Consolidation: Principles and accounting requirements; intra-group transactions and non-controlling interests
On 1 July 2014, Bosco Ltd purchased 80% of the issued shares of Circus Ltd for $890,000. At the date of acquisition, the equity of Circus Ltd consisted of share capital and retained earnings of $500,000 and $425,000 respectively. At the date of acquisition, all assets of Circus Ltd were recorded at fair value, except for inventory, that had a fair value which was $10,000 higher than its carrying amount. All of this inventory was on-sold to external parties by 30 June 2015.
As at 30 June 2016, the following financial statements have been extracted from the financial records of Bosco Ltd and Circus Ltd:
|
Bosco Ltd |
|
Circus Ltd |
|
$ |
|
$ |
| Sales revenue |
2,035,000 |
|
1,250,000 |
| Cost of goods sold |
(1,280,000)
|
|
(595,000) |
| Gross profit |
755,000 |
|
655,000 |
| Dividend revenue - from Circus Ltd |
186,000 |
|
- |
| Interest revenue |
9,000 |
|
- |
| Profit on sale of plant |
87,500 |
|
- |
| Expenses |
|
|
|
| Administrative expenses |
(86,000) |
|
(39,000) |
| Depreciation |
(61,250) |
|
(30,000) |
| Interest expense |
- |
|
(9,000) |
| Other expenses |
(262,750)
|
|
(132,500) |
| Profit before tax |
627,500 |
|
444,500 |
| Tax expense |
(182,250) |
|
(133,350) |
| Profit after tax |
445,250 |
|
311,150 |
| Retained earnings 1 July 2015 |
798,750 |
|
598,350 |
|
1,244,000 |
|
909,500 |
| Dividends paid |
(350,000) |
|
(232,500) |
| Retained earnings 30 June 2016 |
894,000 |
|
677,000 |
|
|
|
|
| Equity |
|
|
|
| Retained earnings |
894,000 |
|
677,000 |
| Share capital |
1,025,000 |
|
500,000 |
| Current liabilities |
|
|
|
| Accounts payable |
142,000 |
|
110,000 |
| Tax payable |
153,000 |
|
113,000 |
| Non-current liabilities |
|
|
|
| Loan from Bosco Ltd |
- |
|
300,000 |
|
2,214,000 |
|
1,700,000 |
|
|
|
|
| Current assets |
|
|
|
| Cash |
110,000 |
|
228,000 |
| Accounts receivable |
94,000 |
|
275,000 |
| Inventory |
120,000 |
|
300,000 |
| Non-current assets |
|
|
|
| Land and buildings |
370,000 |
|
621,000 |
| Plant - at cost |
558,000 |
|
620,000 |
| Less: accumulated depreciation |
(228,000) |
|
(344,000) |
| Loan to Circus Ltd |
300,000 |
|
- |
| Investment in Circus Ltd |
890,000 |
|
-
|
|
2,214,000 |
|
1,700,000 |
The following additional information is provided for the year ended 30 June 2016:
(a) Bosco Ltd uses the partial goodwill method when accounting for non-controlling interests.
(b) During the year ended 30 June 2016, Bosco Ltd made inventory sales to Circus Ltd of $143,000, while Circus Ltd made inventory sales to Bosco Ltd of $120,000.
(c) By 30 June 2016, all of the inventory sold by Bosco Ltd to Circus Ltd during the year had been on-sold to external parties.
(d) The closing inventory of Bosco Ltd at 30 June 2016 includes inventory acquired from Circus Ltd at a cost of $84,000. This had cost Circus Ltd $70,000 to produce.
(e) The directors believe that the goodwill acquired was impaired by $5,000 in the current financial year.
(f) On 1 July 2015, Bosco Ltd sold an item of plant to Circus Ltd for $190,000, when its carrying amount in Bosco Ltd's financial statements was $102,500 (cost $237,500 less accumulated depreciation of $135,000). This plant was assessed as having a remaining useful life of six years, with no residual value.
(g) On 1 January 2016, Bosco Ltd loaned Circus Ltd $300,000. Interest on the loan for the year ended 30 June 2016 amounted to $9,000, and was paid by Circus Ltd on 30 June 2016.
(h) The tax rate is 30%.
Required:
A. With reference to the relevant accounting standards, explain why the relationship between Bosco Ltd and Circus Ltd is a parent-subsidiary relationship and not an associate relationship, even though Bosco Ltd does not own 100% of the shares in Circus Ltd.
B. Prepare the acquisition analysis and consolidation journal entries (including NCI entries) necessary for the preparation of consolidated financial statements for Bosco Ltd and its subsidiary, Circus Ltd, for the financial year ended 30 June 2016.
C. Prepare the acquisition analysis assuming that Bosco Ltd uses the full goodwill method when accounting for non-controlling interests. Assume that the fair value of the non-controlling interest at 1 July 2014 was $200,000.