At 30 March 2020 Ananas Ltd bought all the shares in Pineapple Ltd. At 30 April 2020, Pineapple Ltd issued bonus shares of $60,000 from pre-acquisition retained earnings. What consolidation adjustment entry will be required at 30 June 2020?
Question
At 30 March 2020 Ananas Ltd bought all the shares in Pineapple Ltd. At 30 April 2020, Pineapple Ltd issued bonus shares of $60,000 from pre-acquisition retained earnings. What consolidation adjustment entry will be required at 30 June 2020?
Solution
The consolidation adjustment entry required at 30 June 2020 would be to debit (decrease) the 'Shares in Subsidiary' account in Ananas Ltd's books and credit (decrease) the 'Retained Earnings' account in Pineapple Ltd's books by $60,000.
Here are the steps to understand this:
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Bonus Shares: When a company issues bonus shares, it capitalizes its retained earnings or reserves and increases its share capital. In this case, Pineapple Ltd issued bonus shares of $60,000 from pre-acquisition retained earnings.
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Pre-Acquisition Retained Earnings: These are the retained earnings of Pineapple Ltd before it was acquired by Ananas Ltd. When Pineapple Ltd issued bonus shares from pre-acquisition retained earnings, it effectively distributed a portion of its pre-acquisition profits to its shareholders.
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Consolidation Adjustment Entry: When preparing consolidated financial statements, Ananas Ltd needs to eliminate the investment in Pineapple Ltd ('Shares in Subsidiary') against Pineapple Ltd's equity (including 'Retained Earnings'). Since Pineapple Ltd issued bonus shares from pre-acquisition retained earnings, the 'Shares in Subsidiary' account in Ananas Ltd's books and the 'Retained Earnings' account in Pineapple Ltd's books both need to be decreased by the amount of the bonus shares.
Therefore, the consolidation adjustment entry required at 30 June 2020 is to debit 'Shares in Subsidiary' and credit 'Retained Earnings' by $60,000.
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