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