ACCT20002 Lecture Notes - Lecture 9: Net Impact, Comprehensive Income, Share Capital

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lavendermoose527

5 Jun 2018

School

University of Melbourne

Department

Accounting

Course

ACCT20002

Professor

Jagjit Kaur

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IN CLASS TUTORIAL SOLUTIONS: CONSOLIDATIONS – INTRAGROUP

Case study 28.2

Depreciation expense

At the beginning of the current period, Jessica Ltd sold a depreciable asset to its wholly owned

subsidiary, Amelie Ltd, for $80 000. Jessica Ltd had originally paid $200 000 for this asset, and at

time of sale to Amelie Ltd had charged accumulated depreciation of $150 000. This asset is used

differently in Amelie Ltd from how it was used in Jessica Ltd; thus, whereas Jessica Ltd used a 10%

p.a. straight-line depreciation method, Amelie Ltd uses a 20% straight-line depreciation method.

In calculating the depreciation expense for the consolidated group (as opposed to that recorded

by Amelie Ltd), the group accountant, Rui Xue, is unsure of which amount the depreciation rate

should be applied to ($200 000, $50 000 or $80 000) and which depreciation rate to use (10% or

20%).

Required

Provide a detailed response, explaining which depreciation rate should be used and to what

amount it should be applied.

For the group, depreciation of an asset transferred intragroup is based on the depreciation rate

applied by the entity using the asset and on the carrying amount of the asset at the moment of the

intragroup transfer.

Note that when an asset is transferred within the group, consolidation adjustments are not based on

just reversing the intragroup transaction. The purpose of the adjustments is to remove all the effects

of the intragroup transaction so that only the group’s position in relation to external entities is

reported. As the usage of the asset in the group has changed as a result of transfer within the group,

then the depreciation rate used by the group must reflect the actual consumption of benefits within

the group. This depreciation rate will then be applied to the carrying amount of the asset at the

moment of the intragroup transfer to get the depreciation expense for the asset from the group’s

perspective.

In this example, the carrying amount at the time of the intragroup transfer is $50 000 ($200 000

(original cost) - $150 000 (accumulated depreciation)). The asset is now being used by Amelie Ltd

which applies a 20% depreciation rate. Therefore, the depreciation expense from the group’s

perspective for the current period will be calculated as 20% multiplied by $50 000 (i.e. $10 000)

assuming that the asset was transferred intragroup on the first day of the current period. Given that

Amelie Ltd would have recognised a depreciation expense of 20% x $80 000 = $16 000, on

consolidation an adjustment is posted against the depreciation expense decreasing it by $6000 or 20%

of the profit on the intragroup transfer of $30 000 (i.e. $80 000 (price paid intragroup) - $50 000

(carrying amount at the moment of the intragroup sale)).

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Exercise 28.14

Consolidation with differences between carrying amount and fair value at acquisition date and

intragroup transactions

Zoe Ltd purchased 100% of the shares of Matilda Ltd on 1 July 2017 for $50 000. At that date the

equity of the two entities was as follows.

At 1 July 2017, all the identifiable assets and liabilities of Matilda Ltd were recorded at fair value

except for the following.

All of the inventories were sold by December 2017. The plant and equipment had a further 5-year

useful life. Any valuation adjustments are made on consolidation.

Financial information for Zoe Ltd and Matilda Ltd for the period ended 30 June 2019 is shown

below.

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Additional information

(a) Zoe Ltd records dividend receivable as revenue when dividends are declared.

(b) The beginning inventories of Matilda Ltd at 1 July 2018 included goods which cost Matilda Ltd

$2000. Matilda Ltd purchased these inventories from Zoe Ltd at cost plus 33 1/3% mark-up.

Matilda Ltd, at cost plus 10% mark-up, amounted to $5600. The ending inventories of Zoe Ltd

included goods which cost Zoe Ltd $4400. Zoe Ltd purchased these inventories from Matilda

Ltd at cost plus 10% mark-up.

(d) On 31 December 2018, Matilda Ltd sold Zoe Ltd office furniture for $3000. This furniture

originally cost Matilda Ltd $3000 and was written down to $2500 just before the intragroup

sale. Zoe Ltd depreciates furniture at the rate of 10% p.a. on cost.

(e) The asset revaluation surplus relates to land. The following movements occurred in this

account.

(f) The income tax rate is 30%.

Required

1. Prepare the acquisition analysis at 1 July 2017.

2. Prepare the consolidation worksheet journal entries for the preparation of the consolidated

financial statements for the period ended 30 June 2019.

3. Prepare the consolidated statement of profit or loss and other comprehensive income for the

period ended 30 June 2019.

(LO3, LO4, LO5, LO6 and LO7)

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Document Summary

At the beginning of the current period, jessica ltd sold a depreciable asset to its wholly owned subsidiary, amelie ltd, for 000. Jessica ltd had originally paid 000 for this asset, and at time of sale to amelie ltd had charged accumulated depreciation of 000. This asset is used differently in amelie ltd from how it was used in jessica ltd; thus, whereas jessica ltd used a 10% p. a. straight-line depreciation method, amelie ltd uses a 20% straight-line depreciation method. Provide a detailed response, explaining which depreciation rate should be used and to what amount it should be applied. For the group, depreciation of an asset transferred intragroup is based on the depreciation rate applied by the entity using the asset and on the carrying amount of the asset at the moment of the intragroup transfer. Note that when an asset is transferred within the group, consolidation adjustments are not based on just reversing the intragroup transaction.

Related Questions

hello, I got this topic for my presentation for company accounting, so someone can plz give me the solution how to present in my class.thanks

On the 1 July 2017, Pullman Ltd sold equipment to its wholly owned subsidiary, Wong Ltd, for $90 000. Pullman Ltd had originally paid $200 000 for this asset, and at the time of sale had charged depreciation of $140 000. Pullman Ltd used a 10% straight-line depreciation method, but Wong Ltd uses a 20% straight-line depreciation method for this asset. The tax rate is 30%. A junior accountant working for Pullman Ltd recorded the following consolidation adjustment for 30 June 2018:

Dr Proceeds on sale of equipment 90 000

Cr CA of equipment sold 60 000

Cr Equipment 30 000

Dr Deferred Tax Asset 9 000

Cr Income Tax Expense 9 000

Dr Accumulated depreciation 9 000 Cr

Depreciation expense 9 000 ($90 000 x 10%)

Dr Income tax expense 2 700

Cr Deferred tax asset 2 700

Discuss with the class whether the entries are correct, explaining on a line-by line basis the correct adjustment entries.

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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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Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.

Hamish Ltd
Income statement for theyear ended 30 June 2018	$
*Income*	904,000
Revenue from Sales	850,000
Interest Revenue	18,000
Rent Revenue	36,000
*Expenses*	647,000
Administration and sellingexpenses	133,000
Wages and salary expenses	250,000
Doubtful debts expense	20,000
Goodwill impairment	20,000
Insurance expense	54,000
Depreciation expense - plant	90,000
Long-service leave expenses	35,000
Warrantee expenses	45,000

*Net Profit beforetax*	257,000

Hamish Ltd
Extract from the Balancesheet as at 30 June 2018	$
*Assets*
Cash	40,000
Inventory	90,000
Accounts receivable (net)	80,000
Prepaid insurance	?
Interest receivable	6,000
Goodwill	?
Plant	?
*Liabilities*
Accounts payable	50,000
Wages and salaries owing	30,000
Provision for long-service leaveexpenses	25,000
Rent revenue received inadvance	?
Provision for warranteeexpenses	30,000
Loan payable	200,000

The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:

At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.

The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.

Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.

The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).

Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.

During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.

Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.

During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.

At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.

The tax rate was always 33% but changedto 28% during the current year.

Required:

Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.

Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.

Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9

Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.

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ACCT20002 Lecture Notes - Lecture 9: Net Impact, Comprehensive Income, Share Capital

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