Part A (25 marks)
On 1 July 2014, Brad Ltd had acquired all of the share capital of Pitt Ltd for $165,000.At that date, the equity of Pitt Ltd included:
Pitt LtdShare capital / $120,000
Retained earnings / 10,000
Share capital / 10,000
At date of acquisition all the identifiable assets and liabilities of Pitt Ltd were recorded at fair value except for:
Carrying Amount / Fair valuePlant and equipment (cost $80,000) / $60,000 / $64,000
Land / 90,000 / 105,000
Motor vehicle (cost $28,000) / 22,000 / 25,000
Financial information for Brad Ltd and its subsidiary Pitt Ltd for the year ended 30 June 2017 is shown below:
Brad Ltd / Pitt LtdSales revenue / $340,000 / $262,000
Proceeds from sale of vehicle / - / 20,000
Proceeds from sale of equipment / - / 42,000
Rental income / 65,000 / -
Dividend revenue / 6,500 / -
Total revenue / 411,500 / 324,000
Cost of sales / 160,000 / 120,000
Other expenses / 115,000 / 95,000
Carrying amount of vehicle sold / - / 16,000
Carrying amount of equipment sold / - / 49,000
Total expenses / 275,000 / 280,000
Profit before tax / 136,500 / 44,000
Income tax expense / 32,000 / 7,900
Profit after tax / 104,500 / 36,100
Retained earnings 1 July 2016 / 31,500 / 74,500
Total available for appropriation / 136,000 / 110,600
Less: Interim dividend paid / 9,000 / 4,500
Less: Final dividend declared / 8,000 / 2,000
Retained earnings 30 June 2017 / 119,000 / 104,100
Brad Ltd / Pitt Ltd
Assets:
Deferred tax asset / $4,600 / $2,290
Receivables / 65,000 / 13,100
Inventory / 73,500 / 8,200
Land / 366,000 / 140,000
Plant and equipment / 245,000 / 185,000
Less:accumulated depreciation (Equipment) / (56,000) / (54,000)
Motor vehicles / 70,000 / 69,000
Less: accumulated depreciation (Motor vehicle) / (20,000) / (14,000)
Investment in Pitt Ltd / 165,000 / -
Total assets / 913,100 / 349,590
Liabilities:
Dividends payable / 9,000 / 2,000
Provisions / 5,700 / 8,790
Current tax liability / 28,000 / 4,200
Deferred tax liability / 6,400 / 1,500
Other liabilities / 389,000 / 94,000
Total liabilities / 438,100 / 110,490
Net assets / 475,000 / 239,100
Equity:
Share capital / 300,000 / 120,000
General reserve / 56,000 / 15,000
Retained earnings 30 June 2017 / 119,000 / 104,100
Total equity / 475,000 / 239,100
Additional information:
(a) The Plant and equipment revalued on consolidation had a further 4 year life.
(b) The motor vehicle that was revalued on consolidation was sold to an external party on 1 January 2016 for $20,000.
(c) Goodwill arose on consolidation and was tested annually for impairment. Goodwill was impaired by $2,000 during the year ended 30 June 2016, and by a further $1,500 during the year ended 30 June 2017.
(d) In January 2017, Pitt Ltd paid a $4,500 interim dividend.
(e) During June 2017, Pitt Ltd declared a $2,000 dividend. The dividend was paid in August 2017.
(f) All dividends declared by Pitt Ltd have been from post-acquisition profits. Shareholder approval is not required in relation to dividends.
(g) Brad Ltd has spare office space which it rents out to other businesses.During this year part of this space was rented out to Pitt Ltd for $12,000.
(h) Included in Pitt’s inventory on 1 July 2016, was an amount of inventory worth $3,000, which had been transferred from Brad Ltd in the previous financial year. This inventory originally cost Brad Ltd $2,100.
(i) On 1 January 2017 Pitt Ltd sold inventory to Brad Ltd for $12,000, which was sold at cost plus 25%. Brad Ltd decided to use this as equipment with a useful life of 4 years.
(j) On 1 July 2016, Pitt Ltd sold some equipment to Brad Ltd for $42,000. This item had a carrying amount at time of sale to Brad Ltd of $49,000. Both entities use a 8% per year on cost depreciation rate for this item.
(k) The tax rate is 30%.
Required:
1. Prepare an acquisition analysis at the date of acquisition. (2 marks)
2. Prepare the consolidation journal entries for Brad Ltd at 1 July 2014, immediately after acquisition. (6 marks)
3. Prepare the consolidation journal entries for Brad Ltd as at 30 June 2017. (17 marks)
(Source: adapted from Leo, K. J., Sweeting, J., Knapp, J. & McGowan, S. (2014). Company Accounting, (10th ed.). John Wiley & Sons.)
Part B (10 marks – maximum 550 words)
A Ltd is a Japanese entity that has successfully developed a scarce raw material called 'Aquatan'. It is an essential input for B Ltd and C Ltd's manufacturing processes and both of these companies are customers of A Ltd.
Below are the details of A Ltd's shareholders and directors:
Name of shareholders / % of ordinary voting shares owned / Number of positions held on A Ltd board of directorsB Ltd / 30% / 4
C Ltd / 22% / 2
D Ltd / 25% / 2
The remaining shares of A Ltd are widely held by several independent unrelated individuals. B Ltd is not related to C Ltd or D Ltd, however C Ltd is a wholly owned subsidiary of D Ltd. The other three (3) of the eleven (11) seats on A Ltd's board of directors are held by independent directors.
Required:
On the basis of the above information and the requirements of relevant accounting standard(s), advise whether A Ltd is a subsidiary of B Ltd.
(Source: adapted from Arthur, N., Luff, L., Keet, P., Egan, M., Howieson, B., Ram,. R. (2016). Accounting for corporate combinations and associations (8e), Pearson Education, Australia.)
Marking Guide / Max. marks awardedPart A:
1)
Acquisition analysis with workings / 2
2)
Consolidation journal entries immediately after acquisition date / 6
3)
Consolidation journal entries as at 30 June 2017 / 17
Part B:
Uses information from question in justifying response / 4
Provides the correct response to whether A Ltd is a subsidiary of B Ltd / 2
References to accounting standard(s) / 3
APA Referencing provided / 1
Total / 35
Question 4
On 1 July 2014, White Ltd acquired 75% of the shares in Black Ltd for $190,000.At this date, the equity in Black Ltd comprised:
Share capital / $160,000General reserve / 30,000
Retained earnings / 50,000
All the assets and liabilities in Black Ltd were recorded at fair value, except for inventory, which had a carrying amount of $15,000 and a fair value of $20,000. The inventory had all been sold by 30 June 2015.
Additional information relevant for the period 1 July 2014 - 30 June 2016:
(a) White Ltd uses the partial goodwill method.
(b) Profits earned by the subsidiary during the year ended 30 June 2015 was $12,800 and 30 June 2016 was $14,000.
(c) From 1 July 2014 to 30 June 2016, there had been no movements in Share capital, General reserve and no dividends paid or declared in Black Ltd.
(d) During the year ended 30 June 2016, Black Ltd sold inventory to White Ltd for $48,000. At 30 June 2016, White Ltd still had some of this inventory on hand. This inventory had been sold to it by Black Ltd at a before-tax profit of $4,000.
Additional information relevant for the period 1 July 2016 - 30 June 2017:
(a) The inventory sold to White Ltd by Black Ltd for a before-tax profit of $4,000 in the previous period was sold to external entities during the year ended 30 June 2017.
(b) On 1 January 2017, Black Ltd sold plant to White Ltd for a before-tax profit of $1,200. This plant was carried at $3,000 in the records of Black Ltd at time of sale. Depreciation on this type of plant is calculated using a 20% per year straight-line method.
(c) On 1 February 2017, White Ltd sold an item of plant to Black Ltd. While White Ltd classified this as plant, Black Ltd classified it as inventory. The sales price was $10,000 which included a profit to White Ltd of $1,500. Black Ltd sold this to another entity on 31 March 2017 for $12,000.
(d) On 30 June 2017 White Ltd made an interest free loan of $20,000 to Black Ltd which is not repayable until 30 June 2022.
(e) White Ltd recognises dividends receivable from its subsidiary when the dividends are declared.
Required:
1. Prepare an acquisition analysis at 1 July 2014 using the partial goodwill method. (3 marks)
2. Prepare consolidation journal entries as at 1 July 2014. (3 marks)
3. Prepare consolidation journal entries for the year ended 30 June 2015. (4 marks)
4. Prepare consolidation journal entries for the year ended 30 June 2016. (4 marks)
5. Prepare consolidation journal entries for the year ended 30 June 2017. (13 marks)
Note: Your consolidaiton journal entries for Required 5. should be provided in the following format:
(a) Business combination valuation entries at 30 June 2017 (if applicable)
(b) Pre-acquisition entries at 30 June 2017
(c) NCI share of equity at 1 July 2014
(d) NCI share of equity changes from 1 July 2014 to 30 June 2016
(e) NCI share of equity changes from 1 July 2016 to 30 June 2017
(f) Intragroup transaction adjustments required as at 30 June 2017
You will also need to refer to the consolidation worksheet in Required 6 to complete Required 5.
6. Complete the consolidation worksheet for the year ended 30 June 2017: (8 marks)
Consolidation worksheet at 30 June 2017 / Adjustments / NCI / NCI / ParentWhite Ltd / Black Ltd / Dr / Cr / Group / Dr / Cr / Parent / Cr / Group / Dr / Cr
Sales revenue / $418,000 / $220,000
Other revenue / 49,000 / 20,000
Total trading income / 467,000 / 240,000
Cost of sales / 90,000 / 85,000
Other expenses / 165,000 / 90,000
Total expenses / 255,000 / 175,000
Profit from trading / 212,000 / 65,000
Proceeds from sale of plant / 10,000 / 4,200
Carrying amount of plant sold / 8,500 / 3,000
Gain/loss on sale of plant / 1,500 / 1,200
Profit before tax / 213,500 / 66,200
Income tax expense / 22,000 / 13,000
Profit after tax / 191,500 / 53,200
Retained earnings 1/7/16 / 102,500 / 76,800
Dividend paid / 15,000 / 12,000
Dividend declared / 6,000 / 4,000
Retained earnings 30/6/17 / 273,000 / 114,000
Share capital / 20,000 / 160,000
General reserve / 40,000 / 50,000
Total equity - parent
Total equity - NCI
BCVR
TOTAL EQUITY / 333,000 / 324,000
Current tax liability / 2,200 / 1,800
Payables / 21,000 / 25,500
Loans / 32,000
Debentures / 170,000
Total liabilities / 193,200 / 59,300
Total equity & liabilities / 526,200 / 383,300
Cash at bank / 20,000 / 36,300
Receivables / 36,200 / 133,000
Inventory / 14,000 / 18,000
Plant & equipment / 150,000 / 170,000
Accumulated deprec. / -75,000 / -60,000
Land / 119,000 / 85,000
Deferred tax asset / 2,000 / 1,000
Shares in Black Ltd / 190,000
Loans / 70,000
Goodwill
Total assets / 526,200 / 383,300
Note:
- A Word version of this worksheet will also be made available within 'Resources'.
- Reference your worksheet entries back to consolidation journals from Required 5 in the space provided.
(Source: adapted from Leo, K. J., Sweeting, J., Knapp, J. & McGowan, S. (2014). Company Accounting, (10th ed.). John Wiley & Sons.)
Marking Guide - Question 4 / Max. marks awardedPart A:
1)
Acquisition analysis- partial goodwill method / 3
2)
Consolidation journal entries immediately after acquisition date / 3
3)
Consolidation journal entries as at 30 June 2015 / 4
4)
Consolidation journal entries as at 30 June 2016 / 4
5)
Consolidation journal entries as at 30 June 2017 / 13
6)
Consolidation worksheet as at 30 June 2017 / 8
Total / 35