Preparation of Consolidated Financial Statements and Statement of Equity Changes

The financial statements of Sierra Ltd and Sahara Ltd are presented, which show their individual and consolidated results for the period. The statements include a balance sheet, income statement, and statement of changes in equity. The main points to note are: both companies have reported profits before tax, with Sierra Ltd reporting a profit of $70,000 and Sahara Ltd reporting a profit of $48,000. After accounting for income tax expense, the profits for the period are $50,000 for Sierra Ltd and $30,000 for Sahara Ltd. The consolidated financial statements show a combined profit of $80,000. In terms of equity, Sierra Ltd has reported a retained earnings balance of $62,000, while Sahara Ltd has reported a balance of $6,000.

ACCOUNTING
QUESTIONS

Table of Contents
QUESTION 1..................................................................................................................................3
QUESTION 2..................................................................................................................................6
Acquisition analysis.....................................................................................................................6
Worksheet entries at 30 June 2017..............................................................................................2
P re-aquisition entries..................................................................................................................3
Consolidated financial statements...............................................................................................4
Prepare statements of equity of changes......................................................................................5

QUESTION 1
Acquisition analysis
S. No. Journal entries Debit Credit
1. Accumulated
depreciation-
machinery a/c Dr
To machinery a/c
To Deferred tax
liability a/c
To Business
combination valuation
reserve
50000
35000
4500
10500
2. Depreciation expenses
a/c Dr.
To accumulated
depreciation a/c
3000
3000
3. Deferred tax liability
a/c Dr.
To Income tax
expenses a/c
900
900
4. Cost of sales a/c Dr.
To Income tax
expenses a/c Cr.
Transfer from
business combination
valuation reserve a/c
10000
3000
7000
5. Transfer from
business valuation
5600
03

reserve a/c Dr.
Income tax a/c Dr.
To gain
2400
8000
Pre-acquisition entries
S. No. Journal entries Debit (in $) Credit (in $)
1. Retained earnings a/c
Dr.
Share capital a/c Dr.
General reserve a/c
Dr.
Business combination
valuation reserve a/c
Dr.
To Shares in SC Ltd.
10000
300000
60000
30000
400000
2. Transfer from general
reserve a/c
To general reserve
a/c
5000
5000
3. Transfer from
business combination
valuation reserve a/c
Dr.
To business
combination valuation
reserve a/c
(sale of stock )
4. Business
combination valuation
reserve a/c Dr.
5600
03

To transfer from
business combination
valuation reserve a/c
(re-measurement of
liability)
5600
5. general reserve a/c Dr.
To Transfer from
general reserve a/c
2000
2000
03

QUESTION 2
Acquisition analysis
Net fair value of identifiable assets and liabilities of Sahara Ltd=
(250000+10000+15000+10000)+10000(1-30%) inventory+20000(1-30%) land+ 20000(1-
30%)Plant and equipment+10000(1-30%) trademark
03

Particulars Amount
Share capital 250000
General reserve 10000
Assets revaluation 15000
Retained earnings 10000
Equity 285000
Inventory 10000(1-30%)
= 7000
Land 20000(1-30%)
=14000
Plant and equipment 20000(1-30%)
=14000
Trademark 10000(1-30%)
=7000
Goodwill 25000(1-30%)
=17500
Net fair value of identifiable assets and
liabilities of Sahara ltd
344500
Consideration transferred 264800
Goodwill 79700
Recorded goodwill 25000
Unrecorded goodwill 54700
Worksheet entries at 30 June 2017
Business combination valuation entries
1

Particulars J.F Debit Credit
Accumulated depreciation A/c Dr 130000
To plant 110000
To deferred tax liability 6000
To business combination valuation reserve 14000
Depreciation expense a/c Dr 12000
To accumulated depreciation(20000*20%*3) 12000
Deferred tax liability a/c Dr 2000
To income tax expense 2000
Land a/c dr 20000
To deferred tax liability 6000
To business valuation reserve 14000
Inventory a/c Dr 10000
To deferred tax liability 3000
To business combination reserve 7000
Cost of sales a/c Dr 162000
To income tax expense 48600
Transfer from business combination valuation
reserve(162000*(1-30%)
113400
Trademark a/c Dr 10000
To deferred tax liability 3000 3000
To business valuation reserve 7000 7000
Goodwill 25000
Business valuation reserve 17500
2

Goodwill 42500
Business valuation reserve 5600
Income tax 2400
Idle inventory a/c dr 5000
Gain 3000
P re-aquisition entries
Date Particulars J.F Debit Credit
1-July-2016 Retained earning a/c Dr 10000
Share capital a/c Dr 250000
Asset revaluation surplus a/c Dr 15000
General reserve a/c dr 10000
To shares 264800
To capital reserve 20200
Transfer from business valuation a/c Dr 113400
To business combination (sale of inventory) 113400
Business combination reserve a/c Dr 5600
To transfer from business combination (re
measurement of liability)
5600
Transfer from general reserve a/c Dr 8000
To general reserve 8000
To share in Sahara Ltd
Particulars Sierra Ltd Sahara Ltd Consolidated
Sales revenue 200000 172 000
3

Other income 75 000 30 000
275 000 202 000
Cost of sales 162 000 128 000
Other expenses 53 000 2531 000
215 000 159 000
Profit from trading 60 000 43 000
Gains/(losses) on sale
of non-current assets
10 000 5 000
Profit before tax 70 000 48 000
Income tax expense 20 000 18 000
Profit for the period 50 000 30 000
Consolidated financial statements
Particulars Sierra Ltd Sahara Ltd Consolidated
Sales revenue 200000 172 000 372000
Other income 75 000 30 000 105000
275 000 202 000 477000
Cost of sales 162 000 128 000 290000
Other expenses 53 000 21 000 74000
215 000 159 000 374000
Profit from trading 60 000 43 000 103000
Gains/(losses) on sale
of non-current assets 10 000 5 000 15000
Profit before tax 70 000 48 000 118000
Income tax expense 20 000 18 000 38000
Profit for the period 50 000 30 000 80000
4