On 1 July 2013 Rock Ltd Acquired Ex-Dividend All Of The Issu

On 1 July 2013 Rock Ltd Acquired Ex Div All Of The Issues Capital

On 1 July 2013, Rock Ltd acquired (ex div.) all of the issues capital of Wallaby Ltd. The recorded equity of Wallaby Ltd at this date consisted of: Share capital $120,000, General reserve $25,000, Retained earnings $55,000. At 1 July 2013, all the identifiable assets and liabilities of Wallaby Ltd were recorded at fair value except for certain assets including land, inventory, machinery, and vehicles. Wallaby Ltd’s records showed a dividend payable of $8,000 at 1 July 2013, paid on 31 October 2013. The assets included goodwill of $15,000 from a prior business combination in 2009. Wallaby Ltd owned an internally generated brand name valued at $29,000 deemed to have indefinite useful life, but an impairment test in 2016 showed its recoverable amount was $2,000 less than carrying amount. The machinery and vehicles had remaining useful lives of 8 and 6 years, respectively, with benefits received evenly over those periods. Inventory on hand at acquisition was sold by 31 January 2014. Machinery was sold on 1 January 2016 for $38,000, with subsequent adjustments for valuation differences recognized on sale. Wallaby Ltd paid a $20,000 dividend from the general reserve in June 2015. The trial balances as of 30 June 2016 show various balances for both companies, including cash, receivables, inventory, assets, liabilities, and equity items. Additional details include transactions such as sale of equipment and machinery between companies, sale of inventory, interest payments on debentures, and dividends. Your task is to prepare the consolidation worksheet journal entries necessary for the preparation of the consolidated financial statements of Rock Ltd at 30 June 2016.

Paper For Above instruction

Consolidation of financial statements involves combining the financial information of a parent company with its subsidiaries to present as a single economic entity. The process primarily focuses on eliminating the effects of intra-group transactions and balances, accounting for fair value adjustments at the acquisition date, and recognizing goodwill or any impairments. In this case, Rock Ltd's acquisition of Wallaby Ltd on 1 July 2013 requires a comprehensive consolidation process, considering the specific details provided, including assets, liabilities, and intra-group transactions.

Initial Acquisition and Fair Value Adjustments

At the acquisition date, the fair value adjustments need to be recognized for assets like land, inventory, machinery, vehicle, and the brand name. Notably, Wallaby's land was recorded at fair value, and inventory, machinery, and vehicle require adjustments from book value to fair value. The brand name, valued at $29,000 with indefinite useful life, is recognized as an intangible asset, but an impairment loss must be considered from the 2016 test. Goodwill is recorded at acquisition based on excess purchase consideration over net identifiable assets and liabilities.

Recognition of Goodwill and Intangible Assets

Goodwill of $15,000 from a previous business combination is recorded in Wallaby’s books. The brand name’s fair value of $29,000 is recognized as an indefinite-lived intangible asset, subjected to impairment testing, which in 2016 results in a $2,000 impairment loss. The impairment affects the carrying amount of the intangible asset on the consolidated balance sheet.

Elimination of Intra-Group Transactions

Intra-group sales of inventory, equipment, and machinery must be eliminated at the consolidation level. For example, the inventory transfer at $75,000 with a cost of $70,000 results in unrealized profit on inventory remaining at year-end; 25% of inventory is still on hand, requiring deferred tax adjustments. Similarly, inter-company sales of machinery and equipment at a profit or loss must be adjusted to eliminate unrealized gains or losses.

Adjustments for Asset Sales and Depreciation

Assets sold between entities, such as machinery sold for $38,000 with a carrying amount of $42,000, have gains or losses that need eliminations. Depreciation adjustments are necessary to reflect the revised capitalized cost basis after fair value adjustments and intra-group sale adjustments over their useful lives. The machinery and vehicle's remaining useful lives impact depreciation charges, which must be adjusted in consolidation entries.

Recognition of Dividends and Reserves

Dividends paid, especially intra-group dividends, are eliminated in consolidation. The dividend of $8,000 payable at acquisition and subsequent intra-group dividends (e.g., $20,000 paid from Wallaby's general reserve) need to be adjusted accordingly. The transfer to general reserve from retained earnings by Wallaby Ltd requires adjustments to the retained earnings balance and must be properly reflected in the consolidated equity.

Deferred Tax Adjustments

Deferred tax assets and liabilities arise from temporary differences on fair value adjustments, impairment losses, and recognizing amortized intangible assets. For instance, the impairment of the brand name and fair value adjustments on assets impact deferred tax balances, which need to be recognized at the applicable tax rate of 30%. The deferred tax effect on intra-group profit eliminations should also be considered.

Conclusion

The preparation of consolidated worksheet journal entries involves systematically eliminating intra-group transactions and balances, adjusting for fair value changes at acquisition, recognizing goodwill and intangible assets, and accounting for impairments. Proper treatment ensures that the consolidated financial statements provide a true and fair view of the economic entity, reflecting the actual financial position and performance of the combined company as of 30 June 2016.

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