1. Merits and shortcomings of the consolidation accounting requirements that recognise the goodwill on acquisition & eliminate the investment in the subsidiary, and the fair value of the issued capital and reserves of the subsidiary at the date of acquisition.
2. Impact of these requirements on the information needs of two key user groups: existing shareholders of the ultimate parent, and a non-controlling interest shareholder of a subsidiary.
1. Merits and shortcomings of the consolidation accounting requirements that recognise the goodwill on acquisition & eliminate the investment in the subsidiary, and the fair value of the issued capital and reserves of the subsidiary at the date of acquisition.
2. Impact of these requirements on the information needs of two key user groups: existing shareholders of the ultimate parent, and a non-controlling interest shareholder of a subsidiary.
Related questions
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 |
| On July 1, 2018, Truman Company acquired a 70 percent interest in Atlanta Company in exchange for consideration of $777,700 in cash and equity securities. The remaining 30 percent of Atlantaâs shares traded closely near an average price that totaled $333,300 both before and after Trumanâs acquisition. In reviewing its acquisition, Truman assigned a $147,500 fair value to a patent recently developed by Atlanta, even though it was not recorded within the financial records of the subsidiary. This patent is anticipated to have a remaining life of five years. The following financial information is available for these two companies for 2018. In addition, the subsidiaryâs income was earned uniformly throughout the year. The subsidiary declared dividends quarterly. |
| Truman | Atlanta | |
| Revenues | $(805,725.00) | $(500,000.00) |
| Operating Expenses | $480,000.00 | $344,000.00 |
| Income of Subsidiary | $(44,275.00) | $- |
| Net Income | $(370,000.00) | $(156,000.00) |
| Retained Earning, 1/1/18 | $(895,000.00) | $(520,000.00) |
| Net Income (Above) | $(370,000.00) | $(156,000.00) |
| Dividends declared | $155,000.00 | $50,000.00 |
| Retained Earning 12/31/18 | $(1,110,000.00) | $(626,000.00) |
| Current Assets | $509,525.00 | $284,000.00 |
| Investment in Atlanta | $804,475.00 | $- |
| Land | $479,000.00 | $291,000.00 |
| Buildings | $725,000.00 | $721,000.00 |
| Total Assets | $2,518,000.00 | $1,296,000.00 |
| Liabilities | $(908,000.00) | $(350,000.00) |
| Common Stock | $(95,000.00) | $(300,000.00) |
| Additional paid-in capital | $(405,000.00) | $(20,000.00) |
| Retained Earning, 12/31/18 | $(1,110,000.00) | $(626,000.00) |
| Total Liabilities and StockHolders equity | $(2,518,000.00) | $(1,296,000.00) |
How did Truman allocate Atlantaâs acquisition-date fair value to the various assets acquired and liabilities assumed in the combination?
How did Truman allocate the goodwill from the acquisition across the controlling and noncontrolling interests?
How did Truman derive the Investment in Atlanta account balance at the end of 2018?
Prepare a worksheet to consolidate the financial statements of these two companies as of December 31, 2018. At year-end, there were no intra-entity receivables or payables.
