Fish Ltd acquired an 80 per cent interest in Chips Ltd on 1 July 2003 for a cash consideration of $838,000. At that date the fair value of the net assets of Chips Ltd was represented by:

On 30 June 2005 Fish Ltd sold all its shares in Chips Ltd for $950,000. At this date the fair value of the net assets of Chips Ltd was represented by:

The retained earnings of $490,000 includes operating profit after tax of $90,000 from the current period. Impairment of goodwill was assessed at $6,000, the impairment having been incurred evenly across the last two years. The investment has not been marked to market during the period that the shares were held. What is the elimination entry required for the consolidated accounts?
E) None of the given answers.

Question

Fish Ltd acquired an 80 per cent interest in Chips Ltd on 1 July 2003 for a cash consideration of $838,000. At that date the fair value of the net assets of Chips Ltd was represented by:

On 30 June 2005 Fish Ltd sold all its shares in Chips Ltd for $950,000. At this date the fair value of the net assets of Chips Ltd was represented by:

The retained earnings of $490,000 includes operating profit after tax of $90,000 from the current period. Impairment of goodwill was assessed at $6,000, the impairment having been incurred evenly across the last two years. The investment has not been marked to market during the period that the shares were held. What is the elimination entry required for the consolidated accounts?
E) None of the given answers.

Quizplus · Accepted Answer

The elimination entry required for the consolidated accounts is as follows:

Goodwill on acquisition of Chips Ltd = 1,300,000 - 938,000 = 362,000 
Fish Ltd's share of goodwill = 80% x 362,000 = 289,600

Elimination entry: 
DR Investment in Chips Ltd 838,000 
DR Goodwill 289,600 
DR Dividend received from Chips Ltd (20% x $100,000) 20,000 
CR Share capital in Chips Ltd 600,000 
CR Retained earnings in Chips Ltd 547,000 
CR Impairment loss on goodwill 6,000 
CR Gain on disposal of Chips Ltd* 111,400

*Gain on disposal of Chips Ltd = Proceeds from sale - Carrying amount of investment 
Carrying amount of investment = 938,000 - 6,000 - 90,000 - 20,000 = 822,000 
Proceeds from sale = 950,000 
Gain on disposal of Chips Ltd = 950,000 - 822,000 = 128,000 
Fish Ltd's share of gain on disposal of Chips Ltd = 80% x 128,000 = 102,400

Therefore, the correct answer is B, as it represents the elimination entry required for the consolidated accounts.

Fish Ltd Acquired an 80 Per Cent Interest in Chips