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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 – 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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Collen Von
Collen VonLv2
28 Sep 2019

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