shareholders’ equity of Possum Ltd
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.
Show the following
• acquisition analysis (8 marks),
• consolidation journals (8 marks)
• worksheet entries (5 marks).
• Explain the rationale of intragroup transactions for (a) and (b) above. (4 marks)
• Presentation and referencing (5 marks)
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.
Show the following
• acquisition analysis (8 marks),
• consolidation journals (8 marks)
• worksheet entries (5 marks).
• Explain the rationale of intragroup transactions for (a) and (b) above. (4 marks)
• Presentation and referencing (5 marks)
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