dividend payable/receivable entry as the
dividend has been paid by Darkan Ltd. However, the main pre-acquisition entry at 1 January
2024 will be repeated unchanged at 30 June 2024. There will not be any other pre-acquisition
entries because there were no other events that impacted on pre-acquisition equity during the
period.

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Exercise 28.9

Pre-acquisition reserves transfers

On 1 July 2024, Lota Ltd acquired all the issued shares of Mokai Ltd for $250 000. The
financial statements of Mokai Ltd showed its equity at that date to be as follows.

Share capital (20 000 shares) $120 000

General reserve 50 000
Retained earnings 80 000

All the assets and liabilities of Mokai Ltd were recorded at amounts equal to their fair
values at that date.

During the year ending 30 June 2025, Mokai Ltd undertook the following actions:
 On 10 September 2024, paid a dividend of $30 000 from the profits earned prior to 1
July 2024.
 On 1 January 2025, transferred $10 000 from the general reserve existing at 1 July
2024 to retained earnings.
 On 28 June 2025, declared a dividend of $25 000 from the profits earned after 1 July
2024 to be paid on 15 August 2025.

Required
1. Prepare the acquisition analysis at 1 July 2024.
2. Prepare the consolidation worksheet entries for Lota Ltd’s group at 1 July 2024.
3. Prepare the consolidation worksheet entries for Lota Ltd’s group at 30 June 2025.
(LO3, LO4 and LO5)

1. Acquisition analysis at 1 July 2024:

Net fair value of identifiable assets

and liabilities acquired = ($120 000 + $50 000 + $80 000) (equity)
= $250 000
Consideration transferred = $250 000
Goodwill = $250 000 – $250 000
= $0

2. Consolidation worksheet entries at 1 July 2024:

There are no BCVR entries as all the assets and liabilities of Mokai Ltd were recorded at
amounts equal to their fair values at acquisition date and there is no goodwill. The only
consolidation worksheet entries will be the pre-acquisition entry as shown below:

Pre-acquisition entries:

Retained earnings (1/7/24) Dr 80 000

Share capital Dr 120 000
General reserve Dr 50 000

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 Shares in Mokai Ltd Cr 250 000

The pre-acquisition entry eliminates the pre-acquisition equity against the investment account
recognised by the parent based on the consideration transferred.

3. Consolidation worksheet entries at 30 June 2025:

There are no BCVR entries as all the assets and liabilities of Mokai Ltd were recorded at
amounts equal to their fair values at acquisition date and there is no goodwill. The only
consolidation worksheet entries will be the pre-acquisition entries as shown below:
Pre-acquisition entries:
Retained earnings (1/7/24) Dr 80 000
Share capital Dr 120 000
General reserve Dr 50 000
Shares in Mokai Ltd Cr 250 000

Dividend revenue Dr 30 000

Dividend paid Cr 30 000

Transfer from general reserve Dr 10 000

General reserve Cr 10 000

Note that the first pre-acquisition entry at 30 June 2025 is the same as the one at 1 July 2024
(the beginning of the current period). The next pre-acquisition entries reverse the effects of
the pre-acquisition equity transfers that happen during the current period. Note that the
dividends declared from post-acquisition equity do not have any impact on pre-acquisition
equity and therefore no pre-acquisition entries are prepared for them

Exercise 28.15

Undervalued and unrecorded assets, unrecorded liabilities, pre-acquisition reserves

transfers

On 1 August 2021, Merriwa Ltd acquired 10% of the shares in Allora Ltd for $8000.
Merriwa Ltd used the fair value method to measure this investment with movements in
fair value being recognised in profit or loss. At 1 July 2023, the fair value of this
investment was $15 400. Merriwa Ltd originally invested in Allora Ltd due to the fact
that Allora Ltd was undertaking research into particular microbiological elements that
could influence the profitability of Merriwa Ltd. With the continuing success of this
research, Merriwa Ltd decided to acquire the remaining shares (cum div.) in Allora Ltd.

On 1 July 2023, Merriwa Ltd made an offer to buy the remaining shares in Allora Ltd
for $151 000 cash. This offer was accepted by the shareholders of Allora Ltd. On 1 July
2023, immediately after the business combination, the statement of financial position of
Allora Ltd was as follows.

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 Merriwa Ltd Allora Ltd

Share capital $ 130 000 $ 90 000

General reserve 56 500 12 000

Retained earnings 93 500 36 000

Total equity $ 280 000 $ 138 000

Dividend payable 25 000 12 600

Other liabilities 75 000 25 000

Total liabilities $ 100 000 $ 37 600

Total equity and liabilities $ 380 000 $ 175 600

Cash 11 000 20 600

Receivables 25 200 20 000

Other assets 10 000 8 000

Shares in Allora Ltd 153 800 -

Inventories 55 000 42 000

Plant and equipment 210 000 107 000

Accumulated depreciation — plant and equipment (85 000) (22 000)

Total assets $ 380 000 $ 175 600

On analysing the financial statements of Allora Ltd, Merriwa Ltd determined that all
the assets and liabilities recorded by Allora Ltd at 1 July 2023 were shown at amounts
equal to their fair values except for the following.

The plant and equipment is expected to have a further 4-year useful life and is
depreciated on a straight-line basis. The inventories were all sold by 30 June 2024.

Allora Ltd had expensed all the outlays on research and development. Merriwa Ltd
considered that an asset was created and placed a fair value of $12 000 on this asset at 1
July 2023. The research and development is amortised evenly over a 10-year period.
Allora Ltd also had reported a contingent liability at 30 June 2023 in relation to claims
by customers for damaged goods. Merriwa Ltd placed a fair value of $3000 on these
claims at 1 July 2023. The claims by customers were settled in May 2024 for $2800. The
tax rate is 30%.

Required
1. Prepare the consolidated financial statements for Merriwa Ltd’s group at 1 July
2023.
(LO4 and LO5)

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1. Consolidated financial statements for Merriwa Ltd’s group at 1 July 2023:

Acquisition analysis at 1 July 2023:

Net fair value of identifiable assets

and liabilities of Allora Ltd = ($90 000 + $12 000 + $36 000) (equity)
+ ($43 000 – $35 000) x (1 – 30%) (BCVR – plant)
+ ($46 000 – $42 000) x (1 – 30%) (BCVR – inventories)
+ $12 000 x (1 – 30%) (BCVR – R&D)
– $3 000 x (1 – 30%) (BCVR – claims)
= $152 700
Net consideration transferred = $151 000 – $12 600 (dividend)
= $138 400
Previously acquired equity interest =$15 400
Goodwill = ($138 400 + $15 400) – $152 700
= $1 100
*Note that the net consideration transferred (that together with the fair value of previously
held interest gives the balance of the “Shares in Allora Ltd” account at of 1 July 2023, i.e.
$153 800) is calculated after subtracting 100% the dividend declared by the subsidiary prior
to the acquisition from the fair value of the consideration transferred as it is assumed that
prior to the acquisition of the remaining shares Merriwa Ltd did not recognise the 10% of the
dividend declared by the subsidiary and the fair value of the previously held investment is not
affected by it.

Consolidation worksheet entries at 1 July 2023:

(1) Business combination valuation entries:

The BCVR entries at acquisition date will need to recognise:

 adjustments to fair value for plant and inventories
 the previously not recognised research and development at fair value
 the previously not recognised contingent liability at fair value
 the goodwill acquired.

Accumulated depreciation - plant Dr 11 000

Plant Cr 3 000
Deferred tax liability Cr 2 400
Business combination valuation reserve Cr 5 600

Inventories Dr 4 000
Deferred tax liability Cr 1 200
Business combination valuation reserve Cr 2 800

Deferred research and development Dr 12 000

Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400

Business combination valuation reserve Dr 2 100

Deferred tax asset Dr 900
Provision for customer claims Cr 3 000

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 Goodwill Dr 1 100
Business combination valuation reserve Cr 1 100

(2) Pre-acquisition entries:

Retained earnings (1/7/23) Dr 36 000

Share capital Dr 90 000
General reserve Dr 12 000
Business combination valuation reserve Dr 15 800
Shares in Allora Ltd Cr 153 800

Dividend payable Dr 12 600*

Dividend receivable Cr 12 600

*This entry needs to be posted here to eliminate the dividend declared by the subsidiary prior
to the acquisition and recognised entirely (100%) by the parent at acquisition date as this
dividend is part of pre-acquisition equity.

Consolidation worksheet at 1 July 2023:

Merriwa Allora Adjustments Group
Ltd Ltd Dr Cr
Cash 11 000 20 600 31 600
Receivables 25 200 20 000 12 600 2 32 600
Other assets 10 000 8 000 1 12 000 32 000
1 900
1 1 100
Inventories 55 000 42 000 1 4 000 101 000
Shares in Allora Ltd 153 800 - 153 800 2 -
Plant and equipment 210 000 107 000 3 000 1 314 000
Accum. depreciation (85 000) (22 000) 1 11 000 (96 000)
– plant and
equipment
380 000 175 600 415 200

Dividend payable 25 000 12 600 2 12 600 25 000

Other liabilities 75 000 25 000 3 000 1 110 200
2 400 1
1 200 1
3 600 1
Share capital 130 000 90 000 90 000 130 000
Retained earnings 93 500 36 000 36 000 93 500
General reserve 56 500 12 000 12 000 56 500
Business - - 1 2 100 5 600 1 -
combination 2 15 800 2 800 1
valuation reserve 8 400 1
1 100 1
380 000 175 600 197 500 197 500 415 200

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Consolidated financial statements at 1 July 2023: Only the consolidation statement of
financial position can be prepared as at 1 July 2023.

MERRIWA LTD
Consolidated statement of financial position
as at 1 July 2023
Current assets
Cash and equivalents $31 600
Receivables 32 600
Inventories 101 000
Total current assets $165 200
Non-current assets
Plant and equipment 314 000
Accumulated depreciation (96 000)
218 000
Other assets 32 000
Total non-current assets $250 000
Total assets $415 200
Current liabilities
Dividend payable 25 000
Other liabilities 110 200
Total liabilities $135 200
Equity
Share capital 130 000
Retained earnings 93 500
General reserve 56 500
Total equity $280 000
Total equity and liabilities $415 200