Green Ltd purchased 90 per cent of the issued capital and in the process gained control over Maroon Ltd on 1 July 2005. The fair value of the net assets of Maroon Ltd at purchase was represented by:

Green Ltd paid cash consideration of $3,700,000 for Maroon Ltd. During the period ended 30 June 2007, Maroon Ltd paid management fees of $100,000 to Green Ltd and Maroon had an operating profit of $405,000. Maroon Ltd declared a dividend of $98,000 during the period. Green purchased inventory from Maroon during the period ended 30 June 2007 for $100,000. The inventory cost Maroon Ltd $85,000 and at the end of the period Green had 35 per cent of that inventory still on hand. Maroon's opening retained earnings for the period ended 30 June 2007 was $810,000. Goodwill has been determined to have been impaired by $13,600. Companies in the group use perpetual inventory systems and accrue dividends when they are declared by subsidiaries. There were no other inter-company transactions. Ignore tax implications.
For the period ended 30 June 2007, what consolidation journal entries are required and what is the outside equity interest?
E) None of the given answers.

Question

Green Ltd purchased 90 per cent of the issued capital and in the process gained control over Maroon Ltd on 1 July 2005. The fair value of the net assets of Maroon Ltd at purchase was represented by:

Green Ltd paid cash consideration of $3,700,000 for Maroon Ltd. During the period ended 30 June 2007, Maroon Ltd paid management fees of $100,000 to Green Ltd and Maroon had an operating profit of $405,000. Maroon Ltd declared a dividend of $98,000 during the period. Green purchased inventory from Maroon during the period ended 30 June 2007 for $100,000. The inventory cost Maroon Ltd $85,000 and at the end of the period Green had 35 per cent of that inventory still on hand. Maroon's opening retained earnings for the period ended 30 June 2007 was $810,000. Goodwill has been determined to have been impaired by $13,600. Companies in the group use perpetual inventory systems and accrue dividends when they are declared by subsidiaries. There were no other inter-company transactions. Ignore tax implications.
For the period ended 30 June 2007, what consolidation journal entries are required and what is the outside equity interest?
E) None of the given answers.

Quizplus · Accepted Answer

The consolidation journal entries required for the period ended 30 June 2007 are as follows:

1. To eliminate Maroon Ltd's opening retained earnings: 
Dr. Retained earnings - Maroon Ltd $810,000 
Cr. Retained earnings - Green Ltd $729,000 
Cr. Goodwill impaired $81,000

(Here, the opening retained earnings of Maroon Ltd have to be eliminated as at the date of acquisition as they relate to the period before Green Ltd gained control.)

2. To eliminate management fees: 
Dr. Management fees receivable $100,000 
Cr. Management fees revenue $100,000

(Here, the fees paid by Maroon Ltd to Green Ltd have to be eliminated as they are intra-group transactions and do not reflect an economic transaction with an external party.)

3. To eliminate inter-group sale of inventory: 
Dr. Inventory $29,750 
Cr. Cost of sales $29,750

(Here, the profit of $15,000 made by Maroon Ltd has to be eliminated, as it is unrealized profit and only represents profit made as a result of transactions with Green Ltd within the group.)

4. To adjust for Maroon Ltd's dividend: 
Dr. Dividends receivable $89,100 
Cr. Dividends revenue $89,100

(Here, the dividends paid by Maroon Ltd have to be adjusted as they are intra-group transactions and do not represent cash inflows/outflows from external parties.)

Therefore, the outside equity interest will be 10% (100% - 90%) of Maroon Ltd's capital and reserves.

Green Ltd Purchased 90 Per Cent of the Issued Capital