Purchase of Soletta Ltd: Consolidated Financial Statement Preparation

This assignment solution addresses various aspects of consolidated financial statements related to the potential acquisition of Soletta Ltd. It begins by explaining the purpose of consolidated financial statements, defining key terms like 'group,' 'parent,' and 'subsidiary,' and justifying the necessity of adjusting for intra-group transactions, particularly concerning inventory transfers. The solution then presents an acquisition analysis as of July 1, 2019, including the calculation of goodwill and the necessary journal entries. Furthermore, it details the elimination of intra-group sales, adjustments for unrealized profits on assets, and the treatment of management service revenues and expenses, loan transactions, and dividends within the consolidated entity. Computations for unrealized profit on stock and asset values are also provided, along with calculations for interest on loans. The solution references relevant sources for definitions and principles, ensuring a comprehensive understanding of the consolidation process.

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)

Question 3
Entries in the books of Patagonia Ltd
Date Particulars
L
F DR CR
Question 3 (a)
30/06/20
18 Elimination of Intra Group Sales $ $
Sales 6,000
To CGS 5,750
To Inventory 250
Profit elimination tax recognition effect
DTA(Deferred Tax Asset) 75
ITA(Income Tax Expenses) 75
30/06/20
19
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)
Reduction of assets to written down value and elimination of
profit unrealised $ $
30/06/20
18 Retained Earnings 2,800

DTA 1,200
Tractor 4,000
Depreciation excess charged to be eliminated
30/06/20
20 Accumulated Depreciation 922
To Depreciation Expenses 342
To Retained Earnings 580
(Refer sheet for calculations)
Transactions effect on Income Tax
30/06/20
20 ITA 103
Retained Earnings 174
To DTA 277
Question 3 (C)
30/06/201
8 Sales within Intra group elimination $ $
Sales 400
Purchase 400
Balances elimination of Intra group
Patagonia Ltd - Accounts Receivable 100
Salto Ltd - Accounts Payable 100
Adjustment of overstated inventory
Cost of Goods Sold (COGS) . 100
Inventory A/c. 100
Elimination of Profit tax effect
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 50,000
Receivable Loan 50,000
(Being assumption of Interest paid)
30/06/202
0 Payable Loan 50,000
Receivable Loan 50,000
(Assumed Interest Paid)

30/06/201
9 Interest Revenue 3,000
Interest Expenses 3,000
30/06/201
9 Interest Revenue 3,000
Interest Expenses 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
Intragroup balances elimination
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:

Corporate Finance Institute. (n.d.). What is a Subsidiary. Retrieved September 10, 2018, from
corporatefinanceinstitute.com: https://corporatefinanceinstitute.com/resources/knowledge/finance/
subsidiary-definition/
Course Hero. (2018). Why is it necessary to make adjustments for intragroup transactions? Retrieved
September 10, 2018, from www.coursehero.com:
https://www.coursehero.com/file/18010019/SOLUTION-CHAPTER-20/
Principles of consolidation. (n.d.). Retrieved September 10, 2018, from
accionistaseinversores.bbva.com:https://accionistaseinversores.bbva.com/microsites/bbva2015/en/C/
2.html