Business combination valuation entries, pre-acquisition entries On 1 July 2016

Question 1 (15 marks) Business combination valuation entries, pre-acquisition entries On 1 July 2016, Merelyn Ltd acquired all the issued shares of Cathy Ltd for $220 800. At this date the equity of Cathy Ltd consisted of share capital of $100 000 and retained earnings of $58 800. All the identifiable assets and liabilities of Cathy Ltd were recorded at amounts equal to fair value except for: Carrying amount Fair value Patent $70 000 $72 000 Plant (net of $40 000 depreciation) 40 000 60 000 Inventory 21 600 28 000 The patent was considered to have an indefinite life. It was calculated that the plant had a further life of 10 years, and was depreciated on a straight-line basis. All the inventory was sold by 30 June 2017. In June 2017, Cathy Ltd conducted an impairment test on the patent, as it was considered to have an indefinite life, and the goodwill. As a result, the goodwill was considered to be impaired by $1300. In May 2017, Cathy Ltd transferred $30 000 from the retained earnings on hand at 1 July 2016 to a general reserve. The tax rate is 30%. Required Prepare the consolidation worksheet adjustments entries at 1 July 2016 and 30 June 2017. Question 2 (15 marks) A junior accounts clerk has prepared the following summarised information as at 30 June 2016 for Heaven Ltd: Assets Inventories (at lower of cost and net realisable value) Accounts receivable Cash Land and buildings Plant and equipment Prepayments Calls in arrears (2500 shares at 20c) Patents — cost $ 970 000 651 020 1 598 080 1 750 000 1 716 000 3 400 500 100 000 $6 789 000 Liabilities and equity Retained earnings (30/6/16) Liabilities Share capital (5 000 000 shares) Reserves and provisions 575 480 1 038 520 4 086 000 1 089 000 $6 789 000 Upon further investigation, you have discovered the following additional information: (a) Liabilities of $1 038 520 comprise: Accounts payable Accrued expenses Mortgage loans $790 000 8 520 240 000 (b) Reserves and provisions of $1 089 000 include: Employee benefits (payable after 1 July 2023) Current tax liability Dividends Allowance for impairment of receivables Accumulated depreciation – plant and equipment Accumulated depreciation – buildings Accumulated amortisation – patents $400 000 160 000 200 000 10 000 72 000 207 000 40 000 (c) Cash of $1 598 080 consists of: Cash at bank 10% Telstra bonds (regarded as long-term investments) $ 298 080 1 300 000 (d) Retained earnings balance as at 1 July 2015 was $275 000. (e) Profit for the period was $500 480. (f) Shareholder approval is not required for final dividends declared by directors. (g) During the year, Earth Ltd paid $75 000 to its auditor, of which $19 000 related to services other than the annual audit and half-yearly review. Required Prepare, for Heaven Ltd, the statement of financial position, statement of changes in equity and notes thereto at 30 June 2016 in accordance with the requirements of AASB 101.