SUGGESTED ANSWERS
Topic 1 Business combination
Exercise 1.1
A. Acquisition analysis:
Consideration transferred:
Shares: 100 000 x 10 x $10
Patent
Cash: 100 000 x $5.20
$10 000 000
1 000 000
520 000
$11 520 000
Fair value of identifiable assets and liabilities acquired:
Current assets
Non-current assets
$980 000
4 220 000
5 200 000
500 000
$4 700 000
Liabilities
Goodwill = $11 520 000 - $4 700 000 = $6 820 000
B. Journal entries: Padova Ltd
Patent
Gain from transfer of patent
(Re-measurement as part of consideration)
Current assets
Non-current assets
Goodwill
Liabilities
Share capital
Patent
Cash
(Acquisition of Prato Ltd)
Dr
Cr
650 000
650 000
Dr
Dr
Dr
Cr
Cr
Cr
Cr
980 000
4 220 000
6 820 000
Acquisition-related expenses
Dr
Cash
Cr
(Payment of directly attributable costs)
10 000
Share capital
Cash
(Costs of issuing shares)
Dr
Cr
1
500 000
10 000 000
1 000 000
520 000
10 000
500
500
Exercise 1.2 Accounting by an acquirer
(a) FV of shares is $1.80 per share
Cost of the combination
Shares: 100 000 x $1.80
$180 000
Net fair value of identifiable assets, liabilities and contingent liabilities acquired:
Equipment
$50 000
Land
80 000
Trucks
40 000
Current assets
10 000
180 000
Current liabilities
16 000
$164 000
Goodwill = $180 000 - $164 000
$16 000
Journal entries: Venice Ltd
Equipment
Dr
50 000
Land
Dr
80 000
Trucks
Dr
40 000
Current assets
Dr
10 000
Goodwill
Dr
16 000
Current liabilities
Cr
Share Capital
Cr
(Acquisition of assets and liabilities of Venona Ltd)
16 000
180 000
(b) FV of shares is $1.60 per share
Net fair value of net assets acquired
Consideration transferred shares: 100 000 x $1.60
Gain on bargain purchase = $164 000 - $160 000
$164 000
$160 000
$4 000
Journal entries: Venice Ltd
Equipment
Dr
Land
Dr
Trucks
Dr
Current assets
Dr
Current liabilities
Cr
Gain on bargain purchase
Cr
Share capital
Cr
(Acquisition of assets & liabilities of Venona Ltd)
2
50 000
80 000
40 000
10 000
16 000
4 000
160 000
Problem 1.3
1(a)
Accounting for a business combination by both the acquirer and the
acquiree
Assuming the fair value of “A” ordinary shares was $2 per share
Acquisition analysis
Consideration transferred
=
FV of assets and liabilities acquired
Inventory
Land and buildings
Plant and machinery
Gain on bargain purchase
40 000 x $2.00 = $80 000
$22 000
$34 000
$27 000
$83,000
$3 000
Journal entries:
Inventory
Land and buildings
Plant and machinery
Gain on bargain purchase
Share capital “A” Ordinary
(Assets acquired and shares issued)
1(b)
Dr
Dr
Dr
Cr
Cr
22 000
34 000
27 000
3 000
80 000
Assuming the fair value of “A” ordinary shares was $2.20 per share
Acquisition analysis
Consideration transferred
Net fair value of identifiable assets
and liabilities acquired
Goodwill
=
40 000 x $2.20 = $88 000
=
=
$83 000
$5 000
Journal entries:
Inventory
Dr
22 000
Land and buildings
Plant and machinery
Goodwill
Share capital “A” Ordinary
(Assets acquired and shares issued)
Dr
Dr
Dr
Cr
34 000
27 000
5 000
88 000
3
2.
VERCELLI LTD
Statement of Financial Position
as at 30 June 2010
Current Assets
Cash
Accounts receivable
Inventory
Total Current Assets
$12 000
18 000
65 000
$95 000
Non-Current Assets
Land and buildings
Plant and machinery
less Accumulated depreciation
Goodwill
Total Non-Current Assets
Total Assets
57 000
$79 000
34 000
Current Liabilities
Accounts payable
Non-current Liabilities
Debentures
Total Liabilities
Net Assets
45 000
5 000
107 000
202 000
42 000
20 000
62 000
$140 000
Equity
Share capital
40 000 ordinary shares, fully paid
40 000 “A” ordinary shares, fully paid
Retained earnings
Total Equity
4
$40 000
88 000
$128 000
12 000
$140 000
Topic 3 consolidation in-class illustration example
To help you better understand, the following consolidation entries are presented BY YEAR:
At DOA: 1 July 2010
BCVR entries:
1. Dr: Land
Cr: DTL
BCVR
20,000
6,000
14,000
2. Dr: Accumulated Depreciation - Equip
Cr: Equipment
DTL
BCVR
3. Dr: Inventory
Cr: DTL
BCVR
5,000
4. Dr: Patent
Cr: DTL
BCVR
20,000
6,000
14,000
1,500
3,500
5. Dr: BCVR
10,500
DTA
4,500
Cr: Provision for Loan Guarantee
6. Dr: Goodwill
Cr: BCVR
170,000
150,000
6,000
14,000
15,000
25,000
25,000
Pre-acquisition entry:
7. Dr: Share Capital
Retained Earnings
BCVR
Cr: Shares in S.
300,000
140,000
60,000
500,000
5
At Y1: 1 July 2011
BCVR entries:
1. Dr: Land
Cr: DTL
BCVR
20,000
6,000
14,000
2. Dr: Accumulated Depreciation - Equip
Cr: Equipment
DTL
BCVR
170,000
150,000
6,000
14,000
Dr: Depreciation Expense – Equip
Cr: A. D. – Equip
4000
4000
Dr: DTL
Cr: Income Tax Expense
1,200
1,200
3. Dr: COGS
Cr: Income Tax Expense
BCVR
4. Dr: Patent
Cr: DTL
BCVR
5,000
1,500
3,500
20,000
6,000
14,000
5. Dr: BCVR
10,500
Income Tax Expense
4,500
Cr: Expense
10,000
Gain on De-recognition of LG
5000
6. Dr: Goodwill
Cr: BCVR
25,000
25,000
Pre-acquisition entry:
7. Dr: Share Capital
Retained Earnings
BCVR
Cr: Shares in S.
300,000
140,000
60,000
500,000
6
At Y2: 1 July 2012
BCVR entries:
1. Dr: Land
Cr: DTL
BCVR
20,000
6,000
14,000
2. Dr: Accumulated Depreciation - Equip
Cr: Equipment
DTL
BCVR
170,000
150,000
6,000
14,000
Dr: Depreciation Expense – Equip
Retained Earnings
Cr: A. D. – Equip
4000
4000
8000
Dr: DTL
Cr: Income Tax Expense
Retained Earnings
2,400
1,200
1,200
3. Dr: Retained Earnings
Cr: BCVR
4. Dr: Patent
Cr: DTL
BCVR
3,500
3,500
20,000
6,000
14,000
Dr: Impairment Loss 5,000
Cr: Accumulated Impairment Loss
Dr: DTL
Cr: Income Tax Expense
5. Dr: BCVR
Cr: Retained Earnings
6. Dr: Goodwill
Cr: BCVR
5,000
1,500
1,500
10,500
10,500
25,000
25,000
Dr: Impairment Loss
5,000
Cr: Accumulated Impairment Loss
5,000
7
Pre-acquisition entry:
7. Dr: Share Capital
Retained Earnings
BCVR
Cr: Shares in S.
300,000
140,000
60,000
500,000
At Y3: 1 July 2013
BCVR entries:
1. Dr: Gain
Cr: Income Tax Expense
BCVR
20,000
6,000
14,000
2. Dr: Accumulated Depreciation - Equip
Cr: Equipment
DTL
BCVR
170,000
150,000
6,000
14,000
Dr: Depreciation Expense – Equip
Retained Earnings
Cr: A. D. – Equip
4,000
8,000
Dr: DTL
Cr: Income Tax Expense
Retained Earnings
3,600
12,000
1,200
2,400
3. Dr: Retained Earnings
Cr: BCVR
4. Dr: Patent
Cr: DTL
BCVR
3,500
3,500
20,000
6,000
14,000
Dr: Retained Earnings
5,000
Cr: Accumulated Impairment Loss
5,000
Dr: DTL
Cr: Retained Earnings
5. Dr: BCVR
Cr: Retained Earnings
6. Dr: Goodwill
Cr: BCVR
1,500
1,500
10,500
10,500
25,000
25,000
8
Dr: Retained Earnings
5,000
Cr: Accumulated Impairment Loss
5,000
Pre-acquisition entry:
7. Dr: Share Capital
Retained Earnings
BCVR
Cr: Shares in S.
300,000
140,000
60,000
500,000
To help you better understand, the following entries are presented BY ACCOUNT:
1.
Land has BV=$150K and FV=$170K on July 1, 2010. It was sold in 2013 by subsidiary for
$200K with a selling cost of $1K.
July 1, 2010:
Land
Dr
20,000
Cr
DTL
BCVR
July 1, 2011:
Land
6,000
14,000
20,000
DTL
BCVR
July 1, 2012:
Land
6,000
14,000
20,000
DTL
BCVR
July 1, 2013:
Gain on land
6,000
14,000
20,000*
Tax expense
BCVR
6,000
14,000
*Note: In 2013 Subsidiary will record a gain on sale of land by $49,000 (200,000-150,0001,000). However, from the group’s perspective, the gain on sale is only $29,000 (200,000170,000-1,000).
Why the entry is repeated each year until the land is sold? à because the entry is not entered
into either firm’s accounting books. The entry is repeated when consolidated statements are
prepared.
9
2. Equipment has a FV=$330K and BV=$310K (=480K cost – 170K accumulated depreciation)
on July 1, 2010. The equipment is depreciated on a straight-line basis over a 5-year period.
Hence, annual depreciation=20K/5=4K.
July 1, 2010:
Acc. depre
Dr
170,000
Cr
Equipment
DTL
BCVR
July 1, 2011:
Accu depre
150,000
6,000
14,000
170,000
Equipment
DTL
BCVR
Depre exp
150,000
6,000
14,000
4,000
Accu depre
DTL
4,000
1,200
Tax exp
July 1, 2012:
Accu depre
1,200
170,000
Equipment
DTL
BCVR
150,000
6,000
14,000
Depre exp
4,000
Retained earnings, opening
4,000
Accu depre
DTL
2,400
Ret earnings, opening
Tax exp
July 1, 2013:
Accu depre
170,000
Equipment
DTL
BCVR
150,000
6,000
14,000
Depre exp
Ret earnings, opening
Accu depre
12,000
DTL
8,000
1,200
1,200
4,000
8,000
3,600
Ret earnings, opening
Tax exp
2,400
1,200
10
July 1, 2015 when equipment is fully depreciated:
Accu depre
170,000
Equipment
150,000
DTL
6,000
BCVR
14,000
Ret earnings, opening
Accu depre
DTL
20,000
20,000
6,000
Ret earnings, opening
6,000
(Only BCVR and retained earnings accounts left at the end)
3. Inventory has a FV=$8K and BV=$7.5K on July 1, 2010. Subsidiary’s inventory on hand at
DOA is all sold by 30 June 2011 (Year 1).
July 1, 2010:
Inventory
Dr
5,000
Cr
DTL
BCVR
July 1, 2011:
Cost of sales
1,500
3,500
5,000
Tax exp
BCVR
July 1, 2012:
Retained earnings
BCVR
July 1, 2013:
Retained earnings
BCVR
1,500
3,500
3,500
3,500
3,500
3,500
4. Patent has an unrecorded FV=$20K on July 1, 2010 and is tested for impairment annually,
with an impairment loss of $5,000 recognized in 2011-12(Y2).
July 1, 2010:
Dr
Cr
Patent
20,000
DTL
6,000
BCVR
14,000
July 1, 2011:
Patent
20,000
DTL
6,000
BCVR
14,000
11
July 1, 2012:
Patent
20,000
DTL
BCVR
6,000
14,000
Impairment loss
5,000
Accumulated impair loss
DTL
5,000
1,500
Tax exp
July 1, 2013:
Patent
1,500
20,000
DTL
BCVR
RE, opening
DTL
6,000
14,000
5,000
Accumulated impair loss
1,500
RE, opening
5,000
1,500
5. Unrecorded loan guarantee with FV=$15K on July 1, 2010. The guarantee liability results
in a payment of $10,000 in June 2011, with no further liability existing.
July 1, 2010:
Dr
Cr
BCVR
10,500
DTL
4,500
Provision for loan guarantee
15,000
July 1, 2011:
BCVR
10,500
Tax exp
4,500
Exp
10,000
Gain on de-recog of loan gu
5,000
July 1, 2012:
BCVR
10,500
RE, opening
10,500
July 1, 2013:
BCVR
10,500
RE, opening
10,500
12
6. Goodwill = $25K. It is written down by $5000 in the 2011–12 (Y2) period as a result of an
impairment test.
July 1, 2010:
Dr
Cr
Goodwill
25,000
BCVR
25,000
July 1, 2011:
Goodwill
25,000
BCVR
25,000
July 1, 2012:
Goodwill
25,000
BCVR
25,000
Impairment loss
5,000
Accumu impairment loss
July 1, 2013:
Goodwill
25,000
BCVR
RE, opening
5,000
25,000
5,000
Accumu impairment loss
5,000
7. Pre-acquisition entry:
July 1, 2010:
Share Capital
Retained Earnings, 1/7/2010
BCVR
Shares in S.
July 1, 2011:
Share Capital
Retained Earnings, 1/7/2010
BCVR
Shares in S.
July 1, 2012:
Share Capital
Retained Earnings, 1/7/2011
BCVR
Shares in S.
July 1, 2013:
Share Capital
Retained Earnings, 1/7/2012
BCVR
Shares in S.
Dr
300,000
140,000
60,000
Cr
500,000
300,000
140,000
60,000
500,000
300,000
140,000
60,000
500,000
300,000
140,000
60,000
500,000
13
Financial Statements
Revenue
Expenses
Consolidation worksheet at 30 June 2013
P
S
Dr
Cr
120000
95000
85000
72000 2
4000
35000
23000
Gain on sale of noncurrent assets
Profit before tax
Income tax expense
15000
50000
15000
Profit for the period
Retained earnings(1/7/12)
35000
420000
Retained earnings
(30/6/13)
Share Capital
BCVR
33000
220000
455000
550000
253000
300000
1005000
40000
32000
12000
Provision
Payables
DTL
Total equity and liability
Cash
Land
Equipment
Accumulated depreciation
Shares in Sub Ltd
Inventory
Patent
Accumulated impairment
losses
Goodwill
Accumulated impairment
losses
Total assets
31000
54000
21000
553000
40000
24000
16000
1
Consolidation
215000
161000
54000
20000
26000
80000
6000
1200
1
2
2400
1500
10500
2
4
5
28800
51200
2
3
4
6
7
8000
3500
5000
5000
140000
7
5
7
300000
10500
60000
2
4
3600
1500
492900
544100
550000
14000
14000
3500
14000
25000
1
2
3
4
6
6000
6000
2
4
Eliminated
1094100
80000
56000
34900
84000
1089000
80000
633000
170900
1265000
65000
170000
750000
448000
500000
52000
95000
50000
683000
270000
160000
220000
1283000
(560000)
Eliminated
127000
20000
2
170000
-
2
2
7
5000
4
(5000)
25000
5000
776100
6
(5000)
1265000
75000
-
-
4
20000
-
-
6
25000
-
1089000
150000
12000
500000
633000
14
776100
Exercise 3.1
Business combination valuation and pre-acquisition entries
At 1 July 2010:
Consideration transferred
BV if net assets acquired ($100 000 + $50 000 + $36 000)
Difference
Inventory $8 000 (1 – 30%) = 5,600
Land $15 000 (1 – 30%) =
10,500
Equipment $10 000 (1 – 30%) = 7,000
Goodwill
$218,500
186,000
32,500
23,100
$9 400
1. Worksheet entries at 1 July 2010
Business combination valuation entries
(1)
(2)
(3)
(4)
Inventory
Deferred tax liability
BCVR
Dr
Cr
Cr
8 000
Land
Deferred tax liability
BCVR
Dr
Cr
Cr
15 000
Accumulated depreciation - equipment Dr
Equipment
Cr
Deferred tax liability
Cr
BCVR
Cr
50 000
Goodwill
BCVR
Dr
Cr
9 400
Dr
Dr
Dr
Dr
Cr
36 000
100 000
50 000
32 500
2 400
5 600
4 500
10 500
40 000
3 000
7 000
9 400
2. Pre-acquisition entries
(5)
Retained earnings (1/7/10)
Share capital
General reserve
BCVR
Shares in Flinders Ltd
218 500
15
2. Worksheet entries at 30 June 2011
Business combination valuation entries
The entries at 1 July 2010 are affected by:
- the sale of the inventory
- the depreciation of the equipment
(1)
(2)
(3)
(4)
Cost of sales
Income tax expense
BCVR
Dr
Cr
Cr
8 000
Land
Deferred tax liability
BCVR
Dr
Cr
Cr
15 000
Accumulated depreciation - equipment Dr
Equipment
Cr
Deferred tax liability
Cr
BCVR
Cr
50 000
Depreciation expense
Accumulated depreciation
(10% x $100 000)
Dr
Cr
1 000
Deferred tax liability
Income tax expense
(30% x $1 000)
Dr
Cr
300
Goodwill
BCVR
Dr
Cr
9 400
Dr
Dr
Dr
Dr
Cr
36 000
100 000
50 000
32 500
Dr
Cr
25 000
Pre-acquisition entries
(5)
Retained earnings (1/7/10)
Share capital
General reserve
BCVR
Shares in Flinders Ltd
(6)
Transfer from general reserve
General reserve
2 400
5 600
4 500
10 500
40 000
3 000
7 000
1 000
300
9 400
218 500
25 000
16
Exercise 3.2
Recorded goodwill, unrecorded intangible
At 1 July 2009:
Consideration transferred
=
(50 000 x $5) - $10 000 (dividend receivable)
=
$240 000
BV of net assets acquired ($150 000 + $84 000) 234,000
Cost-book value difference
6,000
Trademark $20 000 (1 -30%) =14,000
Goodwill adjustment
(6,000)
8,000
Gain on bargain purchase
$2 000
1. Business combination valuation entries at 30 June 2013
Amortisation expense
Retained earnings (1/7/12)
Income tax expense
BCVR
Goodwill
Dr
Dr
Cr
Cr
Cr
5 000
10 500
Retained earnings (1/7/09)
Share capital
BCVR
Gain on bargain purchase
Shares in Ankogel Ltd
Dr
Dr
Dr
Cr
Cr
84 000
150 000
8 000
Dividend payable
Dividend receivable
Dr
Cr
10 000
1 500
8 000
6 000
2. Pre-acquisition entries
At 1 July 2009:
2 000
240 000
10 000
At 30 June 2013
This entry is affected by:
- payment of dividend on hand at acquisition date - $10 000
- payment of bonus dividend of $50 000 in 2011
- in current period, write-off of trademark
Retained earnings (1/7/12)*
Share capital
BCVR
Shares in Ankogel Ltd
*
Dr
Dr
Dr
Cr
32 000
200 000
8 000
$84 000 - $2 000 gain on bargain purchase - $50 000 bonus dividend
17
240 000
Exercise 3.3
Bargain purchase, parent holds previously acquired investment in
subsidiary, consolidation worksheet
At 1 July 2011:
Consideration transferred
Previously acquired equity interest
=
$124 200 - $10 000 (dividend) = $114 200
= 13 800
128,000
BV of net assets acquired ($80 000 + $15 000 + $30 000)
125,000
Difference
3,000
Inventory $3 000 (1 – 30%) = 2,100
Plant $5 000 (1 – 30%)
= 3,500
5,600
Gain on bargain purchase
2,600
A. WORKSHEET ENTRIES AT 1 JULY 2011
1. Business combination valuation entries
(1)
(2)
Inventory
Deferred tax liability
BCVR
Dr
Cr
Cr
3 000
Accumulated depreciation
Plant
Deferred tax liability
BCVR
Dr
Cr
Cr
Cr
15 000
Dr
Dr
Dr
Dr
Cr
Cr
30 000
80 000
15 000
5 600
Dr
Cr
10 000
900
2 100
10 000
1 500
3 500
2. Pre-acquisition entries
(3)
Retained earnings (1/7/11)
Share capital
Other components of equity
BCVR
Gain on bargain purchase
Shares in Hafner Ltd
2 600
128 000
128,000 = 124200+13800-10000
(4)
Dividend payable
Dividend receivable
10 000
18
Exercise 3.3 (cont’d)
Glockner
Ltd
25 800
26 200
10 000
55 000
128 000
190 000
(65 000)
370 000
Hafner
Ltd
10 000
25 000
Provisions
Dividend payable
Deferred tax liability
88 000
20 000
-
27 000
10 000
-
4
Share capital
Other component
Retained earnings
Business combination
valuation reserve
180 000
23 800
58 200
-
80 000
15 000
30 000
-
3
3
3
3
370 000
162 000
Cash
Accounts receivable
Dividend receivable
Inventory
Shares in Hafner Ltd
Plant
Accum depreciation
Adjustments
Dr
Cr
42 000
100 000
(15 000)
162 000
1
2
10 000
4
128 000
10 000
3
2
3 000
15 000
10 000
1 500
900
80 000
15 000
30 000
5 600
158600
2 600
3 500
2 100
158600
GLOCKNER LTD
Consolidated Statement of Financial Position
as at 1 July 2011
Current assets:
Cash and equivalents
Receivables
Inventories
Total current assets
Non-current assets:
Property, plant and equipment:
Plant
Accumulated depreciation
Total non-current assets
Total assets
Equity
Share capital
Retained earnings
Other component
Total equity
Current liabilities:
Provisions
Dividend payable
Deferred tax liability
Total liabilities
Total equity and liabilities
$35 800
51 200
100 00
187 000
280 000
(65 000)
215 000
$402 000
180 000
60,800
23,800
264 600
115 000
20 000
2 400
137 400
$402 000
19
Group
2
1
3
2
1
35 800
51200
-100 000
-280 000
(65 000)
402 000
115 000
20 000
2 400
180 000
23800
60,800
-402 000
B. WORKSHEET ENTRIES AT 30 JUNE 2012
1. Business combination valuation entries
(1)
(2)
Cost of sales
Income tax expense
BCVR
Dr
Cr
Cr
3 000
Accumulated depreciation
Plant
Deferred tax liability
BCVR
Dr
Cr
Cr
Cr
15 000
Depreciation expense
Accumulated depreciation
(20% x $5 000)
Dr
Cr
1 000
Deferred tax liability
Income tax expense
Dr
Cr
300
Dr
Dr
27 400
80 000
Dr
15 000
5 600
128 000
900
2 100
10 000
1 500
3 500
1 000
300
2. Pre-acquisition entries
(3)
Retained earnings (1/7/11)
Share capital
Other components of equity
BCVR
Shares in Hafner Ltd
Dr
Cr
20
Topic 4
Exercise 4.1
(a)
(b)
Intragroup transactions Octans Ltd – Cetus Ltd
Sales Revenue
COGS
Inventory
Dr
Cr
Cr
15 000
Deferred Tax Asset
Income Tax Expense
(30% x $5 000)
Dr
Cr
1 500
Sales Revenue
COGS
Dr
Cr
15 000
10 000
5 000
1 500
15 000
Note: TR = 15,000 +20,000 (20,000) à 15,000
TCOGS = 10,000 + 15,000 (10,000) à 15,000
Inventory = 0 (0) à 0
(c)
Sales Revenue
COGS
Inventory
Dr
Cr
Cr
15 000
Deferred Tax Asset
Income Tax Expense
(30% x $2 500)
Dr
Cr
750
Retained Earnings (1/7/010)
COGS
Dr
Cr
6 000
Income Tax Expense
Retained Earnings (1/7/010)
Dr
Cr
1 800
Land
Dr
Cr
5 000
Dr
Cr
1 500
Dr
Cr
12 000
12 500
2 500
750
Note: TR = 15,000 + 9,000 (9,000) à 15,000
TCOGS = 10,000 + 7,500 (5,000) à 12,500
Inventory = 7,500 (5,000) à 2,500
(d)
(e)
Loss for sale of land
Income Tax Expense
Deferred Tax Liability
6 000
1 800
5 000
1 500
(30% x $5 000)
Loan from Cetus Ltd
Loan to Octans Ltd
21
12 000
(f)
(g)
Gain on sale of asset
Asset
Dr
Cr
2 000
Deferred Tax Asset
Income Tax Expense
Dr
Cr
600
Accumulated Depreciation
Depreciation Expense
Dr
Cr
200
Income Tax Expense
Deferred Tax Asset
Dr
Cr
60
Sales Revenue
COGS
Machinery
Dr
Cr
Cr
6 000
Deferred Tax Asset
Income Tax Expense
Dr
Cr
600
Accumulated Depreciation
Depreciation Expense
Dr
Cr
200
Income Tax Expense
Deferred Tax Asset
Dr
Cr
60
22
2 000
600
200
60
4 000
2 000
600
200
60
Exercise 4.2 Intragroup transactions Lyra Ltd – Volans Ltd
(a)
(b)
(c)
Gain on sale of asset
Motor Vehicles
Dr
Cr
3 000
Deferred Tax Asset
Income Tax Expense
Dr
Cr
900
Accumulated Depreciation
Depreciation Expense
Dr
Cr
300
Income Tax Expense
Deferred Tax Asset
Dr
Cr
90
Sales Revenue
COGS
PPE
Dr
Cr
Cr
62 000
Deferred Tax Asset
Income Tax Expense
Dr
Cr
2 100
Accumulated Depreciation
Depreciation Expense
Dr
Cr
700
Income Tax Expense
Deferred Tax Asset
Dr
Cr
210
Sales Revenue
COGS
Inventory
Dr
Cr
Cr
12 000
Deferred Tax Asset
Income Tax Expense
Dr
Cr
150
3 000
900
300
90
55 000
7 000
2 100
700
210
11 500
500
Note: TR = 12,000 +X (X) à 12,000
TCOGS = 10,000 + 12,000*75% (10,000*75%) à 11,500
Inventory = 12,000*25% (1,000*25%) à 500
23
150
(d)
(e)
Machinery
Loss on sale of machinery
Dr
Cr
3 000
Income Tax Expense
Deferred Tax Liability
Dr
Cr
900
Retained Earnings (1/7/10)
Dr
3 000
Gain on sale of asset
Cr
Income Тax Еxpense
Dr
Retained Earnings (1/7/10)
Cr
Accumulated Depreciation
Dr
3 000
900
3 000
900
900
300
Retained Earnings (1/7/10)
Cr
150
Depreciation Expense
Cr
150
Retained Earnings (1/7/10)
Dr
Income Tax Expense
Cr
45
45
Additional explanation for Part (e)
§ At 1 Jan 2010 (mid YE1):
Volans Ltd (Sub) sold a depreciable asset (carrying amount of $22000) to Lyra Ltd (Parent) for
$25000.
§ Both entities charge depreciation at 10% p.a. on cost.
§ On 31 Dec 2010 (mid YE2):
Lyra (Parent) sold this asset to Tucana (outsider) for $22000
24
Topic 5 Non-controlling interest
Illustrative Example 5.1
(a) During the 2009 – 10 period, Biel Ltd sold inventory to Lugano Ltd for $23,000, recording a
profit before tax of $3,000. Lugano Ltd has since resold half of these items.
Analysis: This is an upstream sale. Subsidiary already recorded profit upon sales. However,
from the group’s viewpoint, only half of profit has been realized by 30 June 2010.
Unrealized profit=3,000/2=1500 need to be eliminated when preparing consolidated
statement. The NCI share of profit will be affected.
(b) During the 2009 – 10 period, Lugano Ltd sold inventory to Biel Ltd for $18,000, recording a
profit before tax of $2,000. Biel Ltd has not resold any of these items.
Analysis: This is a downstream sale. Parent has recorded profit upon sales. However, from
the group’s viewpoint, the profit has not been realized by the reporting date. Since it is a
downstream sale, unrealized profit should not affect NCI share of profit from the subsidiary.
(c) On 1 June 2010, Biel Ltd paid $1,000 to Lugano Ltd for services rendered.
Analysis: As you don’t make profit selling products to yourself, intra-group
service revenue should be eliminated.
(d) During the 2008 – 09 period, Biel Ltd sold inventory to Lugano Ltd. At 30 June 2009,
Lugano Ltd sill had inventory on hand on which Biel Ltd had recorded a before-tax profit of
$4,000. Lugano Ltd resold these inventories by 30 June 2010.
Analysis: An upstream sale. Refer to a) above. Note that the inventory has been sold before
30 June 2010.
(e) On 1 July 2008, Biel Ltd sold plant to Lugano Ltd for $150,000, recording a profit of
$20,000 before tax. Lugano Ltd applies a 10% p.a. straight-line method of depreciation in
relation to these assets.
Analysis: An upstream sale. Parent keeps the plant for internal use. Although the item is not
held for resale purpose, the group should recognize profit upon usage. Initially, total
unrealized after-tax profit = 20,000*70%=14,000. Subsequently, the group should recognize
realization of profit = 14,000*10%=1,400/year. After 10 years, all unrealized will fully
become realized profit. Remember, when calculating NCI share of profit (for income
statement) and NCI share of equity (for balance sheet), unrealized profit should be deducted
as it is an upstream sale.
Required
Calculate NCI share of profit and equity for the year ended 30 June 2010 (Income tax rate is
30%).
25
Cost of acquisition
BV of net assets acquired (500K + 80K + 50K + 20K)*80%
Cost-book value differential
540,000
520,000
20,000
Allocation:
Inventory 10K*70%*80%=5,600
PPE 20K*70%*80%=
11,200
Goodwill
16,800
3,200
BCVR entries:
On DOA
(1) BCVR entries:
Dr: Inventory
Cr: BCVR
Cr: D.T.L.
Dr: Acc. Dep.
Cr: Plant
Cr: BCVR
Cr: D.T.L.
10,000
7,000
3,000
40,000
20,000
14,000
6,000
On June 30, 2010 (YR4)
(1) BCVR entries:
(Inventory)
Dr: Retained Earnings (opening)
Cr: BCVR
7,000 à affects beginning R.E
7,000
(Equipment)
Dr: Acc. Dep.
Cr: Plant
Cr: BCVR
Cr: D.T.L.
40,000
20,000
14,000
6,000
Dr: Depreciation Expense (YR4)
Dr: Retained Earnings (opening)
Cr: Accumulated Depreciation
4,000 à affects current period profit
12,000 à affects beginning R.E
16,000
Dr: D.T.L.
Cr: Retained Earnings (opening)
4,800
3,600 à affects beginning R.E
26
1,200 à affects current YR profit
Cr: Income Tax Expense
Intra-group Transaction
(a) Up-stream intra-group transaction à NCI adjustment
Dr: Sales Revenue
Cr: COGS
Cr: Inventory
Dr: D. T. A.
Cr: Income Tax Expense
23,000 à affects S’s current period profit
21,500 à affects S’s current period profit
1,500
450
450 à affects S’s current period profit
NCI adjustment:
Dr: NCI (1,500 – 450)*20%
Cr: NCI share profit for the year
210
210
(b) Down-stream intra-group transaction à NO NCI adjustment
Dr: Sales Revenue
Cr: COGS
Cr: Inventory
Dr: D. T. A.
Cr: Income Tax Expense
18,000
16,000
2,000
600
600
(c) Intra-group service à NO NCI adjustment
Dr: Service Revenue
Cr: Service Expense
1,000
1,000
(d) Up-stream intra-group transaction à NCI adjustment
Dr: Retained Earnings (opening)
4,000 à affects beginning R.E
Cr: COGS
4,000 à affects current period profit
Dr: Income Tax Expense
1,200 à affects current period profit
Cr: Retained Earnings (opening)
1,200 à affects beginning R.E
NCI adjustment:
Dr: NCI (4,000-1,200)*20%
Cr: Retained Earnings (opening)
560
560
Dr: NCI share profit for the year (4,000-1,200)*20% 560
Cr: NCI
560
27
(e) Up-stream intra-group transaction à NCI adjustment
Dr: Retained Earnings (opening)
20,000 à affects beginning R.E
Cr: Plant
20,000
Dr: D.T.A.
6,000
Cr: Retained Earnings (opening)
6,000 à affects beginning R.E
Dr: Acc. Dep.
4,000 (for 2 yrs)
Cr: Retained Earnings (opening)
2,000 à affects beginning R.E
Cr: Dep. Expense
2,000 à affects current period profit
Dr: Retained Earnings (opening)
Dr: Income Tax Expense
Cr: D.T.A.
600 à affects beginning R.E
600 à affects current period profit
1,200 (for 2 yrs)
NCI adjustment:
Dr: NCI (20,000-6,000-2,000+600)*20%
Cr: Retained Earnings (opening)
2,520
2,520
Dr: NCI share profit for the year (2,000-600)*20%
Cr: NCI
NCI share of profit:
55,000*0.2
Less: After tax depreciation on plant (4K-1.2K)*0.2
Plus: Realized profit in beginning inv (2800*0.2)
Realized profit via depreciation (1400*0.2)
Less: Unrealized ending inventory (1050*0.2)
NCI share of Equity:
Subsidiary’s equity (30 June 2010) = 802K*0.2
Plus: Undepreciated plant on DOA, 20K/5 yrs*0.7*0.2
Less: Unrealized profit on inventory (1500*0.7*0.2)
Less: Unrealized profit on plant
Total NCI share
280
280
11,000
(560)
560
280
(210)
11,070
Starting point
Plant on DOA
Item d)
e)
a)
160,400
Starting point
560 To adj BV equity to FV
(210)
Item a)
(2,240)*
e)
158,510
* The plant only had been depreciated for 2 years=20K*10%*2 yrs=4,000. After-tax unrealized
profit = (20,000-4,000)*0.7=11,200. All this amount, NCI=11,200*20%=2,240
(which is = 160,960-210+560-560-2,520+280=158,510)
Consolidated financial statements (For your reference, not required in the final exam)
28
Consolidated Statement of Comprehensive Income
for the year ended 30 June 2010 (YE4)
Revenue:
Sales (1,250k-23k-18k)
Other (360k-Div 25k*0.8-Service 1k)
Total revenue
Expenses:
Cost of Sales (1,020k-21.5k-16k-4k)
Other (390k-Service 1k+(depreciation 4k-2k)
Total expenses
Profit before tax
Income tax expense (65k-(1,200+600-1,200-600-450)
Profit for the period
Other comprehensive income:
Revaluation loss
Total comprehensive income
Profit for the period attributable to :
Equity holder of the parent
Non-controlling interest
Total comprehensive income attributable to:
Equity holder of the parent
Non-controlling interest
$ 1,209,000
339,000
1,548,00
978,500
391,000
1,369,500
178,500
64,550
$ 113,950
(5,000)
108,950
102,880
11,070
113,950
95,880
13,070
108,950
Consolidated Statement of Financial Position
30 June 2010 (YR4) (Partial Goodwill)
EQUITY AND LIABILITIES
Equity attributable equity holders of the parent
Share capital
$
General reserve (80k+80%*(100k-80k)
Revaluation reserve (20k+80%*(60k-20k)
Retained earnings (note 1)
Non-controlling interest
Total equity
600 000
96 000
52 000
282 840
1 030 840
158 510
1 189 350
Liabilities
Dividend payable (40k-15k*0.8)
Non-current liabilities (50k-DTL 4,800)
Total liabilities
Total equity and liabilities
28 000
45 200
73 200
1 262 550
29
$
ASSETS
Non-current assets
Land
Plant and equipment (700k-20k-20k)
Accumulated depreciation (203k-28k)
Deferred tax asset (90k-DTA (5,850-6,000)
Goodwill – parent
Other
$
180 000
660 000
(175 000)
89 850
3 200
140 000
898 050
Current assets
Receivables (110k-12k for DIV)
Inventory (270k-1,500-2,000)
$
Total assets
$
98 000
266 500
364 500
1 262 550
30
Topic 6
Exercise 6.1
Translation into functional currency
1. The functional currency for Auckland Ltd is the NZ$
a).
Plant:
NZ$
Tanner
40 000
Accumulated depreciation
(40 000 x 1/5 x 47/12)
31 333
rate
7.8
HK$
312 000
HK$
7.8
244 400
67 600
Benches
Accumulated depreciation
(20 000 x 1/8 x 28/12)
20 000
7.8
156 000
5 833
7.8
45 500
Presses
Accumulated depreciation
(70 000 x 1/7 x ¾)
70 000
7.8
546 000
7 500
7.8
58 500
30 000
7.8
8 000
2 500
7 500
7.5
7.5
7.5
60 000
18 750
57 250
25 000
420 000
445 000
30 000
$415 000
7.2
7.5
180 000
3 150 000
3 330 000
231 000
$3 099 000
Inventory
110 500
487 500
665 600
234 000
b).
Depreciation:
Tanner: 1/5 x 40 000
Benches: 1/8 x 20 000
Presses:
Cost of sales:
Opening stock
Purchases
Closing stock
7.7
31
136 000
Exercise 6.1 (Cont’d)
2. The functional currency for Auckland Ltd is the HK$
a).
Plant:
NZ$
Tanner
40 000
Accumulated depreciation
(40 000 x 1/5 x 47/12)
31 333
rate
5.4
HK$
216 000
HK$
5.4
169 200
46 800
Benches
Accumulated depreciation
(20 000 x 1/8 x 28/12)
20 000
5.8
116 000
5 833
5.8
33 832
Presses
Accumulated depreciation
(70 000 x 1/7 x ¾)
70 000
6.2
434 000
7 500
6.2
46 500
30 000
7.7
8 000
2 500
7 500
5.4
5.8
6.2
43 200
14 500
46 500
25 000
420 000
445 000
30 000
$415 000
7.2
7.5
180 000
3 150 000
3 330 000
231 000
$3 099 000
Inventory
82 168
337 500
516 468
231 000
b).
Depreciation:
Tanner: 1/5 x 40 000
Benches: 1/8 x 20 000
Presses:
Cost of sales:
Opening stock
Purchases
Closing stock
7.7
32
104 200
Exercise 6.2
Translation into presentation currency
1. Functional currency is the US$
Sales
Cost of sales:
Opening stock
Purchases
Closing stock
Cost of sales
Gross profit
Expenses:
Depreciation
Other
Profit for the period
Retained earnings at 1/1/09
Retained earnings at 31/12/09
Share capital
Foreign currency translation reserve
Total equity
Property, plant & equipment
Accumulated depreciation
Accounts receivable
Inventory
Cash
Accounts payable
Net assets
US$
90 000
rate
1/0.56
A$
160 714
20 000
55 000
75 000
45 000
30 000
60 000
1/0.52
1/0.56
38 462
98 214
136 676
77 586
59 090
101 624
15 000
30 000
45 000
15 000
50 000
65 000
100 000
______
165 000
155 000
45 000
110 000
40 000
45 000
12 000
207 000
42 000
$165 000
1/0.56
1/0.56
1/0.58
1/0.52
1/0.52
1/0.60
1/0.60
1/0.60
1/0.60
1/0.60
1/0.60
26 786
53 571
80 357
21 267
96 154
117 421
192 308
(34 729)
275 000
258 333
75 000
183 333
66 667
75 000
20 000
345 000
70 000
$275 000
2 Verifying the foreign currency translation reserve
Profit as translated
Profit x closing rate: 15 000 x 1/0.60
Translation gain
21 267
25 000
3,733
Opening net assets
Opening net assets x opening rate
Opening net assets x closing rate (150 000 x 1/0.6)
Translation loss
Total foreign currency translation reserve
150 000
288 462
250 000
(38 462)
(34 729)
33
Alternatively:
Net assets, opening
Profit
Dividend
Net assets, ending
Translation loss (B-A)
34
US$
150,000
15,000
0
Rate
1/0.52
165,000
1/0.6
A$
288,462
21,267
0
309,729 (A)
275,000 (B)
(34,729)
Exercise 6.2 (Cont’d)
3. Functional currency is the A$
Sales
Cost of sales:
Opening stock
Purchases
Closing stock
Cost of sales
Gross profit
Expenses:
Depreciation
Other
Profit
Foreign currency translation loss
Profit
Retained earnings at 1/1/09
Retained earnings at 31/12/09
Share capital
Total equity
Property, plant & equipment
Accumulated depreciation
Accounts receivable
Inventory
Cash
Accounts payable
Net assets
US$
90 000
rate
1/0.56
A$
160 714
20 000
55 000
75 000
45 000
30 000
60 000
1/0.52
1/0.56
38 462
98 214
136 676
77 586
59 090
101 624
15 000
30 000
45 000
15 000
1/0.52
1/0.56
50 000
65 000
100 000
$165 000
1/0.52
155 000
45 000
110 000
40 000
45 000
12 000
207 000
42 000
$165 000
1/0.52
1/0.52
1/0.58
1/0.52
1/0.60
1/0.58
1/0.60
1/0.60
28 846
53 571
82 417
19 207
(1 877)
17 330
96 154
113 484
192 308
$305 792
298 077
86 538
211 539
66 667
77 586
20 000
375 792
70 000
$305 792
4. Verification of translation adjustment
Net monetary assets at 1 January 2009
Increases: sales
Decreases:
Purchases
Expenses
Net monetary assets at 31 December 2009
Foreign currency translation loss (B-A)
US$
5 000
90 000
(55 000)
(30 000)
10 000
35
rate change
gain/(loss)
1/0.52
9,615
1/0.56 160,714
1/0.56 (98,214)
1/0.56 (53,571)
18,544 (A)
1/0.6
16,667 (B)
(1,877)
Topic 7
Exercise 7.1
OSCAR LTD – ALEX LTD
Profit for the period
$100 000
Adjustments:
Depreciation over charged on inter-entity profit hidden in non-c asset
transferred on 1/7/08 (a)
10% x $2 000 (1 - 30%)
140
Unrealised profit on sale of plant on 1/1/10 (b)
original profit $3 000 (1 – 30%) less
depreciation of 15% x ½ x $2 100
(1 942)
Unrealised profit in ending inventory (c)
$8 000 (1 – 30%)
(5 600)
Realised profit on inventory to non-current asset sale:
10% x $2 000 (1 – 30%)
140
92 738
Investor’s share – 25% (approx.)
$23 185
Journal entries in Oscar Ltd:
`
Cash
Investment in Alex Ltd
(Dividend received from associate:
25% x $10 000)
Cash
Investment in Alex Ltd
(25% x $8 000)
Investment in Alex Ltd
Share of profit or loss of associates
36
Dr
Cr
2 500
Dr
Cr
2 000
Dr
Cr
23 185
2 500
2 000
23 185
Exercise 7.2
ANGUS LTD – JORDAN LTD
At 1 July 2008:
Net fair value of identifiable assets
and liabilities of Jordan Ltd
Net fair value acquired
Cost of investment
Goodwill
Depreciation of plant p.a.
after tax
=
=
=
=
=
=
$195 000 (equity) + $5 000 (1 –30%) (plant)
$198 500
30% x $198 500
$59 550
$60 050
$500
=
=
30% x 1/5 x $3 500
$210
1. Consolidation Worksheet Entries
2008 – 2009
Profit for the period (30,000*30%)
Pre-acquisition adjustment:
Depreciation of plant
$9 000
(210)
$8 790
The consolidation worksheet entries at 30 June 2009 are:
Investment in Jordan Ltd
Dr
Share of profit or loss of associates
Cr
Dividend revenue
Investment in Jordan Ltd
(30% [$15 000 + $10 000])
Dr
Cr
2009 – 2010
Profit for the period
Investor’s share – 30%
Pre-acquisition adjustment:
Depreciation of plant
8 790
8 790
7 500
7 500
$20 000
6 000
(210)
$5 790
The consolidation worksheet entries at 30 June 2010 are:
Investment in Jordan Ltd
Dr
1 290
Retained earnings (1/7/09)
Cr
1 290
(30% [$30 000 from 0809 - $15 000 dividend paid 0809 - $10000 dividend declared 0809 or simply
8790-7500] - $210)
Investment in Jordan Ltd
Share of profit or loss of associates
Dr
Cr
5 790
Dividend revenue
Dr
3 000
37
5 790
Investment in Jordan Ltd
(30% ($5 000 + $5 000))
Cr
3 000
2010 – 2011
Profit (loss) for the period
Investor’s share – 30%
Pre-acquisition adjustment:
Depreciation of plant
$ (5 000)
(1 500)
(210)
$ (1 710)
The consolidation worksheet entries at 30 June 2011 are:
Investment in Jordan Ltd
Dr
Retained earnings (1/7/10)
Cr
(or simply 1290 + 5790 – 3000)
4 080
4 080
Share of profit or loss of associates
Investment in Jordan Ltd
Dr
Cr
1 710
Dividend revenue
Investment in Jordan Ltd
(30% [$2 000 + $1 000])
Dr
Cr
900
38
1 710
900