Please note the following:
1) All workings, where appropriate, must be shown to substantiate your answers.
2) Solutions should be rounded to the nearest dollar.
3) To assist the marker, narrations should be provided along with your journal entries.
Question 1: Part A On the 1 July 2013, Dog Ltd acquired 100% of the share capital of House Ltd (cum div) for $800,000. House Ltd's balance sheet on acquisition date included:
| |
$ |
| Share capital |
450,000 |
| Retained earnings |
200,000 |
| General reserve |
100,000 |
| Dividend payable |
15,000 |
At acquisition date, all of House Ltd's net assets were recorded at fair value except for:
| |
Carrying Amount$ |
Fair Value$ |
| Inventory |
35,000 |
40,000 |
| Land |
68,000 |
75,000 |
| Buildings (Cost $96,000) |
67,200 |
78,000 |
| Contingent liability |
- |
8,000 |
Additional Information:
a) The dividend payable at acquisition date was subsequently paid during July 2013.
b) The revalued land was sold during the year ended 30 June 2017 for $42,000.
c) The revalued inventory was sold during the year ended 30 June 2014.
d) The contingent liability identified on the acquisition of House Ltd still existed at 30 June 2017.
e) The revalued buildings were still held at 30 June 2017 being depreciated on the straight line basis at 10% p.a.
f) Since acquisition, goodwill has been impaired by $2,500. $1,500 of this impairment occurred during the year ended 30 June 2017.
g) Of the management fee revenues earned by Dog Ltd during the year ended 30 June 2017, $15,000 was collected from House Ltd.
h) House Ltd's inventory balance at 1 July 2016 included an item previously purchased from Dog Ltd. This inventory had been sold by Dog Ltd to House Ltd at a gain of $3,400.
i) During the year ended 30 June 2017, House Ltd sold a quantity of inventory to Dog Ltd for $17,000. This inventory had originally cost House Ltd $12,000 with 75% of this inventory still being held by Dog Ltd at 30 June 2017.
j) All dividends paid/declared by Dog Ltd during the year ended 30 June 2017 was from post-acquisition profits.
k) Financial statements for the year ended 30 June 2017 are reproduced below:
| |
Dog Ltd$ |
House Ltd$ |
|
| |
| Sales |
5,120,000 |
2,640,000 |
|
| Cost of goods sold |
(4,070,000) |
(2,210,000) |
|
| Gross profit |
1,050,000 |
430,000 |
|
| Dividend revenue |
120,000 |
- |
|
| Interest revenue |
- |
14,000 |
|
| Management fees revenue |
25,000 |
- |
|
| Other income |
30,000 |
- |
|
| Depreciation expense |
(180,000) |
(86,000) |
|
| Finance costs |
(91,000) |
(35,000) |
|
| Other expenses |
(284,000) |
(33,000) |
|
| Profit before income tax |
670,000 |
290,000 |
|
| Income tax expense |
(201,000) |
(87,000) |
|
| Profit after tax |
469,000 |
203,000 |
|
| Retained earnings at (1/7/16) |
690,000 |
320,000 |
|
| Interim dividend paid |
(70,000) |
(45,000) |
|
| Final dividend declared |
(140,000) |
(75,000) |
|
| Retained earnings at (30/6/17) |
949,000 |
403,000 |
|
| Share capital |
800,000 |
450,000 |
|
| General reserve |
210,000 |
100,000 |
|
| Total equity |
1,959,000 |
953,000 |
|
| Trade and other payables |
413,000 |
137,000 |
|
| Dividend payable |
140,000 |
75,000 |
|
| Loan from House Ltd (7% per year, interest payable 31 December) |
200,000 |
- |
|
| Mortgage loan |
1,453,000 |
401,000 |
|
| Deferred tax liabilities |
90,000 |
- |
|
| Total liabilities |
2,296,000 |
613,000 |
|
| Total liabilities and equity |
4,255,000 |
1,566,000 |
|
| Cash |
158,000 |
115,000 |
|
| Trade and other receivables |
72,000 |
35,000 |
|
| Dividends receivable |
75,000 |
- |
|
| Inventory |
710,000 |
440,000 |
|
| Land |
720,000 |
250,000 |
|
| Buildings |
1,500,000 |
780,000 |
|
| Accumulated depreciation buildings |
(320,000) |
(494,000) |
|
| Plant and equipment |
790,000 |
450,000 |
|
| Accumulated depreciation plant and equipment |
(235,000) |
(210,000) |
|
| Investment in House Ltd |
785,000 |
- |
|
| Loan to Dog Ltd (7% per year, interest payable 31 December) |
- |
200,000 |
|
| Total Assets |
4,255,000 |
1,566,000 |
|
Required:
- Determine the gain on bargain purchase or goodwill as at acquisition date.
- Prepare the consolidation journal entries for Dog Ltd immediately after acquisition on 1 July 2013.
- Prepare the consolidation journal entries for Dog Ltd as at 30 June 2017.
- Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Dog Ltd as at 30 June 2017.
(Source: adapted from Arthur, N., Luff, L., Keet, P. Accounting for corporate combinations and associations (7e), Pearson Education, Australia.)
Part B :
Blue Ltd sold inventory during the current period to its wholly owned subsidiary, Sky Ltd, for $15,000. These items previously cost Blue Ltd $12,000. Sky Ltd subsequently sold half the items to Michael Ltd for $8,000. The tax rate is 30%.
The group accountant for Blue Ltd, Mack Tyson, maintains that the appropriate consolidation adjustment entries are as follows:
| Account |
Dr
$ |
Cr
$ |
| Sales |
15,000 |
|
| Cost of sales |
|
13,000 |
| Inventory |
|
2,000 |
| Deferred tax asset |
300 |
|
| Income tax expense |
|
300 |
Required:
- Discuss whether the entries suggested by Mack Tyson are correct, explaining on a line-by-line basis the correct adjustment entries.
- Determine the consolidation journal entries in the following year, assuming the inventory is sold to an external party, and explain the adjustments on a line-by-line basis.
(Source: adapted from Picker, R., Leo, K., Loftus, J., Wise, V. Clark, K., & Alfredson, K. (2013). Applying International financial reporting standards. (3rd edition) Brisbane: John Wiley & Sons.)
Question 2:
Part A On 1 January 2013, Cap Ltd acquired 65% of the share capital of Stone Ltd for $3,600,000. At acquisition date, Stone Ltd's balance sheet included:
| $ |
| Share capital |
5,000,000 |
| Retained profits |
350,000 |
| General reserve |
50,000 |
At acquisition date, all of Stone Ltd's net assets were recorded at fair value except for:
| |
Carrying Amount |
Fair Value |
| Equipment (cost $67,000) |
$50,000 |
$58,000 |
Additional information: a) Cap Ltd adopts the partial goodwill method.
b) The revalued equipment was still held at 30 June 2017, being depreciated on the straight-line basis over 5 years.
c) On 1 January 2016, Stone Ltd sold an item of equipment to Cap Ltd, recognising a gain of $22,000 on the sale. This equipment was still held at 30 June 2017 and at the time of the sale it was estimated that it would have a further useful life of 10 years.
d) During the year ended 30 June 2017, Stone Ltd sold a quantity of inventory to Cap Ltd for $28,000. Stone Ltd received a gain of $8,500 on the sale and Cap Ltd still held 50% of this inventory at 30 June 2017.
e) During the year ended 30 June 2017, Cap Ltd sold an item of plant to Stone Ltd at a gain of $80,000. This machinery was held as inventory in the books of Stone Ltd at 30 June 2017.