Consolidated Financial Statements and Acquisition Analysis for Soletta Ltd

This memorandum provides information on consolidated financial statements, group companies, intragroup transactions, and inventory transfers within the group. It also includes an acquisition analysis for Soletta Ltd with journal entries and computations for various scenarios. The analysis covers purchase consideration, fair value of business acquired, net assets acquired, upward valuation of equipment, recognition of fair value of lawsuit, and positive goodwill. The memorandum also includes computations for eliminating intra-group sales, unrealized profit, excess depreciation charged, and intra-group balances. Additionally, it covers the computation of interest on loans, revenue and expenses on dividends, and stock cost markup. References are provided for further reading.

MEMORANDUM
DATE: 4 September 2018
TO: Jane Penfold
FROM: Accountant
SUBJECT: Presentation to Executive on purchase of majority shares of Soletta Ltd
This memorandum is presented to the executive team for purchasing the majority shares of Soletta
Ltd.and the associated issues and reporting, concerning the acquisition that might require their
attention.
a) What is the purpose of preparing consolidated financial statements?
The purpose of preparing consolidated financial statement is to report to the stakeholders of the
company, the results along with the financial position of the group as if they were a single entity
having transactions only with the outside world. (Hill, 2018)
b) What is a group, a parent and a subsidiary?
A group is a composition of parents and subsidiaries companies that operates as single economic
entity.
A parent is a company that has directly or indirectly controlling interest in another entity..
A subsidiary is a company, which is controlled by a parent company. (Murray, 2017)
c) How many parents can a group have? Justify your answer.
A group can have composition consisting of multiple parent and subsidiaries companies, there can be
multiple tiers of subsidiaries companies which may be owned by different parent company and may
ultimate be ultimate parent or holding company.

d) Why is it necessary to make adjustments for intragroup transactions?
Entity concept of consolidation states that transactions within the group must be adjusted or eliminated
if with the same group. Adjustments are required to be made for intra group transactions as those are
inherent to the group and do not reflect transactions with external parties for gain.(Consolidated
Financial Statements of Group Companies)
e) When are profits realised in relation to inventories transfers within the group?
Profits realized in relation to inventories are transferred to the group only when the inventories are
sold to an external party .

Question
Acquisition Analysis as on 1st July, 2019
Sl. No. Particulars $ $
1 Purchase Consideration paid to Soletta Ltd. for issue of Shares
$
1,000,000
2 Fair Value of business Acquired
Net Assets Acquired
- Share Capital
$
650,000
- General Reserve
$
20,000
-Retained Earnings
$
250,000 $ 920,000
3 Upward valuationof Equipment
$
50,000
4 Recognition of Fair Value of Law suit
$
(40,000)
5 Positive Good Will ( Balancing Figure)
$
70,000

Business Combination JE
In the books of Paldivia Ltd as 1st July, 2019
Date Particulars LF DR CR
01/07/201
9 AssetEquipment
$
50,000
To Revaluation Surplus
$
50,000
(Being Upward revaluation of Equipment by $50,000)
01/07/201
9 Revaluation Surplus
$
40,000
To Prov for Suits
$
40,000
(Being valued at fair price)
01/07/201
9 Retained earnings $ 250,000
General reserve
$
20,000
Share capital $ 650,000
Revaluation Surplus
$
80,000
To Investment
$
1,000,000
01/07/201
9 Goodwill
$
70,000
To Revaluation Surplus
$
70,000
01/07/201
9 Solletta shares Ltd
$
1,000,000
To Cash
$
1,000,000
( Being cash settlement done)

Question 3
Entries in the books of Patagonia Ltd
Date Particulars
L
F DR CR
Question 3 (a)
30/06/201
8 Eliminate Intra Group Sales $ $
Sales 6,000
To CGS 5,750
To Inventory 250
Recognise tax effect of profit elimination
DTA(Deferred Tax Asset) 75
ITA(Income Tax Expenses) 75
30/06/201
9
In case of further period sales, no entry is required as the
profit has been “realised”. (All accounts will close to
retained earnings)
Question 3 (b)
Eliminate unrealised profit and reduce asset to group
written
down value $ $

30/06/201
8 Retained Earnings 2,800
DTA 1,200
Tractor 4,000
Elimination of Excess Depreciation charged
30/06/202
0 Accumulated Depreciation 922
To Depreciation Expenses 342
To Retained Earnings 580
(Refer sheet for calculations)
Income Tax effect of above transaction
30/06/202
0 ITA 103
Retained Earnings 174
To DTA 277
Question 3 (C)
30/06/201
8 Eliminate Intra Group Sales $ $
Sales 400
Purchase 400
Elimination of Intra group balances
Patagonia Ltd - Accounts Receivable A/c Dr. 100
Salto Ltd - Accounts Payable A/c Cr. 100
Eliminate unrealised profit and adjust overstated inventory
Cost of Goods Sold (COGS) A/c Dr. 100
Inventory A/c Cr. 100
Recognise tax effect of profit elimination
DTA. 30
To ITA 30
30/06/201
9
In case of further period sales, no entry is required as the
profit has been “realised”. (All accounts will close to
retained earnings)

30/06/201
9
In case of further period sales, no entry is required as the
profit has been “realised”. (All accounts will close to
retained earnings)
Question 3 (D)
$ $
30/06/202
0 Management revenue services 3,000
Management expenses services 3,000
30/06/202
0 Salto Ltd - Accounts Receivable 3,000
Patagonia Ltd - Accounts Payable 3,000
Question 3 (E)
$ $
30/06/201
9 Payable Loan A/c Dr. 50,000
Receivable Loan A/c Cr. 50,000
(Assumed Interest Paid)
30/06/202
0 Payable Loan A/c Dr. 50,000
Receivable Loan A/c Cr. 50,000
(Assumed Interest Paid)
30/06/201
9 Interest Revenue A/c Dr. 3,000
Interest Expenses A/c Cr. 3,000
30/06/201 Interest Revenue A/c Dr. 3,000

9
Interest Expenses A/c Cr. 3,000
Question 3 (F)
30/06/202
0 Revenue On Dividend 1,500
Expenses On Dividend 1,500
Question 3 (G)
30/06/202
0 Revenue On Dividend 3,000
Expenses On Dividend 3,000
Elimination of Intra group balances
30/06/202
0 Dividend Payable 3,000
Dividend Receivable 3,000
Computation
Part3 (a)
Stock SP $ 6,000
Cost Mark up 20%
CP $ 5,000
Stock as on 30/06/2018 $ 1,250 (5000/4)
Unrealised Profit $ 250 (1250*20%)

Part 3 (b)
Cost Price Sale Price Excess
Assetcost 01/01/2018 $ 16,000 $ 20,000
Depreciation till 30/06/2018 @ 10% $ 800 (16000*10%*6/12) $ 1,000 $ 200
Net Asset Value $ 15,200 $ 19,000
Depreciation till 30/06/2019 @ 10% $ 1,520 (15200*10%) $ 1,900 $ 380
Net Asset Value $ 13,680 $ 17,100
Depreciation till 30/06/2019 @ 10% $ 1,368 (13680*10%) $ 1,710 $ 342
Net Asset Value $ 12,312 $ 15,390
Total Excess Charged $ 922
Part 3 (C)
Stock SP $ 400
Cost Mark up 100%
CP(400/200*100) $ 200
Stock as on 30 June 2018(200/2) $ 100
UnrealisedProfit(100*100%) $ 100
Part 3 (e)
Value of Loan $ 50,000
Interest rate 6%
Period 5 Years
Date of Loan 1-Jul-18
Calculation Of Interest
31-Dec-18 ```````````````````` $ 1,500

````````````
30-Jun-19 $ 1,500
31-Dec-19 $ 1,500
30-Jun-20 $ 1,500
References
Consolidated Financial Statements of Group Companies. (n.d.). Retrieved September 6, 2018, from
http://www.icaiknowledgegateway.org: http://www.icaiknowledgegateway.org/littledms/folder1/chapter-5-
consolidated-financial-statements-of-group-companies.pdf
Hill, M. G. (2018). The reporting entity and Consolidated Financial Statements. Retrieved September 6, 2018,
from www.ocf.berkeley.edu: https://www.ocf.berkeley.edu/~cchang/pdf%20docs/ch003.pdf
Murray, J. (2017, November 30). What Is a Subsidiary Company. Retrieved September 6, 2018, from
www.thebalancesmb.com: https://www.thebalancesmb.com/what-is-a-subsidiary-company-4098839