Hammer Ltd acquired all the issued capital of Nail Ltd on 1 July 2005 for cash consideration of $1.5 million. The fair value of the net assets of Nail Ltd at that date was $1.2 million as follows:

During the period ended 30 June 2006, Nail Ltd declared a dividend of $200,000 that is identified as being paid out of pre-acquisition profits and a further $100,000 is declared at the end of the period that is out of post-acquisition profits. Goodwill had been determined to have been impaired by $15,000 during the period. What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2006?
E) None of the given answers.

Question

Hammer Ltd acquired all the issued capital of Nail Ltd on 1 July 2005 for cash consideration of $1.5 million. The fair value of the net assets of Nail Ltd at that date was $1.2 million as follows:

During the period ended 30 June 2006, Nail Ltd declared a dividend of $200,000 that is identified as being paid out of pre-acquisition profits and a further $100,000 is declared at the end of the period that is out of post-acquisition profits. Goodwill had been determined to have been impaired by $15,000 during the period. What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2006?
E) None of the given answers.

Quizplus · Accepted Answer

The consolidation journal entries required to prepare group accounts for the period ended 30 June 2006 are as follows:

1. To eliminate the investment in Nail Ltd: 
Dr Investment in Nail Ltd $1,500,000
Cr Cash $1,500,000

2. To recognize the fair value adjustments to the assets and liabilities of Nail Ltd: 
Dr Property, plant and equipment $50,000
Cr Revaluation reserve $50,000
(To reflect the increase in the value of Nail Ltd's property, plant and equipment)

3. To eliminate the pre-acquisition dividend: 
Dr Retained earnings ($200,000 - $15,000) $185,000
Cr Dividend income $200,000

4. To recognize the post-acquisition dividend: 
Dr Dividend receivable $100,000
Cr Dividend income $100,000

Therefore, option B is the correct answer.

Hammer Ltd Acquired All the Issued Capital of Nail Ltd