Question (100 marks)

Portsmouth Ltd is a manufacturer of sunglasses and Skyline Ltd is a manufacturer of      sunscreens.    In anticipation of high revenue growth rate of Skyline Ltd, on 1 January     2022, Portsmouth Ltd acquired 70% of the shares of Skyline Ltd by paying $33,800 cash to Skyline Ltd.    The fair value of the non-controlling interests was $13,600 on the         acquisition day.    The followings reflect the financial performance and financial position of both companies on 31 December 2022.

Additional Information:

1) The equity balance of Skyline Ltd on the acquisition day consisted of share capital of $25,000 and retained earnings of $5, 100.

2) The accountant of Portsmouth Ltd found that, on 1 January 2022, there was an

in-process research and development project undertaken by the Skyline Ltd and the  cost incurred under this project was $9,000.    This amount was recognized as an      expense in the financial statement of Skyline Ltd.    However, the accountant judged that this project had met the definition of an intangible asset.    The remaining useful life of this intangible asset was 10 years from the acquisition day.

3) On the acquisition day, Portsmouth Ltd asked a professional to revalue the net assets of Skyline Ltd.    It was found that the fair value of the net assets was equal to

their book value EXCEPT that there should be a fair value increase of the factory        building by $13,000 and an impairment loss of the accounts receivable by $500.    The remaining useful life of this factory building was 20 years from the acquisition day.

4) Three months before the acquisition, several workers of Skyline Ltd were injured       owing to the unsafe working condition in one of the production lines.    Accordingly,  these workers took legal action against the company for claiming damages.    As of    31 December 2021, the verdict for this legal case was still pending and the company’s experienced lawyer opined that the outcome is not probable based on the following    estimations:

Therefore, on 31 December 2021, the above event was disclosed as a contingent liability in the notes to financial statements of Skyline Ltd.

5) The accounting policy of Portsmouth Ltd requires that the measurement of NCI on acquisition day should be based on fair value approach.

6) Tax rate is 20%.

Required: (Allfigures should be rounded to zero decimalplace.)

1.   Based on the relevant International Financial Reporting Standard, prepare the following consolidation journal entries for the year ended 31 December 2022. (Narratives are not required.)       (21 marks)

CJE1: Eliminate Investment in Skyline Ltd

CJE2: Adjustment of depreciation and amortization on FV change of S Ltd’s asset CJE3: Adjustment of tax effect of CJE2

CJE4: Elimination of dividends income and declared between P Ltd and S Ltd CJE5: Allocate post-acquisition profits of Skyline Ltd to NCI

2.   Prepare the Consolidated Financial Statements of Portsmouth Ltd

as at 31 December 2022.    (Use Worksheet Approach)                    (59 marks)