All workings, when appropriate, must be shown to substantiate your answers.

Question 1 [20 marks]

Topic 1: Consolidation: Principles and accounting requirements

On 1 July 2017, Patience Ltd acquired all the issued shares of Silence Ltd for a cash consideration of $1,000,000. At that date, the financial statements of Silence Ltd showed the following information.

All the assets and liabilities of Silence Ltd were recorded at amounts equal to their fair values at the acquisition date, except some equipment recorded at $50,000 below its fair value with a related accumulated depreciation of $80,000. Silence Ltd accounted for all its property, plant and equipment in its own books using the cost model. In addition, Patience Ltd identified at acquisition date a contingent liability related to a lawsuit where Silence Ltd was sued by a former supplier and attached a fair value of $40,000 to that liability.

Required:

1. Prepare the acquisition analysis at 1 July 2017.

2. Prepare the consolidation worksheet entries for Patience Ltd’s group at 1 July 2017.

Question 1 / Max. marks allocated
Acquisition analysis (Part 1) / 5
Consolidation worksheet entries (Part 2) / 14
Presentation / 1
Total / 20

Question 2 [30 marks]

Topic 2: Consolidation: Intra-group transactions

On 1 July 2016, Pandora Ltd acquired all the issued shares of Sebastian Ltd. Pandora Ltd paid $30,000 in cash and 20,000 shares in Pandora Ltd valued at $3 per share. At this date, the equity of Sebastian Ltd consisted of $66,000 share capital and $6,000 retained earnings.

At 1 July 2016, all the identifiable assets and liabilities of Sebastian Ltd were recorded at amounts equal to their fair values except for:

The plant was considered to have a further 5-year life. The patents were sold for $120,000 to an external entity on 18 August 2016. The inventory was all sold by 30 June 2017.

Additional information:

(a) Pandora Ltd sells certain raw materials to Sebastian Ltd to be used in its manufacturing process. At 1 July 2017, Sebastian Ltd held inventory sold to it by Pandora Ltd in the previous year at a profit of $600. During the 2017/2018 year, Pandora Ltd sold inventory to Sebastian Ltd for $21,000. None of this was on hand at 30 June 2018.

(b) Sebastian Ltd also sells items of inventory to Pandora Ltd. During the 2017/2018 year, Sebastian Ltd sold goods to Pandora Ltd for $4,500. At 30 June 2018, inventory which had been sold to Pandora Ltd at a profit of $300 was still on hand in Pandora Ltd’s inventory.

(c) On 1 July 2017, Sebastian Ltd sold an item of plant to Pandora Ltd for $15,000. This plant had a carrying amount in the records of Sebastian Ltd of $14,000 at time of sale. This type of plant is depreciated at 10% p.a. on cost.

(d) On 1 January 2017, Pandora Ltd sold an item of inventory to Sebastian Ltd for $18,000. The inventory had cost Pandora Ltd $16,000. This item was classified by Sebastian Ltd as plant. Plant of this type is depreciated by Sebastian Ltd at 20% p.a.

(e) On 1 March 2018, Sebastian Ltd sold an item of plant to Pandora Ltd. Whereas Sebastian Ltd classified this as plant, Pandora Ltd classified it as inventory. The sales price was $9,000 which included a profit to Sebastian Ltd of $1,500. Pandora Ltd sold this to another entity on 31 March 2018 for $9,900.

(f) The tax rate is 30%.

At 30 June 2018, the following financial information was provided by the two companies:

Pandora Ltd / Sebastian Ltd
Dr ($) / Cr ($) / Dr ($) / Cr ($)
Sales revenue / 64,500 / 78,000
Cost of sales / 30,900 / 46,350
Trading expenses / 4,800 / 9,000
Office expenses / 7,950 / 4,050
Depreciation expenses / 1,800 / 3,900
Proceeds on sale of plant / 9,000 / 15,000
Carrying amount of plant sold / 7,500 / 14,000
Income tax expense / 11,100 / 7,300
Share capital / 96,000 / 66,000
Retained earnings (1/7/17) / 48,000 / 31,500
Current liabilities / 21,100 / 10,500
Deferred tax liability / 11,000 / 15,000
Plant / 57,000 / 107,250
Accumulated depreciation – plant / 18,300 / 33,450
Intangibles / 12,000 / 11,100
Deferred tax assets / 8,100 / 9,450
Shares in Sebastian Ltd / 90,000 / 0
Inventories / 28,500 / 24,600
Receivables / 8,250 / 12,450
267,900 / 267,900 / 249,450 / 249,450

Required:

Prepare the consolidation worksheet entries for the preparation of the consolidated financial statements of Pandora Ltd for the year ended 30 June 2018.

Question 2 / Max. marks allocated
Acquisition analysis / 3
Consolidation entries for part (1) / 25
Presentation / 2
Total / 30

Rationale

Thisassessment task covers topics 1 & 2. It has been designed to ensure that you are engaging with the subject content on a regular basis. More specifically it seeks to assess your ability to:

  • be able to explain the relationships that exists between a parent company and its subsidiary and an investor and its investee;
  • be able to prepare accounts for each of the above-mentioned business combinations in accordance withrelevant professional and statutory reporting requirements.

Marking criteria

The marking guide for this task is provided below. The detailed allocation of marks for relevant questions has been provided above for your information.

Criteria / High distinction / Distinction / Credit / Pass
For both Question 1 & 2:
Prepare acquisition analysis and consolidation journal entries, consolidation worksheets and consolidated financial statements for group structures, in accordance with relevant professional and statutory reporting requirements. / Acquisition analysis and determination of goodwill or gain on bargain purchase is computed accurately.
At least 85% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Consolidation worksheet presented with all entries entered correctly and appropriate cross referencing provided for all adjustments made.
Financial statements are presented in publishable format without flaw and in accordance with relevant accounting standards. / Acquisition analysis and determination of goodwill or gain on bargain purchase is computed with very few minor errors.
At least 75% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Consolidation worksheet presented with almost all entries entered correctly. Appropriate cross referencing provided for all adjustments made.
Financial statements are presented in publishable format with minor flaws and in accordance with relevant accounting standards. / Acquisition analysis and determination of goodwill or gain on bargain purchase is computed correctly with some minor errors.
At least 65% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Consolidation worksheet presented with a number of minor errors made. Appropriate cross referencing provided for all adjustments made.
Financial statements are presented in publishable format with minor flaws. / Acquisition analysis and determination of goodwill or gain on bargain purchase is computed with a limited number of errors.
At least half of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Consolidation worksheet presented with a number of errors made. Appropriate cross referencing provided for all adjustments made.
Financial statements are presented in publishable format with a few flaws.

Presentation

Physical presentation of assignments:

All answers must be presented in minimum font size of 11, Arial or Times New Roman font style. If you have prepared your work in excel and copied and pasted your work into word or pdf (see requirements below), you must ensure that all work presented follow this presentation font size and format.

It is essential that presentation of assignments adheres to accepted standards in relation to neatness and layout, as you are practising to present material in a work situation.

You should submit a bibliography (using APA referencing style) with your assignment.

For practical questions:

  • All journal entries must include narrations unless otherwise specified and presented in accordance to the format used in your key text;
  • Any ledger accounts should preferably be shown in 'T' account format and dates and descriptions are included;
  • Journal entries and ledger accounts must reflect the strict order of sequence of events; financial statements (including extracts) should include proper headings and accord with presentation standards.

Requirements

This assignment must be submitted through Turnitin.

It is recommended that your name, student ID and page number are included in the header or footer of every page of the assignment.
Further details about submission in Turnitin are provided in On-line submission