AYB340 Lecture Notes - Lecture 9: Financial Statement, Retained Earnings

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6 Jul 2019

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Quick recap: non-controlling interests (ncis) is the equity in a subsidiary not attributable, directly or indirectly, to a parent i. e. the ownership in a subsidiary other than the parent entity, a nci is: Nci: entitled to a share of consolidated equity, to be identified and represented within equity. In statement of: financial position and profit/loss and oci (split between parent and nci) Effects of the nci on the consolidation process: 2. Calculation of goodwill (full goodwill - split v/s partial goodwill all to parent: 3. Intragroup transactions (only dividends: parent reversed, nci equity reduced: 4. Bcve (recognition of goodwill - full goodwill: 5. Pre-acquisition entry (reverse parent % and goodwill partial goodwill: 6. Worksheet (extra columns: calculate nci share of equity. Learning objective 4: adjustments for intragroup transactions: nci is entitled to a share of consolidated equity, nci share of the equity recorded by the subsidiary is calculated in three steps: Step 1: share of equity at acquisition date.

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On January 1, 2014, McIIroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $372,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Also, the acquisition date fair value of the 40 percent noncontrolling interest was $248,000. The subsidiary held patents (with a 10 year remaining life) that were undervalued within the company's accounting records by $70,000, and an unrecorded customer list (15 year remaining life) assessed at a $45,000 fair value. Any remaining excess acquistion date fair value was assigned to goodwill. Since acquistion, McIIroy has applied the equity method to its investment in Stinson account and no goodwill impairment has occurred. At year end, there are no intra-entity payables or receivables. Intra-entity inventory sales between the two companies have been made as follows:

Year Cost to McIIroy Transfer price to Stinson Ending Balance (at transfer price)

2014 $120,000 $150,000 $50,000

2015 $112,000 $160,000 $40,000

The individual financial statements for these two companies as of December 31, 2015 and the year then ended follow:

McIIroy, Inc. Stinson, Inc.

Sales $(700,000) $(335,000)

COGs 460,000 205,000

Operating expenses 188,000 70,000

Equity earnings in Stinson (28000) 0

Net income $(80,000) $(60,000)

Retained earnings 1/1/15 $(695,000) $(280,000)

Net income(above) (80,000) (60,000)

Dividends declared 45,000 15,000

Retained earnings 12-31-15 $(730,000) $(325,000)

Cash & receivables $248,000 $148,000

Inventory 233,000 129,000

Investment in Stinson 411,000 0

Buildings (net) 308,000 202,000

Equipment (net) 220,000 86,000

Patents (net) 0 20,000

Total assets $1,420,000 $585,000

Liabilities $(390,000) $(160,000)

Common Stock (300,000) (100,000)

Retained earnings 12-31-15 (730,000) (325,000)

Total liabilities & equities $(1,420,000) $(585,000)

a. Show how McIIroy determined the $411,000 investment in Stinson account balance. Assume that McIIroy defers 100 percent of downstream intra-entity profits against its share of Stinson's income (amounts to be deducted should be indicated with a minus sign.)

Consideration transferred _______________________________

Increase in Stinson's retained earnings 1/1/14 to 1/1/15______________________________

Excess fair value amortization _________________________________

2014 ending inventory profit deferral_____________________________

McIIroy's equity in earnings of Stinson for 2015_____________________

Stinson 2015 dividends declared to McIIroy________________________

Investment account balance 12/31/15_____________________________

b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of Dec. 31, 2015.

Accounts McIIroy Stinson Debit Credit Non Controlling Interest Consolidation total

Sales $(700,000) $(335,000)

COGs 460,000 205,000

Operating exps 188,000 70,000

Equity in earnings of Stinson (28,000) 0

Seperate co. net income (80,000) (60,000)

Cons. net income

To NCI

To parent

Retained earnings 1/1 $(695,000) $(280,000)

Net income (80,000) (60,000)

Dividends declared 45,000 15,000

Retained earnings 12/31 (730,000) (325,000)

Cash & Rec's $248,000 $148,000

Inventory 233,000 129,000

Investment in Stinson 411,000 0

Bldgs (net) 308,000 202,000

Equip(net) 220,000 86,000

Patents(net) 0 20,000

Customer list

Goodwill

Total Assets $1,420,000 $585,000

Liabilities (390,000) (160,000)

Common Stock 300,000 100,000

NCI 1/1

NCI 12/31

Retained earnings 12/31 (730,000) (325,000)

Total Liabilities & equity $(1,420,000) $(585,000)

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Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests

Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.

Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.

All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:4

	Carrying amount	Fair value
	$	$
Plant (cost $150,000)	100,000	110,000
Land	60,000	76,000

The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.

Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:

	Parent Ltd	Subsidiary Ltd
	$	$
Sales	632,000	440,000
Other revenue:
Debenture interest	10,000	-
Management and consulting fees	10,000	-
Dividends from Subsidiary Ltd	24,000	-
Total revenue	676,000	440,000
Cost of sales	260,000	170,000
Manufacturing expenses	180,000	120,000
Depreciation on plant	30,000	30,000
Administrative expenses	30,000	16,000
Financial expenses	22,000	10,000
Other expenses	28,000	24,000
Total expenses	550,000	370,000
Profit before tax	126,000	70,000
Income tax expense	(50,000)	(34,000)
Operating profit after tax	76,000	36,000
Retained earnings 1 July 2016	100,000	90,000
	176,000	126,000
Transfer to general reserve	6,000	-
Interim dividend paid	20,000	20,000
Final dividends declared	20,000	10,000
	46,000	30,000
Retained earnings 30 June 2017	130,000	96,000
General reserve	100,000	20,000
Other components of equity	26,000	20,000
Share capital	600,000	200,000
Debentures	400,000	200,000
Current tax liability	50,000	34,000
Dividend payable	20,000	10,000
Deferred tax liability	-	14,000
Other liabilities	180,000	24,000
	1,506,000	618,000
Assets
Financial assets	100,000	120,000
Debentures in Subsidiary Ltd	200,000	-
Shares in Subsidiary Ltd	263,200	-
Plant (cost)	240,000	204,000
Accumulated depreciation â plant	(130,000)	(110,000)
Other depreciable assets	152,000	110,000
Accumulated depreciation	(80,000)	(50,000)
Inventory	180,000	170,000
Deferred tax asset	170,800	60,000
Land	402,000	114,000
Dividend receivable	8,000	-
	1,506,000	618,000

Additional information:

(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.

(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.

(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.

(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.

(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.

(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.

(g) The tax rate is 30%.

Required:

Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.

Note: show all necessary workings and narrations.

Question 1	Max. marks allocated
Acquisition analysis	5
Consolidation entries - accuracy	35
Total	40

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AYB340 Lecture Notes - Lecture 9: Financial Statement, Retained Earnings

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