On 1 July 2017, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $3
On 1 July 2017, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $3,230,000. At this date, the equity of Son Ltd consisted of: Share capital – 600 000 shares $ 1,200,000 General reserve 500,000 Retained earnings 900,000 At the acquisition date, Son Ltd reported a dividend payable of $50,000 and its assets included $100,000 of recorded goodwill. The dividend payable at the acquisition date was subsequently paid in August 2017. On 1 July 2017, all the identifiable assets and liabilities of Son Ltd were recorded at amounts equal to fair value except for the following: Carrying amount Fair value Land $500,000 $650,000 Inventory 20,000 30,000 Plant (cost $350 000) 250 000 300,000 The land on hand at the acquisition date was sold in March 2018. Of the inventory on hand in Son Ltd at 1 July 2017, 60 percent was sold in November 2017 and the remainder was sold in July 2018. The plant was estimated to have a further 5-year life with zero residual value. Son Ltd was involved in a court case that could potentially result in the company paying damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this liability to be $30,000, even though Son Ltd had not recorded any provision for damages (liability). On 29 June 2019 Son Ltd reassessed the liability in relation to the court case as the chance of winning the case had improved. The fair value on 29 June 2019 was considered to be $10,000. The company applies the partial goodwill method. The income tax rate is 30%. During the period 1 July 2017 to 30 June 2019, the following intragroup transactions have occurred between Parent Ltd and Son Ltd: (T1) At 30 June 2019, Parent Ltd approved and declared a final dividend of $80,000 and Son Ltd approved and declared a final dividend of $50,000. Son Ltd subsequently paid its dividend on 20 August 2019. (T2) On 1 October 2018, Parent Ltd issued 5,000 10% debentures of $100 at nominal value. Son Ltd acquired 1,000 of these. Interest is paid half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities’ accounts. (T3) On 1 March 2019, Son Ltd sold equipment to Parent Ltd for $100,000. The equipment had an original cost of $150,000. At the time of sale, the carrying amount of the equipment was $80,000. Son Ltd had treated the asset as a depreciable non-current asset, being depreciated at 10% on cost, whereas Parent Ltd records the equipment as inventory. Parent Ltd sold this asset to Beanie Ltd on 15 June 2019 for $90,500.