Suggested exercises
Topic 1 Business combination
Exercise 1.1
Padova Ltd acquired all the assets and liabilities of Prato Ltd on 1 July 2011. At this date,
the assets and liabilities of Prato consisted of:
Carrying amount
$ 1 000 000
4 000 000
5 000 000
500 000
4 500 000
3 000 000
1 500 000
4 500 000
Current assets
Non-current assets
Liabilities
Share capital – 100 000 shares
Reserves
Fair value
980 000
4 220 000
5 200 000
500 000
4 700 000
In exchange for these net assets, Padova Ltd agreed to:
• issue 10 Light Ltd shares for every Prato Ltd share – Padova Ltd shares were
considered to have a fair value of $10 per share; costs of share issue were $500
• transfer a patent to the former shareholder of Prato Ltd – the patent was carried in the
records of Padova Ltd at $350 000 but was considered to have a fair value of $1
million
• pay $5.20 per share in cash to each of the former shareholders of Prato Ltd.
Padova Ltd incurred $10 000 in costs associated with the acquisition of these net assets.
Required
1. Prepare an acquisition analysis in relation to this acquisition.
2. Prepare the journal entries in Padova Ltd to record the acquisition.
1
Exercise 1.2
Venice Ltd acquired the assets and liabilities of Verona Ltd on 1 July 2011. These net
assets measured at fair value consisted of:
Equipment
Land
Trucks
Current assets
Current liabilities
$
50 000
80 000
40 000
10 000
(16 000)
Required
Prepare the journal entries in Venice Ltd to record this business combination assuming
that, to acquire these net assets, Venice Ltd:
1. issue 100 000 shares at $1.80 per share.
2. issue 100 000 shares at $1.60 per share.
2
Problem 1.3
Vercelli Ltd was finding difficulty in raising finance for expansion. Chieti Ltd was
interested in achieving economies by marketing a wider range of products.
The following shows the financial positions of the companies at 30 June 2010.
Vercelli Ltd
Chieti Ltd
Share capital
40 000 shares
$ 40 000
90 000 shares
$ 90 000
Retained earnings
12 000
30 000
52 000
120 000
Liabilities:
Debentures (secured by floating charge)
20 000
–
Accounts payable
42 000
12 000
62 000
12 000
Total equity and liabilities
$ 114 000
$ 132 000
Assets:
Cash
$ 12 000
$ 24 000
Accounts receivable
18 000
20 000
Inventory (at cost)
43 000
47 000
Land and buildings (at cost)
23 000
19 000
Plant and machinery (at cost)
52 000
41 000
Accumulated depreciation on plant and machinery
(34 000)
(19 000)
Total assets
$ 114 000
$ 132 000
It was agreed that it would be mutually advantageous for Vercelli Ltd to specialise in
manufacturing and for marketing, purchasing and promotion to be handled by Chieti Ltd.
Accordingly, Chieti Ltd sold part of its assets to Vercelli Ltd on 1 July 2010, the
identifiable assets acquired having the following fair values:
Inventory $22 000 (cost $15 000)
Land and building $34 000 (carrying amount $10 000)
Plant and machinery $27 000 (cost $38 000, accumulated depreciation $18 000)
The acquisition was satisfied by the issue of 40 000 ‘A’ ordinary shares (fully paid) in
Vercelli Ltd.
Required
1. Show the journal entries to record the above transactions in the records of Vercelli Ltd:
(a) if the fair value of the ‘A’ ordinary shares of Vercelli Ltd was $2 per share
(b) if the fair value of the ‘A’ ordinary shares of Vercelli Ltd was $2.20 share (Assume
the assets acquired constitute a business entity.)
2. Show the statement of financial position of Vercelli Ltd after the transactions,
assuming the fair value of Vercelli’s Ltd’s ‘A’ ordinary shares was $2.20 per share.
Provide the notes to the financial statement relating to the business combinations.
3
Topic 3
Consolidation in-class illustration example
On 1 July 2010 P Ltd acquired 100% of S Ltd, giving in exchange of 100K shares in P at
$5 each. S has an unrecorded patent (because it is self-developed) with a FV of $20,000,
and an unrecorded guarantee liability (because it is a contingent liability) with a FV of
$15,000. Tax rate is 30%. S Ltd balance sheet on the 1 July 2010 is as follows.
P
S
Carrying Amount
Carrying Amount
Share Capital
550,000
300,000
RE
350,000
140,000
Provisions
30,000
60,000
60,000
Payables
27,000
34,000
34,000
Tax Liabilities
10,000
6,000
6,000
Total E & L
967,000
540,000
Land
120,000
150,000
170,000
Equipments
620,000
480,000
330,000
Acc Dep.
(380,000)
(170,000)
Shares in S
500,000
Inventory
92,000
75,000
80,000
Cash
15,000
5,000
5,000
Total A
967,000
540,000
FV
Equity & Liability
Assets
4
The following events occurred in a 3-year time period subsequent to DOA (1 July 2010).
The reporting period is from 1 July to 30 June each year.
1.
2.
3.
4.
S’ land is sold in 2012-13 (Y3) for $200K.
S’ equipment is depreciated on a straight-line basis over 5 years (Y1, Y2, Y3).
S’ inventory on hand at DOA is all sold by 30 June 2011 (Y1).
S’ patent has an indefinite life, and is tested for impairment annually, with an
impairment loss of $5K recognized in 2011-12(Y2).
5. S’ guarantee liability results in a payment of $10K in June 2011, with no further
liability existing (Y1).
6. Goodwill is written down by $5K in 2011–12 (Y2) as a result of an impairment test.
Summary:
Y1: inventory sold, guarantee liability settled, equipment depreciated.
Y2: patent impaired, goodwill impaired, equipment depreciated.
Y3: land sold, equipment depreciated.
Required: Prepared consolidated balance sheet for Y3.
5
Exercise 3.1
On 1 July 2010, Frankland Ltd acquired all the share capital of Flinders Ltd for $218 500.
At this date, Flinders Ltd’s equity comprised:
Share capital – 100 000 shares
General reserve
Retained earnings
$ 100 000
50 000
36 000
All identifiable assets and liabilities of Flinders Ltd were recorded at fair value as at 1
July 2010 except for the following:
Inventory
Land
Equipment (cost $100 000)
Carrying amount
$ 27 000
75 000
50 000
Fair value
$ 35 000
90 000
60 000
The equipment is expected to have a further 10-year life. All the inventory was sold by
June 2011. The tax rate is 30%.
On 30 June 2011, the directors of Flinders Ltd decided to transfer $25 000 from the
general reserve to retained earnings.
Required
Prepare the consolidation worksheet entries for the preparation of consolidation financial
statements for Frankland Ltd and its subsidiary Flinders Ltd as at:
1. 1 July 2010.
2. 30 June 2011.
6
Exercise 3.2
On 1 July 2009, Bergamo Ltd acquired all the share capital (cum div.) of Ankogel Ltd,
giving in exchange 50 000 shares in Bergamo Ltd, these having a fair value at acquisition
date of $5 per share. Costs incurred in undertaking the acquisition amounted to $10 000.
The dividend payable at the acquisition date was paid in September 2009. At 30 June
2009, the statement of financial position of Ankogel Ltd was as follows:
Plant and equipment
Goodwill
Current assets
Statement of Financial Position
as at 30 June 2009
$ 218 000
Share capital (150 000 shares)
6 000
Retained earnings
44 000
Dividend payable
Other liabilities
$ 268 000
$ 150 000
84 000
10 000
24 000
$ 268 000
The recorded amounts of the identifiable assets and liabilities of Ankogel Ltd at the
acquisition date were equal to their fair values. Ankogel Ltd had not recorded an
internally development trade-mark. Bergamo Ltd valued this at $20 000. It was assumed
to have a 4-year life.
The tax rate is 30%.
On 31 December 2011, Ankogel Ltd paid a bonus share dividend from pre-acquisition
profits, the dividend being one share for every three held.
Required
Prepare the consolidation worksheet entries for the preparation of consolidated financial
statement at 30 June 2013.
7
Exercise 3.3
As part of a corporate expansion plan, Glockner Ltd acquired the remaining shares (cum
div.) of Hafner Ltd on 1 July 2011 for $124 200 cash. At this date, it already held 10% of
the shares of Hafner Ltd which it had acquired two years previously for $10000. These
available-for-sale financial instruments were recorded by Glockner Ltd at fair value. The
fair value at 1 July 2011 was $13 800. The statement of financial position of both
companies at 30 June 2011 were as follows:
Glockner Ltd
$ 180 000
23 800
58 200
262 000
88 000
20 000
108 000
$ 370 000
$ 150 000
26 200
13 800
55 000
190 000
(65 000)
$ 370 000
Share capital
Other components of equity
Retained earning
Total equity
Provisions
Dividend payable
Total liabilities
Total equity and liabilities
Cash
Receivables
Share in Hafner Ltd
Inventory
Plant
Accumulated depreciation
Total assets
Hafner Ltd
$ 80 000
15 000
30 000
125 000
27 000
10 000
37 000
$ 162 000
$ 10 000
25 000
42 000
100 000
(15 000)
$ 162 000
All identifiable assets and liabilities of Hafner Ltd were recorded at fair value as at 1 July
2011 except for the following:
Inventory
Plant (cost $100 000)
Carrying amount
$ 42 000
85 000
Fair value
$ 45 000
90 000
The plant is expected to have a further useful life of 5 years. Inventory held at 1 July
2011 was all sold by 30 June 2012. The dividend payable at 1 July 2011 was paid in
October 2011. The company tax rate is 30%.
Required
1. Prepare the consolidation worksheet entries, the consolidation worksheet and the
consolidated statement of financial position for Glockner Ltd and its subsidiary,
Hafner Ltd, as at 1 July 2011.
2. Prepare the consolidation worksheet entries for the preparation of consolidation
financial statements for Glockner Ltd and its subsidiary, Hafner Ltd, as at 30 June
2012.
8
Topic 4
Exercise 4.1
Octans Ltd owns all of the share capital of Cetus Ltd, In relation to the following
intragroup transactions, all parts of which are independent unless specified, prepare the
consolidation work-sheet adjusting entries for preparation of the consolidation financial
statements as at 30 June 2011. Assume an income tax rate of 30% and that all income on
sale of assets is taxable and expenses are deductible.
(a) In January 2011, Octans Ltd sells inventory to Cetus Ltd for $15 000. This inventory
had previously cost Octans Ltd $10 000, and it remains unsold by Cetus Ltd at the end
of the period.
(b)All the inventory in (a) above is sold to Hydra Ltd, an external party, for $20 000 on 2
February 2011.
(c)Half the inventory in (a) above is sold to Grus Ltd, an external party, for $9000 on 22
February 2011. The remainder is still unsold at the end of the period.
(d)Octans Ltd, in March 2011, sold inventory for $10 000 that was transferred from Cetus
Ltd 3 years ago. It had originally cost Cetus Ltd $6000, and was sold to Octans Ltd for
$12 000.
(e)Cetus Ltd sold some land to Octans Ltd in December 2010. The Land had originally
cost Cetus Ltd $25000, but was sold to Octans Ltd for only $20 000. To help Octans
Ltd pay for the land, Cetus Ltd gave Octans Ltd an interest-free loan of $12 000, and
the balance was paid in cash. Octans Ltd has as yet made no repayments on the loan.
(f)On 1 July 2010, Octans Ltd sold a depreciable asset costing $10 000 to Cetus Ltd for
$12 000. Octans Ltd had not charged any depreciation on the asset before the sale.
Both entities depreciate assets at 10% p.a. on cost.
(g)On 1 July 2010, Octans Ltd sold an item of machinery of Cetus Ltd for $6000. This
item had cost Octans Ltd $4000. Octans Ltd regarded this as inventory whereas Cetus
Ltd intended to use it as a non-current asset. Cetus Ltd charges depreciation at the rate
of 10% p.a. on cost.
9
Exercise 4.2
Lyra Ltd owns all the share capital of Volans Ltd. The following transactions relate to the
period ended 30 June 2011. Assuming an income tax rate of 30%, provide adjustment
entries to be included in the consolidation worksheet as at 30 June 2011.
(a)On 1 July 2010, Lyra Ltd sold a motor vehicle to Volans Ltd for $15 000. This had a
carrying amount to Lyra Ltd of $12 000. Both entities depreciate motor vehicles at a
rate of 10% p.a. on cost.
(b)Volans Ltd manufactures items of machinery which are used as property, plant and
equipment by other companies, including Lyra Ltd. On 1 January 2011, Volans Ltd
sold an item to Lyra Ltd for $62 000, its cost to Volans Ltd being only $55 000 to
manufacture. Lyra Ltd charges depreciation on these machines at 20% p.a. on the
declining value.
(c)Lyra Ltd manufactures certain items which it then markets through Volans Ltd. During
the current period, Lyra Ltd sold for $12 000 items to Volans Ltd at cost plus 20%.
Volans Ltd has sold 75% of these transferred items at 30 June 2011.
(d)Volans Ltd also sells second-hand machinery. Lyra Ltd sold one of its depreciable
assets (original cost $40 000, accumulated depreciation $32 000) to Volans Ltd for
$5000 on 1 January 2011. Volans Ltd had not resold the item by 30 June 2011.
(e)Volans Ltd sold a depreciable asset (carrying amount of $22 000) to Lyra Ltd on 1
January 2010 for $25 000. Both entities charge depreciation at a rate of 10% p.a. on
cost in relation to these items. On 31 December 2010, Lyra Ltd sold this asset to
Tucana Ltd for $20 000.
10
Topic 5 Non-controlling interest
Example 5.1
Lugano Ltd acquired 80% of the shares of Biel Ltd on 1 July 2006 for $540,000 when the
equity of Biel Ltd consisted of:
Share capital
General reserve
Retained earnings
$500,000
100,000
50,000
All identifiable assets and liabilities of Biel Ltd are recorded at fair value at this date
except for inventory for which the fair value was $10,000 greater than carrying amount,
and plant which had a carrying amount of $150,000 (net of $40,000 accumulated
depreciation) and a fair value of $170,000. The inventory was all sold by 30 June 2007,
and the plant had a further 5-year life with depreciation based on the straight-line method.
Financial information for both companies at 30 June 2010 is as follows.
Lugano Ltd
$ 720,000
240,000
960,000
(610,000)
(230,000)
(840,000)
120,000
(40,000)
80,000
200,000
280,000
(20,000)
(25,000)
(45,000)
235,000
600,000
100,000
935,000
25,000
25,000
50,000
$ 985,000
$ 80,000
100,000
200,000
(115,000)
100,000
Sales revenue
Other revenue
Cost of sales
Other expenses
Profit before tax
Tax expenses
Profit for the period
Retained earnings at 1/7/09
Dividend paid
Dividend declared
Retain earnings at 30/6/10
Share capital
General reserve
Total equity
Dividend payable
Other liabilities
Total liabilities
Total equity and liabilities
Receivables
Inventory
Plant and equipment
Accumulated depreciation
Land at fair value
11
Biel Ltd
$ 530,000
120,000
650,000
(410,000)
(160,000)
(570,000)
80,000
(25,000)
55,000
112,000
167,000
(10,000)
(15,000)
(25,000)
142,000
500,000
160,000
802,000
15,000
25,000
40,000
$ 842,000
$ 30,000
170,000
500,000
(88,000)
80,000
Shares in Biel Ltd
Deferred tax assets
Other assets
Total assets
540,000
50,000
30,000
$985,000
40,000
110,000
$842,000
(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.
(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.
(c) On 1 June 2010, Biel Ltd paid $1,000 to Lugano Ltd for services rendered.
(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.
(e) On 1 July 2008, Biel Ltd sold plant to Lugano Ltd for $150,000, recording a profit of
$20,000 before tax. Lugano Ltd applies a 10% p.a. straight-line method of depreciation in
relation to these assets.
Required
Calculate NCI share of profit and equity for the year ended 30 June 2010 (Income tax rate
is 30%).
12
Topic 6 Foreign currency
Exercise 6.1
Auckland Ltd is a manufacturer of sheepskin products in New Zealand. It is a fully
owned subsidiary of a Hong Kong company, China Ltd. The following assets are held by
Acukland Ltd at 30 June 2010:
Plant:
Cost
NZ$
Useful life
(years)
Acquisition
Date
Tanner
Benches
presses
40 000
20 000
70 000
5
8
7
10/8/06
8/3/08
6/10/09
Exchange rate on
acquisition date
(NZ$1 = HK$)
5.4
5.8
6.2
Plant is depreciated on a straight-line basis, with zero residual values. All assets acquired
in the first half of a month are allocated a full month’s depreciation.
Inventory:
l
At 1 July 2009, inventory on hand of $25 000 was acquired during the last month
of the 2008 – 09 period.
l
Inventory acquired during the 2009 – 10 period was acquired evenly throughout
the period. Total purchase of $420 000 was acquired during that period.
l
The inventory of $30 000 on hand at 30 June 2010 was acquired during June 2010.
Relevant change rates (quoted as NZ$1 = HK$) are as follow:
Average for June 2009
1 July 2009
Average for 2009 -10
Average for June 2010
30 June 2010
7.2
7.0
7.5
7.7
7.8
Required:
1.
Assuming the functional currency for Auckland Ltd is the NZ$, calculate:
a)
the balances for the plant items and inventory in HK$ at 30 June 2010
b)
the depreciation and cost of sales amounts in the statement of comprehensive
income for 2009 – 10.
2.
a)
b)
Assuming the functional currency is the HK$, calculate:
the balances for the plant items and inventory in HK$ at 30 June 2010
the depreciation and cost of sales amounts in the statement of comprehensive
income for 2009 – 10.
3.
Discuss the differences in the result achieved in parts 1 and 2 above, and explain
why the choice of the functional currency gives a different set of accounting
numbers.
13
Exercise 6.2
January Ltd, an Australian company, acquired all the issued shares of July Ltd, a US
company, on 1 January 2009. At this date, the net assets of July Ltd are shown below.
US$
Property, plant and equipment
155 000
Accumulated depreciation
(30 000)
125 000
Cash
10 000
Inventory
20 000
Accounts receivable
10 000
Total assets
165 000
Accounts payable
15 000
Net assets
150 000
The trail balance of July Ltd at 31 December 2009 was:
US$ Dr
US$ Cr
Share capital
100 000
Retained earnings
50 000
Accounts payable
42 000
Sales
90 000
Accumulated depreciation – plant and equipment
45 000
Property, plant and equipment
155 000
Accounts receivable
40 000
Inventory
45 000
Cash
12 000
Cost of sales
30 000
Depreciation
15 000
Other expenses
30 000
327 000
327 000
Additional information
1.
No property, plant and equipment were acquired in the 2009 period.
2.
All sales and expenses were acquired evenly throughout the period. The inventory
on hand at the end of the year was acquired during December 2009.
3.
Exchange rates were (A$1 = US$):
1 January 2009
0.52
31 December 2009
0.60
Average for December 2009
0.58
Average for 2009
0.56
4.
The functional currency for July Ltd is the US dollar.
Required
1.
Prepare the financial statements of July at 31 December 2009 in the presentation
currency of Australian dollars.
2.
Verify the translation adjustment.
3.
Discuss the differences that would occur if the functional currency of July Ltd
were the Australian dollar.
4.
If the functional currency were the Australian dollar, calculate the translation
adjustment.
14
Topic 7 Investment in associates
Exercise 7.1
Oscar Ltd owns 25% of the shares of its associate, Alex Ltd. At the acquisition date, there
were no differences between the fair values and the carrying amounts of the identifiable
assets and liabilities of Alex Ltd.
For 2009 – 10, Alex Ltd recorded a profit of $100 000. During this period, Alex Ltd paid
a $10 000 dividend, declared in June 2009, and an interim dividend of $8000. The tax
rate is 30%.
The following transactions have occurred between Oscar Ltd and Alex Ltd:
a) On 1 July 2008, Alex Ltd sold a non-current asset costing $10 000 to Oscar Ltd for
$12 000. Oscar Ltd applies a 10% p.a. on cost straight-line method of depreciation.
b) On 1 January 2010, Alex Ltd sold an item of plant to Oscar Ltd for $15 000. The
carrying amount of the asset to Alex Ltd at time of sale was $12000. Oscar Ltd applies
a 15% p.a. straight-line method of depreciation.
c) A non-current asset with a carrying amount of $20 000 was sold by Alex Ltd to Oscar
Ltd for $28 000 on 1 June 2010. Oscar Ltd regarded the item as inventory and still had
the item on hand at 30 June 2010.
d) On 1 July 2008, Oscar Ltd sold an item of machinery to Alex Ltd for $6000. This item
had cost Oscar Ltd $4000. Oscar Ltd regarded this item as inventory whereas Alex Ltd
intended to use the item as a non-current asset. Alex Ltd applied a 10% p.a. on cost
straight-line depreciation method.
Required
Oscar Ltd applies IAS 28 in accounting for its investment in Alex Ltd. Prepare the
journal entries in the records of Oscar Ltd for the year ended 30 June 2010 in relation to
its investment in Alex Ltd.
15
Exercise 7.2
On 1 July 2008, Angus Ltd purchased 30% of the shares of Jordan Ltd for $60 050. At
this date, the ledger balances of Jordan Ltd were:
Capital
Other reserves
Retained earnings
$150 000
30 000
15 000
$195 000
Assets
Less: Liabilities
$225 000
30 000
$195 000
At 1 July 2008, all the identifiable assets and liabilities of Jordan Ltd were recorded at
fair value except for plant whose fair value was $5000 greater than carrying amount. This
plant has an expected future life of 5 years, the benefits being received evenly over this
period. Dividend revenue is recognised when dividends are declared. The tax rate is 30%.
The result of Jordan Ltd for the next 3 years were:
Profit/(loss) before income tax
Income tax expense
Profit/(loss)
Dividend paid
Dividend declared
30 June 2009
$ 50 000
20 000
30 000
15 000
10 000
30 June 2010
$ 40 000
20 000
20 000
5 000
5 000
30 June 2011
$ (5 000)
(5 000)
2 000
1 000
Required
Prepare, in journal entry format, for the years ending 30 June 2009, 2010 and 2011, the
consolidation worksheet adjustments to include the equity-accounted results for the
associate, Jordan Ltd, in the consolidated financial statements of Angus Ltd.
16