Memorandum and Consolidated Worksheet Entries for Palvidia Ltd

This document includes a memorandum discussing issues related to the purchase of shares in Soletta Ltd and consolidated worksheet entries for Palvidia Ltd as of 1 July 2019 and 30 June 2019 and 2020.

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MEMORANDUM
DATE: 28 August 2018
TO: Jane Penfold
FROM: Accountant of Palvidia Ltd
SUBJECT: Discussion on issues relating to purchase of shares in Soletta Ltd.
This memorandum is prepared to clarify and discuss issues relating to the decision of
management to purchase majority of shares in Soletta Ltd. The explanation of the issues is
as below:
Purpose of consolidated financial statements
The consolidated financial statements are prepared by the parent company, primarily for the
use of owners, creditors or other stakeholders of the parent company. It helps them to have a
look on the complete financial status, operations or on the profitability of the company.
(Staff, 2018)
Meaning of group, a parent and a subsidiary
Group means the group of companies consisting of holding company and its subsidiary
companies.
Parent company means the company which holds the majority of shares of other companies,
i.e. subsidiary companies.
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Subsidiary company means the company whose majority of shares are held by the parent
company. In other words, subsidiary is owned and controlled by the parent company.
No. of parent companies in a group
A group can have unlimited number of parent companies. But the ultimate parent company
will be 1 only. For instance, A Ltd is the holding of B Ltd. and C Ltd. Similarly, Z Ltd is the
holding of A Ltd. In this case, the group has two parent companies, i.e. A Ltd. which is the
parent of B and C, and Z ltd. which is the parent of A Ltd. But the ultimate parent company
will be 1 only i.e. Z Ltd.
Requirement of Intragroup transactions
Intra group transactions are notional from a group point of view because the income of one
company is the expense of the other company having no effect on the profit and loss of the
group. Hence, these transactions are required to be eliminated from the groups consolidated
financial statements else it leads to incorrect view of the financial position of the group.
("Intra-group transactions: identifying differences | Sigma Conso", 2018)
Realisation of profit on inventories transfers within the group
On inventories transferred within the group, the profit is realised when the inventories are
sold to the external parties.
Accountant of Palvidia Ltd.
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(a
) Acquisition Analysis as at 1 July, 2019
Particulars Amount
Net fair value of assets and liabilities acquired
Share Capital $ 650,000
General Reserve $ 20,000
Retained earnings $ 250,000
Fair valuation of assets/liabilities
Fair valuation of Equipment (50000*(1-30%)) $ 35,000
Fair valuation of Contingent Liability (-40000*(1-
30%)) $ (28,000) $ 7,000
Total value $ 927,000
Consideration paid $ 1,000,000
Goodwill on acquisition $ 73,000
(b) Consolidated Worksheet Entries as at 1 July, 2019
Particulars Amount
Accumulated Depreciation $ 80,000
To Equipment $ 30,000
To Deferred tax liability $ 15,000
To Business combination valuation reserve $ 35,000
Business combination valuation reserve $ 28,000
Deferred tax liability $ 12,000
To Provision for lawsuit $ 40,000
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Goodwill $ 73,000
To Business combination valuation reserve $ 73,000
Pre-Acquisition Entry
Share Capital $ 650,000
General Reserve $ 20,000
Retained earnings $ 250,000
Business combination valuation reserve $ 80,000
To Shares in Soletta Ltd $ 1,000,000
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Consolidated Worksheet Entries as at 30 June, 2019
Sr. No. Particulars Amount
(a) Elimination of profit from opening inventory
Retained earnings (1/7/18) $ 175
Income tax expense $ 75
To Cost of Sales (6000/120%*20%/4) $ 250
(b) Sale of inter-company asset
Retained earnings (1/7/18) $ 2,800
Deferred tax asset $ 1,200
To Tractor $ 4,000
Accumulated depreciation (refer WN-1) $ 580
To Depreciation expenses $ 380
To Retained earnings (1/7/18) $ 200
Income tax expense $ 114
Retained earnings (1/7/18) $ 60
To Deferred tax asset $ 174
(c) Elimination of profit from closing inventory
Sales revenue $ 400
To Cost of sales $ 300
To Inventory $ 100
Deferred tax asset $ 30
To Income tax expense $ 30
Payable to Salto Ltd. $ 100
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To Receivable from Patagonia Ltd $ 100
(e) Inter-company loan elimination
Loan from Salto Ltd. $ 50,000
To Loan to Patagonia Ltd $ 50,000
Interest income (50,000*6%) $ 3,000
To Interest expenses $ 3,000
Interest payable (50,000*6%/2) $ 1,500
To Interest receivable $ 1,500
Consolidated Worksheet Entries as at 30 June, 2020
Tran.
No. Particulars Amount
(b) Sale of inter-company asset
Retained earnings (1/7/19) $ 2,800
Deferred tax asset $ 1,200
To Tractor $ 4,000
Accumulated depreciation (refer WN-1) $ 922
To Depreciation expenses $ 342
To Retained earnings (1/7/19) $ 580
Income tax expense $ 103
Retained earnings (1/7/19) $ 174
To Deferred tax liability $ 277
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(c) Elimination of profit from closing inventory
Retained earnings (1/7/19) $ 70
Income tax expense $ 30
To Cost of Sales $ 100
(d) Inter-company elimination of management fee
Management fee $ 3,000
To Management expense $ 3,000
Payable to Patagonia Ltd $ 3,000
To Receivable from Salto Ltd $ 3,000
(e) Inter-company loan elimination
Loan from Salto Ltd. $ 50,000
To Loan to Patagonia Ltd $ 50,000
Interest income (50,000*6%) $ 3,000
To Interest expenses $ 3,000
Interest payable (50,000*6%/2) $ 1,500
To Interest receivable $ 1,500
(f) Dividend by subsidiary
Dividend income $ 1,500
To Interim dividend paid $ 1,500
(g) Dividend by subsidiary
Dividend payable $ 3,000
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To Final dividend declared $ 3,000
Dividend revenue $ 3,000
To Dividend receivable $ 3,000
WN-1 Calculation of depreciation & WDV of tractor sold
Depreciation for the period 01/01/18 to 30/06/18 (4000*10%) $ 200
WDV as on 30/06/18 (4000-200) $ 3,800
Depreciation for the year ended on 30/06/19 (3800*10%) $ 380
WDV as on 30/06/19 (3800-380) $ 3,420
Depreciation for the year ended on 30/06/20 (3420*10%) $ 342
WDV as on 30/06/20 (3420-342) $ 3,078
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References:
Intra-group transactions: identifying differences | Sigma Conso. (2018). Retrieved from
https://www.sigmaconso.com/en/intra-group-transactions-identifying-differences
Staff, I. (2018). Consolidated Financial Statements. Retrieved from
https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp
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