In order to answer the question students needed to eliminate the investment

In order to answer the question students needed to

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In order to answer the question students needed to eliminate the investment asset against 80% of the pre-acquisition equities (share capital and retained profits) and recognise goodwill, allocate 20% of the pre-acquisition equities to the minority interest, and add together the other account balances in full (100%). Overall the question was well handled by the majority of students. Common student errors were as follows: * Some students assumed that the subsidiary was incorporated and there were no pre-acquisition retained profits * Some students eliminated 20% of the asset and liability balances of the subsidiary to achieve a proportional consolidation instead of a full consolidation * Some students ignored the minority interest issue in the question * Some students eliminated the investment asset against 100% of the pre-acquisition equities and ended up with excess on acquisition25
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Question 13(15 marks)On 1 January 20X1, A Ltd acquired 80% of the ordinary voting shares of B Ltd and achieved control. The consideration for this acquisition was 10 million shares in A Ltd. The market value of one A Ltd share at the date of acquisition was $2. The recorded net assets of B Ltd at 1 January 20X1 are represented by the following shareholders’ equity balances: $m Share capital 5 Retained profits 1.1.X1 10 Book values and fair values of B Ltd’s assets at 1 January 20X1, where different, are as follows: Book ValueFair Value$m $m Land 1 5 Inventory 1 2 B Ltd sold the entire inventory by 31 December 20X1. All companies in the group use the periodic inventory system. B Ltd paid a dividend of $5m out of its pre-acquisition profits during the year to 31 December 20X2. The income tax rate is 30%. REQUIRED a)Prepare an acquisition analysis for A Ltd’s investment in B Ltd. (5 marks) b)Prepare the valuation and elimination consolidation journal entries in respect of A Ltd’s investment in B Ltd for the consolidation at 31 December 20X1. (5 marks) c)Prepare the valuation and elimination consolidation journal entries in respect of A Ltd’s investment in B Ltd for the consolidation at 31 December 20X2. (5 marks) 26
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(This page is provided for Question 13) _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 27
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(This page is provided for Question 13) _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ __________________________________________________________________________________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________28
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(This page is provided for Question 13) _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ __________________________________________________________________________________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________29
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SOLUTION - QUESTION 13 (15 marks) (a)ACQUISITION ANALYSIS A’s investment in B $m$mMARKS Cost of acquisition of investment in B Ltd Purchase consideration – 1m shares @ $2.00 each 20 1 Carrying amount of identifiable net assets of B at 1.1.X1 Share capital 5 ½ Retained profits 10 ½ Fair value adjustment Land ($5m – $1m) 4 ½ Inventory ($2m - $1m) 1 ½ Deferred tax liability @ 30% (1.5)1 Identifiable net assets acquired at fair value 18.5Interest acquired by A Ltd 80%1(14.8)5Difference – goodwill on acquisition 5.2(b)CONSOLIDATION JOURNALS 31 DECEMBER 20X1 Valuation entries for B Ltd’s land and inventory including tax consequences $m $m MARKS DR Land 4 ½ DR Cost of sales – opening inventory 1 ½ CR Income tax expense 0.3½ CR Deferred tax liability 1.2½ CR BCVR 3.5½ 2.5OR (b)CONSOLIDATION JOURNALS 31 DECEMBER 20X1 Valuation entries for B Ltd’s land and inventory including tax consequences $m $m MARKS DR Land 4 CR Deferred tax liability 1.2All correctCR BCVR 2.81130
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