Accounting Entries for Business Combination and Financial Statements for Ghost Ltd and Bat Ltd

Solution 1
At 1 July 2018:
Net fair value of Bat Ltd
=$200,000 + $25,000 + $45,000) (equity)
+ $4,000 (1 – 30%) (P&E)
+ $20,000 (1 –30%) (land)
+ $10,000 (1 – 30%) (inventory)
+ $10,000 (1 – 30%) (trademark)
+ $1,000 (1 – 30%) (machinery)
- $25 000 (goodwill)
Net fair value acquired = $276,500
Cost of combination = $330,000
Goodwill acquired = $28,500
1. Business combination valuation entries at 30 June 2020
Debit Credit
Gain (loss) on sale of non-current assets 20,000
Income tax expense 6,000
Transfer from business combination
valuation reserve 14,000
Trademark 10,000
Deferred tax liability 3,000
Business combination valuation reserve 7,000
Accumulated depreciation - P&E 114,000
Plant and equipment 110,000
Deferred tax liability 1,200
Business combination valuation reserve 2,800
Depreciation expense - P&E 800
Retained earnings (1/7/16) 800
Accumulated depreciation - P&E 1600
($4 000 /5)
Deferred tax liability 480
Income tax expense 240
Retained earnings (1/7/16) 240
Depreciation expense – machinery 125

Gain (loss) on sale of non-current assets 625
Income tax expense 225
Retained earnings (1/7/16) 175
Transfer from business combination
valuation reserve 700
2. Pre-acquisition entry 30/6/2018
Debit Credit
Retained earnings 45,000
Share capital 200,000
General reserve 25,000
Business combination valuation reserve 31,500
Goodwill 28,500
Shares in Bat Ltd 330,000
Pre-acquisition entry 30/6/2020
Debit Credit
Retained earnings* (1/7/19) 52,000
Share capital 200,000
General reserve 25,000
Business combination valuation reserve 24,500
Goodwill 28,500
Shares in Bat Ltd 330,000
* $45 000 + $7000 BCVR - Inventory
Transfer from business combination
valuation reserve 14,000
Business combination valuation reserve 14,000
Transfer from business combination
valuation reserve 700
Business combination valuation reserve 700
Shares in Bat Ltd 5,000
Interim dividend paid 5,000
3. Interim dividend paid
Debit Credit
Dividend revenue 5,000
Interim dividend paid 5,000
4. Final dividend declared
Debit Credit
Dividend payable 4,000

Final dividend declared 4,000
Dividend revenue 4,000
Dividend receivable 4,000
5. Inter-entity sales of inventory: Profit in opening inventory
Debit Credit
Retained earnings (1/7/19) 2,800
Income tax expense 1,200
Cost of sales 4,000
6. Transfer of plant to inventory: Ghost Ltd – Bat Ltd
Debit Credit
Gain (loss) on sale of non-current assets 5,000
Inventory 5,000
Deferred tax asset 1,500
Income tax expense 1,500
7. Intragroup sales of inventory: Profit in ending inventory
Debit Credit
Sales 8,000
Cost of sales 7,000
Inventory 1,000
Deferred tax asset 300
Income tax expense 300
8. Intragroup sales of inventory: Profit in ending inventory
Debit Credit
Sales 18,000
Cost of sales 16,000
Inventory 2,000
Deferred tax asset 600
Income tax expense 600
9. Sale of Furniture
Debit Credit
Retained earnings (1/7/19) 700
Deferred tax asset 300
Furniture 1,000
10. Depreciation
Accumulated depreciation - furniture 150
Depreciation expense 100
Retained earnings (1/7/19) 50
Income tax expense 30
Retained earnings (1/7/19) 15
Deferred tax asset 45