Consolidated Financial Statements and Business Combination Analysis

MEMORANDUM
DATE: 4 thSeptember, 2018
TO: Jane Penfold
FROM: Accountant
SUBJECT: Presentation to Executive on purchase of majority shares of Soletta Ltd
This memorandum is with reference to purchase of majority shares of Soletta Ltd. and few
issues, which might be faced on the decision to purchase the majority shares on discussion with
the executive team of Soletta Ltd.
a) What is the purpose of preparing consolidated financial statements?
The purpose of consolidated financial statement is to present to the various stakeholders of the
company, the results of the operations and the financial position of the group consisting of the
parent and its subsidiaries as if they were a single entity. (Principles of consolidation)
b) What is a group, a parent and a subsidiary?
A group is a composite of parent and subsidiaries corporations that functions as a single
economic entity having common control.
A Parent company is a company which controls another entity.
A subsidiary corporation or a daughter corporation is a company that is owned or controlled by
another company referred to as parent company. (Corporate Finance Institute)
c) How many parents can a group have? Justify your answer.
A group can have multiple parent companies like for example there can be a parent company
which holds first tier subsidiaries directly and then an ultimate parent company which controls
second and lower tiers of subsidiaries indirectly through first tier subsidiaries.

d) Why is it necessary to make adjustments for intra group transactions?
Adjustments are made for intra group transactions as these are internal to the group and do not
reflect transactions with external parties. (Course Hero, 2018) This is also in line with the entity
concept of consolidation, which says transactions within the group must be adjusted as within the
same economic entity.
Intra group transaction does not reflect an economic activity for earning some gain but is like
transaction with oneself considering group as a single entity.
e) When are profits realised in relation to inventories transfers within the group?
Profits realized in relation to inventories are transferred within the group when the inventory is
on-sold to an external entity not forming part of the group.

Answer 2
(a):
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
Books of Paldivia Ltd as at 1st July, 2019
Answer2(b)
Date Particulars LF DR CR
01/07/201
9 AssetEquipment
$
50,000
Revaluation Surplus
$
50,000
(Being Equipment revalued upward by $50,000)
01/07/201
9 Revaluation Surplus
$
40,000
Prov for Suits
$
40,000
(Being fairprice valuation done)
01/07/201
9 Retained earnings $ 250,000
General reserve
$
20,000
Share capital $ 650,000
Revaluation Surplus
$
80,000
Investment
$
1,000,000
01/07/201
9 Goodwill
$
70,000
Revaluation Surplus
$
70,000
01/07/201
9 Solletta shares Ltd
$
1,000,000
To Cash
$
1,000,000
( Being settlement done in cash)