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Question 3: Topic 3 and 4 - Consolidated financial statements, method, acquisition, business combination valuation and intra-group transactions (35 marks)

On 1 July 2018, Pink Ltd acquired 100% of the shares (cum div.) in Purple Ltd. The consideration for these shares consisted of 15,000 shares in Pink Ltd valued at $3.00 per share plus a brand that was carried in the records of Pink Ltd at $10,000 (net of accumulated amortisation of $1,500), but the fair value at acquisition date is $12,400.

On 1 July 2018, the equity of Purple Ltd consisted of the following:

Share capital	25,000
Retained earnings	16,000

At this date, Purple Ltd had in its accounts a dividend payable of $3,000, which was paid on 16 July 2018. Purple Ltd had also recorded goodwill of $2,500, net of accumulated impairment losses of $3,500.

Purple Ltd had an unrecorded asset relating to internally generated trademarks that had a fair value of $4,000. These had a future expected useful life of 8 years. All other identifiable assets and liabilities of Purple Ltd were recorded at amounts equal to fair value except for the following:

	Carrying amount	Fair value
Plant (cost $45000)	37,000	40,000
Inventory	9,000	11,500

The plant was expected to have a further 6 year useful life.

The inventory held at 1 July 2018, 90% was sold by 30 June 2020 and the rest by 30 June 2021. In June 2021, Purple Ltd transferred $2,500 from retained earnings on hand at 1 July 2018 to general reserve. The tax rate is 30%. The following information was provided by the two companies at 30 June 2021:

	Pink Ltd	Purple Ltd
Revenues	100,000	53,200
Dividend revenues	4,500
Expenses	(74,500)	(20,000)
Profit before tax	30,000	33,200
Gains (losses) on sale of non-current assets		(200)
Income tax expense	(11,000)	(9,000)
Profit for the year	19,000	24,000
Retained earnings (1/7/20)	22,000	19,000
	41,000	43,000
Transfer to general reserve	(12,000)	(2,500)
Dividends declared	-	(3,000)
Dividends paid	(5,000)	(1,500)
Retained earnings (30/6/21)	24,000	36,000
Share capital	75,000	25,000
General reserve	21,000	2,500
Total equity	120,000	63,500
Provisions	27,500	6,000
Payables	26,900	4,000
Total liabilities	54,400	10,000
Total equity and liabilities	174,400	73,500
Cash	12,500	7,000
Receivables	25,000	12,500
Inventory	20,000	18,500
Goodwill	-	6,000
Accumulated impairment losses	-	(3,500)
Shares in Purple Ltd	54,400	-
Property, plant and equipment	105,000	45,000
Accumulated depreciation plant	(42,500)	(12,000)
Total assets	174,400	73,500

The following transactions were also noted:

1. In February 2020, Purple Ltd sold inventory to Pink Ltd for $12,000, at a mark-up of 20% on cost. One-quarter of this inventory were unsold by Pink Ltd at 30 June 2021 to external parties.
2. On 1 January 2020, Purple Ltd sold a new item of plant to Pink Ltd for $20,000. This had cost Purple Ltd $16,000 on that day. Both entities charged depreciation at the rate of 10% per year on the straight line balance. The plant was still on hand with Pink Ltd at 30 June 2021.
3. A non-current asset with a carrying amount of $1,000 was sold by Purple Ltd to Pink Ltd for $800 on 1 January 2021. Pink Ltd intended to use this item as inventory, being a seller of second-hand goods. The item was still on hand at 30 June 2021.
4. In December 2020, Purple Ltd paid a $1,500 interim dividend.
5. During March 2021, Purple Ltd declared a $3,000 dividend. The dividend was paid in August 2021.

Required:

1. Determine the goodwill as at acquisition date. (3 marks)
2. Prepare the consolidation journal entries immediately after acquisition on 1 July 2018. (5 marks)
3. Prepare the consolidation journal entries as at 30 June 2021. (14 marks)
4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements as at 30 June 2021. (7 marks)
5. Prepare the following financial statements for 30 June 2021:
   1. Consolidated statement of profit or loss and other comprehensive income (2 marks);
   2. Consolidated statement of financial position (2 marks); and
   3. Consolidated statement of changes in equity (2 marks).

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