Corporate Accounting: Acquisition Analysis, Adjusted Journal Entries, Consolidated Statements

This document provides an analysis of corporate accounting, focusing on acquisition analysis, adjusted journal entries, and consolidated statements. It explains the impact of revaluation, goodwill, and non-controlling interest. The document also explores the valuation of assets and liabilities and provides insights into the consolidated financial statements of Ethan Ltd and Darren Ltd.

CORPORATE ACCOUNTING

Accounting
1. Acquisition analysis
Computation of Assets taken over by Ethan 1.7.17 30.6.18
Share Capital of the company 54,000.00 54,000.00
Retained Earnings 36,000.00 44,300.00
Reserve - Asset Revaluation 18,000.00 20,000.00
Inventory revaluation 1,400.00 140.00
Machinery revaluation 1,050.00 840.00
Total 1,10,450.00 1,19,280.00
Post Acquisition Profit
8,830.
00
Consideration paid 1,10,000.00 1,10,000.00
*Acquisition goodwill – (450)
2. Adjusted journal entries
Journal entry
Cost of Sales Ac Dr 300
To, machinery AC 300
Combination Entries of Business
Share Capital 54000
Retained Earnings 36000
Asset Revaluation Reserve 18000
Revaluation Reserve 2450
To shares of Darren Ltd 1,10,000.00
To Gain on Business Purchase 450
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Accounting
3. Consolidated statements
Income Statement
for the year ended 30th June 2018
Ethan Ltd Darren ltd
Profit before tax 1,20,000.00 12,500.00
Tax Expense -56,000.00 -4,200.00
Profit 64,000.00 8,300.00
Retained Earning 80,000.00 36,000.00
Transferred to General reserve - -3,000.00
Closing Retained Earning 1,44,000.00 41,300.00
Adjustments
Subsidiary Share 8,830.00 (119280-110450)
Total 1,52,830.00
Consolidated Financial Statements of Ethan Ltd
As at 30.6.18
Ethan Ltd Darren ltd Consolidated
Share Capital 3,60,000.00 54,000.00 3,60,000.00
Retained Earning 1,44,000.00 41,300.00 2,450.00
General Reserve 10,000.00 3,000.00 10,000.00
Asset Revaluation Surplus 18,500.00 20,000.00 18,500.00
Liabilities 42,500.00 13,000.00 55,500.00
Total 5,75,000.00 1,31,300.00 4,46,450.00
Goodwill(Business Combination Valuation
Reserve) -
Land 1,60,000.00 20,000.00 1,80,000.00
Plant and Machinery 3,60,000.00 1,25,600.00 5,26,900.00
Depreciation
-
1,10,000.00
-
33,000.00
-
1,43,000.00
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Accounting
Inventory 55,000.00 18,700.00 73,700.00
Shares in Darren Ltd 1,10,000.00 -
5,75,000.00 1,31,300.00 6,37,600.00
Analysis
The shares are purchased by Ethan Ltd is ex. the dividend, therefore, Ethan Ltd didn’t have
any right in the Dividend up to date of acquisition so no impact of dividend will be there in
the analysis of acquisition or calculation of Gain or Loss on Acquisition. It is payable to the
third party and it is assumed opening liabilities include dividend payable of $10000 and
during the year it has been paid to respective shareholders.
Ethan Ltd has acquired all the shares of Darren Ltd that means it’s a case of 100% holding so
no requirement for valuation of Non-Controlling Interest. Non-Controlling Interest group
consists of minority shareholders who do have any control in the company, they are shown as
liability in Financial Statements.
The assets, as well as liabilities, are acquired at FV and the difference that exists in the
carrying amount and FV is revalued. In the case mentioned, it can be said that all assets, as
well as liabilities, are carried at their particular respective value irrespective of inventory and
machinery. Hence, after-tax influence changes pertaining to changes on revaluation are taken
into consideration for the purpose of computation (Madura & Fox, 2011).
Change in valuation of Machinery will lead to addition depreciation each year and thus fair
value on the date of Balance Sheet will have the impact of such revaluation after deducting
addition depreciation from date of acquisition to date of reporting or balance sheet.
Increase in value of Inventory is to be recorded just in consolidated financial statements since
as per the information is given 90% of the inventory was sold between the date of acquisition
and date of reporting so revaluation effect will be taken on only remaining 10% of inventory
in stock. Any profit or loss on the sale of inventory is assumed to have been recorded
properly during the year and thus no further impact of such sale of inventory will come on
consolidated statements (Libby, Libby & Short, 2012).
Both the companies used valuation method to measure land and the accumulated changes in
the value of land can be seen in the Asset Revaluation reserve. Even during the year Ethan
Ltd has increased value of Land by $5000 as at the beginning of the year the reserve balance
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Accounting
was $13500 and at the year-end it is $18500 so the difference may be assumed to have
attributed to land as no information of any other asset being revalue is there in the sums. Thus
land at the beginning of the period must be lesser by $5000.
In May Darren Ltd transferred a part of Retained Earnings to General Reserve, thus a
company has no restriction in transferring any amount to General Reserve during or at end of
the year (Melville, 2013). As both retained earnings and general reserve belongs to the Equity
Shareholders there is the impact on valuation (Gowthrope, 2011). It is just an appropriation of
profits of the company.
In out computation, there has been a major net gain on such acquisition of $540 and the net
FV of the acquired assets stands at $110450 while the consideration stands at $110000. The
case of deferred consideration comes into action as the payment of the amount is on the
upfront basis and no other liability needs to be paid after the acquisition date. It is assumed
that the consideration done for the purchase is provided in cash that is through a bank or in
the equity of Ethan Ltd as there is no specific detail regarding the share capital of Ethan Ltd
or any other payment mode that applies to the purchase consideration.
In the consolidated financial statements, the investments in Shares of Darren will not be
reflected in the other asset and liability are added line by line items thereby considering the
impact of equity. The difference if any that arises in the given consolidations adjustments are
projected as Goodwill or Business Combination Valuation reserve (Damodaran, 2012). The
gain comes into the picture and hence reserve of $540 is required to be made in consolidated
financial statements and will not influence the financial statements of any company.
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Accounting
References
Damodaran, A. (2012). Investment Valuation. New York: John Wiley & Sons.
Gowthrope, C. (2011). Business accounting and finance for non specialists (3rd ed.). South
Western
Libby, R., Libby, P & Short, D. (2012). Financial accounting. New York:
McGraw-Hill/Irwin.
Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western
Melville, A. (2013). International Financial Reporting – A Practical Guide. 4th edition,
Pearson, Education Limited, UK
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