Memorandum
To: Chief financial officer (CFO)
Cc: Other team members
From: Accountant name
Date: 6 Sept 2018
Subject: Investment decisions in Soletta ltd.
This memorandum has been prepared to analyze that why an organization should acquire other company and how the financial records are prepared in the company. In the memorandum, purpose of consolidated financial statement, meaning of group, subsidiary and parent company, intra transaction adjustment etc has been studied.
consolidated financial statements are the statement which collectively describe about the financial performance of an organization. The main purpose behind the preparation of consolidated financial statement is describe the overall performance to the stakeholders of the parent company. A parent company prepares the consolidated financial statement which includes the statement of subsidiary companies as well.
Group, parent and subsidiary companies are inter linked to each other. A group company owns the parent company and subsidiary companies. It is not important for a group company to have the operations in the industry. Further, a parent company is could be a part of Group Company which holds the control of interest in various subsidiary companies. The substantial interest in the subsidiary companies improves the profitability level of the business (Higgins, 2012). Lastly, those companies who are controlled and owned by the other companies are the subsidiary companies.
A group is eligible to hold various parent companies at the same time. The only condition with the group company is that the parent companies must operate as a single economic entity and it must also have common source of control over the interest and the profits.
Intra group transactions are recorded by the parent companies in their consolidated financial statement to reduce the impact of inter transaction among the companies. It contains only those transactions which have taken place in the business only (Haney, 2009). Operations and transaction with external parties are not collected.
Realization of inventory in the business occurs at the time when external entities are involved in the transaction, such as, at the time, when the inventory is sold to clients which are not the part of company.
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Acquisition Analysis |
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On the date of 1st July 2019 |
|
|
Share capital |
$ 650,000 |
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Ass: General Reserve |
$ 20,000 |
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Add: Retained earnings |
$ 250,000 |
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Add: Changes into equipment prices |
$ 50,000 |
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Less: Accumulated depreciation |
-$ 80,000 |
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Less: Liability |
-$ 40,000 |
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Total value |
$ 850,000 |
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Less: Purchase consideration |
$ 1,000,000 |
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Goodwill on acquisition |
$ 150,000 |
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General Journal Entries of Paldivia Ltd |
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On the date of 1st July 2019 |
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Date |
Particulars |
Debit |
Credit |
|
1/07/2019 |
Sundry Assets |
$ 50,000 |
|
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Business combination valuation reserve |
$ 30,000 |
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Accumulated depreciation |
$ 80,000 |
||
|
1/07/2019 |
Business combination valuation reserve |
$ 40,000 |
|
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Accumulated depreciation |
$ 40,000 |
||
|
1/07/2019 |
Deferred tax assets |
$ 3,000 |
|
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Profit and loss a/c |
$ 3,000 |
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1/07/2019 |
Goodwill on acqusiition |
$ 1,000,000 |
|
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Accumulated impairment loss |
$ 150,000 |
||
|
Business combination valuation reserve |
$ 850,000 |
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W.N. |
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Calculation of deferred tax assets |
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Total increment in the Assets |
$ 50,000 |
||
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Less: Increment in the liabilities |
-$ 40,000 |
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Net Assets |
$ 10,000 |
||
|
DTA (Tax rate @ 30%) |
$ 3,000 |
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a) |
Retained Earnings |
$ 163 |
|
|
$ 70 |
|||
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Cost of sales (6000*1/3)*20/120*70% |
$ 233 |
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b) |
Retained Earnings (1/1/14) |
$ 2,800 |
|
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Deferred tax assets (Difference *30% |
$ 1,200 |
||
|
Tractors (Differences) |
$ 4,000 |
||
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Accumulated depreciation |
$ 1,000 |
||
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Depreciation expenses |
$ 400 |
||
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Retained earnings |
$ 600 |
||
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(10% *4000 p.a. for 2.5 years) |
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Income tax expenses (Depreciation expenses *30%) |
$ 120 |
||
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Retained earnings (Retained earnings *30%) |
$ 180 |
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Deferred tax assets |
$ 300 |
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c) |
Retained Earnings (1/5/19) |
$ 140 |
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Income tax expenses |
$ 60 |
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Cost of sales |
$ 200 |
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d) |
Unearned Service revenue |
$ 3,000 |
|
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Accrued Service expenses |
$ 3,000 |
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e) |
Loan payable a/c |
$ 50,000 |
|
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Loan receivable a/c |
$ 50,000 |
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Interest revenue a/c |
$ 4,500 |
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Interest expenses a/c |
$ 4,500 |
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(50000*6%*1.5) |
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Arrears in interest revenue |
$ 1,500 |
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Arrears in interest expenses |
$ 1,500 |
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f) |
Dividend revenue a/c |
$ 1,500 |
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Interim dividend a/c |
$ 1,500 |
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g) |
Dividend payable |
$ 3,000 |
|
|
Final dividend declared |
$ 3,000 |
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Dividend revenue a/c |
$ 3,000 |
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Dividend receivable |
$ 3,000 |
References:
Haney, L. H. (2009). Business Organization and Combination. BiblioBazaar, LLC.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
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