Part A
On 1 July 2011, Sebastopol Ltd acquired 100 percent of the share capital and reserves of Ross Creek Ltd for $200 000. On the date of acquisition, all assets of Ross Creek Ltd were recorded at fair values except Land which had a fair value of $80 000..
The shareholder's equity data for Ross Creek Ltd on 1 July 2011 was as follows:
Share Capital 150 000
General Reserve 30 000
Retained Earnings 5 000
In addition Ross Creek Ltd had recorded a contingent liability of $5 000 in the notes to the financial statements at 30 June 2011. This related to a possible damages claim against the company.
The financial data for Sebastopol Ltd Ltd and Ross Creek Ltd at consolidation date, 30 June 2012 (one year after acquisition), is as follows:
Sebastopol
Ross Creek
$ mce_markernbsp;
INCOME STATEMENT
Sales revenue 340 000 140 000
Cost of goods sold 195 000 63 000
Gross profit
Depreciation Expense
Interest Expense
Management Fee Expense
Impairment Loss Investment in Subsidiary
Other Expenses 145 000
32 000
9 000
10 000
36 000
77 000
23 000
1 000
70000
34 000
Total expenses 87 000 65 000
Trading profit 58 000
12000
Dividend Revenue
Management Fee Revenue
Interest Revenue
Other Revenue
Total Other revenue 15 000
7 000
3 000
25 000
3 000
3 000
Net profit before tax 83 000 15 000
Income tax expense 28 000 5 000
Net profit after tax 55 000 10 000
Retained earnings (1/7/2011) 35 000 5 000
Available for appropriation 90 000 15 000
- Dividend paid 10 000 12 000
- Final dividend declared 30 000 3 000
Total appropriations 40 000 15 000
Retained earnings (30/6/2012) 50 000 -
STATEMENT OF FINANCIAL POSITION
Credit balances
Share capital 400 000 150 000
General reserve 20 000 30 000
Retained Earnings 50 000 -
Accounts Payable 40 000 20 000
Other Liabilities 16 000 15 000
Dividend payable 30 000 3 000
Unsecured Notes 12% 50 000 -
Total Credits 606 000 218 000
Debit balances
Accounts receivable 70 000 16 000
Inventory 25 000 15 000
Shares in Ross Creek Ltd 200 000 -
Accum Impairment Loss Investment in Ross Creek (10,000) -
Land - 60 000
Plant & equipment 220 000 125 000
Accum Deprec Plant and Equip (64 000) (23 000)
Motor Vehicles
Accum Deprec Motor Vehicles
Dividend receivable
Unsecured Notes Sebastopol 190 000
(28 000)
3 000 -
-
-
25 000
Total Debits 606 000 218 000
Additional information:
(1) Ross Creek Lts holds one-half of the unsecured notes issued by Sebastopol Ltd. Interest at the rate of 12% per annum, has been paid on these notes during the year
(2) On 25 January 2012 Ross Creek Ltd paid an interim dividend of $2000
(3) During the year ended 30 June 2012 Ross Creek Ltd paid management fees of $7000 to Sebastopol Ltd
(4) During the year ended 30 June 2012 Sebastopol Ltd had sold inventory to Ross Creek Ltd for $30000. All of this inventory had been sold by Ross Creek Ltd to parties external to the group during the year. This intragroup sale was made on credit terms and $10000 remains owing to Sebastopol Ltd at 30 June 2012
(5) Goodwill on acquisition:
For the year ended 30 June 2012, the directors advise that goodwill should be written off completely.
6) On 1 January 2012 Sebastopol Ltd sold Plant and Equipment which had cost $20000 on 1 July 2010 to Ross Creek Ltd for $15000, recording a profit of $3000 before tax. Both companies apply a 20% per annum straight line method of depreciation for these assets. There is no change to the estimated useful life of the asset
7) On 3 August 2011 Ross Creek Ltd declared and paid a dividend of $10000 from profits earned prior to its acquisition by Sebastopol Ltd. The directors consider that the value of the investment in Ross Creek Ltd has been impaired and have adjusted the parent company accounts to reflect this impairment
8) Ross Creek Ltd declared a final dividend of $3000 on 20 June 2012. Sebastopol Ltd has recognised this dividend as a receivable at 30 June 2012
9) The tax rate for all companies is 30%.
REQUIRED:
a Prepare an acquisition analysis
b Prepare the consolidation journal entries for consolidating the accounts of Sebastopol Ltd and Ross Creek Ltd for the year ended 30 June 2012.
c Prepare the consolidation worksheet
d Prepare the consolidated financial statements for the year ended 30 June 2012
PART B
Discuss the recent changes in the treatment of dividends paid by a subsidiary from profits earned prior to acquisition by the parent company
Key assignment details and assessment criteria:
1. Group assignment with no more than two students in each group
2. Submission due date: Week 10
Assessment Criteria
The criteria used to assess the submitted assignment will be:
• Ability to work collegially in a group environment for shared success.
• Accurate presentation of journals, worksheets and financial statements as required in the assignment
• The structure, coherence and logic of arguments and analysis presented.
• Demonstrated understanding of the subject matter that is the focus of the assignment topic.