Question (100 marks)

On 1 January 2021, Palm Ltd acquired 70% of the equity share capital of Silk Ltd. As    part of the consideration, Palm Ltd made an immediate cash payment of $2 per share. In addition, Palm Ltd will pay a further amount in cash on 31 December 2023 if Silk Ltd   achieves the profit before tax of $5 million by that day. The value of this contingent       consideration at the date of acquisition was estimated to be $3 million. However, at 31   December 2022, in the light of Silk Ltd’s financial performance, its value was

re-estimated at only $2.8 million. The contingent consideration has not been recorded in Palm Ltd’s book.

At the date of acquisition, share capital of Silk Ltd was $8 million and retained earnings were $4 million.

At the date of acquisition, shares in Silk Ltd had a listed market price of $2.1 each.

Below are the summarized draft financial statements of both companies.

Statements of Profit or Loss for the year ended 31 December 2022

Statements of Financial Position as at 31 December 2022

Additional Information:

(i)        At the date of acquisition, the fair values of Silk Ltd’s assets were equal to their carrying amounts with the exception of a leased property. This had a fair value of $3 million above its carrying amount and a remaining lease term of 10 years at that date. All depreciation is included in cost of sales.

(ii)       Palm Ltd transferred raw materials at their cost of $4 million to Silk Ltd in

September 2022. Silk Ltd processed all of these materials incurring additional direct costs of $1.2 million and sold them back to Palm Ltd in November 2022 for $8.5 million. At 31 December 2022, Palm Ltd had $3 million of these goods still in inventory.

(iii)      In 2021, Palm Ltd sold equipment with a carrying amount of $5.6 million to

Silk  Ltd  for  $6  million.  The  accumulated  depreciation  was  $1.4  million. Estimated useful life at date of original purchase was ten years and at the date of resale was eight years. Silk Ltd had recognized full year depreciation on the equipment in both 2021 and 2022.

(iv)      Palm Ltd had recorded its investment in Silk Ltd in its book for only the cost of

the immediate cash payment.

(v)       Palm Ltd’s policy was to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Silk Ltd’s share price at that date could be deemed  to  be  representative  of the  fair  value  of the  shares  held  by  the non-controlling interest.

(vi)      All items in the above statements of profit or loss are deemed to accrue evenly

over the year unless otherwise indicated.

(vii)     Tax rate was 20% and recognize tax effects where appropriate.

Required: (Allfigures should be rounded to nearest $’000.)

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.)                                                          (50 marks)

CJE1:    Eliminate Investment in Silk Ltd

CJE2a: Adjustment of depreciation on FV change of Silk Ltd’s asset CJE2b: Adjustment of tax effect of CJE2a

CJE3:    Eliminate intragroup transaction of Palm Ltd’s transfer of raw materials

to Silk Ltd

CJE4a: Adjustment of unrealized profit arising from Silk Ltd’s sale of goods to Palm Ltd

CJE4b: Adjustment of tax effect of CJE4a

CJE5a: Adjustment of unrealized profit arising from Palm Ltd’s sale of equipment to Silk Ltd

CJE5b: Adjustment of tax effect of CJE5a

CJE5c: Adjustment of depreciation arising from Palm Ltd’s sale of equipment to Silk Ltd

CJE5d: Adjustment of tax effect of CJE5c

CJE6: Adjustment of contingent consideration

CJE7: Allocation of post-acquisition retained earnings of Silk Ltd to NCI CJE8: Allocation of current year’s profit/loss of Silk Ltd to NCI