Topic 2: Consolidation: Intra-grouptransactions

On 1 July 2015, Ping Pong Ltd acquired all the issued shares ofSing Song Ltd. At the date of acquisition, the shareholders’ equityof Sing Song Ltd consisted of share capital $120,000; generalreserve $25,000 and retained earnings $55,000. The identifiable netassets of Sing Song Ltd were recorded at amounts equal to theirfair values, except for the following assets:

	Carrying amount	Fair value
	$	$
Land	100,000	130,000
Inventories	78,500	86,100
Machinery (cost $86,000)	52,000	56,000
Vehicles (cost $58,000)	47,000	53,000

The assets of Sing Song Ltd at acquisition date includedgoodwill recorded at $15,000 arising from a business combinationtransaction in 2011. As at the date of acquisition, the vehiclesand machinery were expected to have a further useful life of 6 and8 years respectively, with benefits to be received evenly overthose periods. Inventories on hand on 1 July 2015 was all sold by31 January 2016. The land owned at 1 July 2015 was sold inSeptember 2016 for $150,000. The machinery on hand at 1 July 2015was sold on 1 January 2018 for $38,000.

Adjustments for the differences between carrying amount and fairvalues of assets and liabilities on hand at acquisition date arerecognised on consolidation. When assets are sold or derecognised,any related valuation reserves are transferred to retainedearnings.

At 1 July 2015, Sing Song Ltd owned but had not recorded aninternally generated brand name, an identifiable asset included aspart of the business combination transaction. This brand name wasconsidered by Ping Pong Ltd to have a fair value of $29,000 and anindefinite useful life. An impairment test conducted with respectto the brand name on 30 June 2018 concluded that its recoverableamount at that date was $2,000 less than its carrying amount.

In June 2017, Sing Song Ltd paid a share dividend worth $20,000from the general reserve on hand at 1 July 2015.

The trial balances of both companies at 30 June 2018 showed thefollowing balances:

	Ping Pong Ltd		Sing Song Ltd
	Dr ($)	Cr ($)	Dr ($)	Cr ($)
Sales revenue		450,000		320,000
Dividend revenue		17,000		-
Other income		11,400		17,000
Proceeds on sale of equipment		18,000		-
Proceeds on sale of machinery		-		38,000
Cost of sales	210,000		192,550
Income tax expense	30,000		32,000
Depreciation and other expenses	39,000		36,000
Carrying amount of equipment sold	21,000		-
Carrying amount of machinery sold	-		30,500
Dividend paid	10,000		5,000
Dividend declared	20,000		12,000
Transfer to general reserve	10,000		5,000
Share capital		200,000		140,000
General reserve		35,000		10,000
Retained earnings (1 July 2017)		51,300		67,500
Accounts payable		69,500		36,000
Loan payable (due 30 June 2022)		25,000		15,000
Dividend payable		20,000		12,000
Provisions		12,500		9,300
Current tax liability		43,000		34,000
Deferred tax liability		11,800		5,000
Accumulated depreciation-vehicles		16,400		60,000
Accumulated depreciation-equipment		-		34,500
8%Debentures (matures 30 June 2021)		25,000		-
Cash	2,500		1,250
Receivables	27,000		13,000
Inventories	39,700		24,500
Other current assets	15,200		8,200
Deferred tax assets	7,500		3,500
Vehicles	88,000		158,000
Equipment	-		42,000
Land	140,000		180,000
Financial assets	68,000		14,800
Goodwill	28,000		15,000
Shares in Sing Song Ltd	250,000		-
Debentures in Ping Pong Ltd	-		25,000
	1,005,900	1,005,900	798,300	798,300

Additional information:

On 1 January 2018, Ping Pong Ltd sold an item of equipment toSing Song Ltd for $18,000. The equipment had a carrying amount atthe date of sale of $21,000. Both companies depreciate equipment at20% on a straight line basis.

On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for$7,800. The machine had a carrying amount of $7,000 at the date ofsale. Ping Pong Ltd recorded the machine as inventories. Theinventories item was sold to an external party in November 2017 for$8,200.

All interests on the 8% debentures has been paid and brought toaccount in the records of both companies.

During the 2017-2018 financial year, Ping Pong Ltd soldinventories to Sing Song Ltd for $75,000. The cost of theseinventories to Sing Song Ltd was $70,000. Of these inventories, 25%is still on hand at 30 June 2018.

The transfer to the general reserve recorded by Sing Song Ltd inthe current year was from retained earnings recorded at 1 July2015.

The tax rate is 30%.

Required:

Prepare an acquisition analysis.

Prepare the consolidation worksheet entries necessary to preparethe consolidated financial statements for the year ending 30 June2018 for the group comprising Ping Pong Ltd and Sing Song Ltd.

Note: you are not required to prepare the consolidationworksheet and the consolidated financial statements.