SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 1
CONSOLIDATION AND EQUITY METHOD
P Co. acquired a 90% ownership interest in Y Co. on 1 January 2003. At the date of acquisition, the
share capital of Y Co. was $1,000,000 and the retained earnings balance was $500,000. The book values
of Y Co. were close to their fair values, with the exception of inventory that was undervalued by
$100,000. Y Co. sold the undervalued inventory in 2003. The fair value of non-controlling interests
was $200,000 as at the date of acquisition.
On 1 January 2004, P Co. acquired a 30% ownership interest in Z Co. At that date, the share capital of
Z Co. was $200,000 while its retained earnings balance was $400,000. Z Co. had an unrecognized
intangible asset with a reliable fair value of $240,000. The intangible asset had a useful life of five
years from the date of acquisition.
In 2004, Y Co. sold inventory to P Co. at a transfer price of $360,000. The original cost of the inventory
was $200,000. 90% of the inventory remained unsold at the end of 2004; 10% of the original inventory
remained unsold as at the end of 2005.
On 1 January 2005, Z Co. transferred machinery to P Co. at an invoiced price of $296,000. The original
cost of the machinery was $360,000. The machinery had an original useful life of five years with no
residual value. As at 1 January 2005, the remaining useful life of the machinery was four years with
no change to its original estimated useful life.
There has been no change in share capital of Y Co. and Z Co. since acquisition.
Ignore taxation implications.
The financial statements for P Co., Y Co. and Z Co. for the financial year ended 31 December 2005 are
shown below:
All dividends have been paid by 31 December 2005.
1
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Required:
Prepare the consolidation and equity accounting entries for 2005 and prepare a consolidation
worksheet for the year ended 31 December 2005.
2
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
3
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 2
CONSOLIDATION AND EQUITY METHOD
On 1 January 2001, P Co. acquired 70% of S Co. by issuing 1,000,000 new shares to the owners of S Co.
The fair value of consideration paid by P Co. to acquire S Co. was $2,100,000. The fair value of noncontrolling interests at acquisition date was $900,000. On 1 January 2002, P Co. acquired a 40%
ownership interest in A Co. by making a cash payout of $200,000 to the owners of A Co.
The following information relates to balance sheets at date of acquisition:
The following financial statements relate to the financial year ended 31 December 2003:
All dividends have been paid by 31 December 2003.
4
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Additional information:
(1) Impairment of in-process R&D of $100,000 was expensed off in the consolidated financial
statement of P Co. in 2002.
(2) Undervalued inventory as at 1 January 2001 was sold in 2001.
(3) The contingent liability of $50,000 in respect of legal claims was paid off by S Co. in 2003 and
recognized as an expense by S Co. in 2003.
(4) The following sales of inventory were made during 2002 and 2003.
Sales from S Co. to P Co.
Original cost
Percentage (original transferred amount) unsold to third parties at year-end
2002
$100,000
$ 80,000
20%
Sales from S Co. to P Co.
Original cost
Percentage (original transferred amount) unsold to third parties at year-end
Sales from P Co. to A Co.
Original cost
Percentage (original transferred amount) unsold to third parties at year-end
2003
0%
$200,000
$160,000
40%
$ 70,000
$ 50,000
30%
0%
(5) Undervalued fixed assets of A Co. had a useful life of five years from date of acquisition.
(6) There is no change in the share capital of S Co. and A Co. from acquisition date.
(7) Ignore taxation implications.
5
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Required:
(1) Prepare the consolidation adjustment journal entries for the year ended 31 December 2003.
(2) Prepare the equity accounting journal entries for the year ended 31 December 2003.
(3) Prepare the consolidation worksheet for the year ended 31 December 2003 to show the
consolidated financial statements prepared in accordance with HKFRS 10 and HKAS 28.
(4) Perform a reconciliation for the investment in associates as at 31 December 2003.
6
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
7
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 3
CONSOLIDATION AND EQUITY METHOD
The financial statements of Plasma Ltd. (Entity P), Studio Ltd. (Entity S) and Audio Ltd. (Entity A) are
shown below:
Note: The balances of “Amount due to .. “ and “Amount due from ..” refer to specific intercompany
balances. All dividends have been paid by 31 December 2009.
Plasma Ltd. acquired an interest in Studio Ltd. and Audio Ltd. as follows:
Date of acquisition
Percentage acquired by Plasma Ltd.
Shareholders’ equity at date of acquisition
Share capital
Retained earnings
Studio Ltd.
1 January 2007
90%
Audio Ltd.
1 January 2008
30%
$ 800,000
900,000
$1,700,000
$ 200,000
400,000
$ 600,000
8
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Differences between fair values and book values at the date of acquisition were as follows:
Studio Ltd.
Book value of inventory
Fair value of inventory
The inventory was sold to third parties in 2007.
The fair value of non-controlling interests as at the date of acquisition was
$190,000. The group adopts full goodwill method in measuring noncontrolling interests.
Audio Ltd.
Unrecorded contingent liability that was reliably measured
The contingent liability materialised in 2009; Audio Ltd. recorded an expense
to the income statement of $100,000 for the year ended 31 December 2009.
$220,000
$320,000
$(100,000)
Additional information:
(a) On 1 January 2008, Studio Ltd. transferred machinery to Plasma Ltd. at an invoiced price of
$162,000. The original cost of the machinery was $180,000. The equipment was originally
purchased by Studio Ltd. on 1 January 2007 when the estimated useful life was five years.
Estimated useful life at the date of transfer was 4.5 years. Both companies adopt an accounting
policy of depreciating equipment using straight-line method with zero residual value.
(b) In 2009, Plasma Ltd. sold excess inventory to Studio Ltd. at a transfer price of $50,000. The
inventory cost Plasma Ltd. $60,000. The loss incurred by Plasma Ltd. was indicative of an
impairment loss of the inventory. At 31 December 2009, only 10% of the transferred inventory still
remained in the warehouse of Studio Ltd.
(c) In 2008, Plasma Ltd. sold inventory to Audio Ltd. as follows:
Sale of inventory from Plasma Ltd. to Audio Ltd.
Transfer price of inventory
Original cost of the inventory
Percentage resold to third parties during 2008:
2009 (based on original value):
$100,000
$ 70,000
20%
60%
(d) Due to “less-than-expected” performance of Audio Ltd., the investment carrying value of Audio
Ltd. has been impaired by $200,000 at 31 December 2009.
(e) Plasma Ltd. has a building which it purchased on 1 January 2009 for 4,000,000 doughnut coins
(“DC”, a currency of Country Doughnut) and which is located in Country Doughnut. The
building is carried at cost and has been depreciated on the straight-line basis over its useful life of
20 years. The accountant of Plasma Ltd. has correctly accounted for the depreciation of this
building for the year; however, the directors of Plasma Ltd. decided to carry out an impairment
review for this building and noted that the recoverable amount of the building as at 31 December
2009 was estimated to be 3,600,000 DC. The accountant has not taken into account any
impairment implication into the financial statements.
Relevant exchange rates are:
Dates
1 January 2009
31 December 2009
Average for the year to 31 December 2009
$ to
10 DC
12 DC
10.5 DC
9
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
(Hint: Impairment review is similar to what we have discussed in class regarding the application of lower
of cost and net realisable value for inventories. You need to compare the carrying amount of the building
with its recoverable amount as at year end. If the recoverable amount is lower than the carrying amount,
the company needs to incur an impairment loss.)
Required:
Prepare the consolidated statement of profit or loss and statement of financial position of the group
for the year ended 31 December 2009.
Income statement for the year ended 31 December 2009
Plasma
Studio
$
$
Profit before tax
4,200,000
1,800,000
Tax expense
Profit after tax for the year
(840,000)
3,360,000
(360,000)
1,440,000
Dividends declared and paid
Retained earnings, beginning
(400,000)
1,200,000
(300,000)
1,200,000
Retained earnings, ending
4,160,000
2,340,000
Adjustments
Dr ($)
Cr ($)
Consolidated
$
10
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Statements of financial position as at 31 December 2009
Plasma
Studio
$
$
Assets
Fixed assets, net book value
2,800,000
2,200,000
Investment in Y Co., at cost
Investment in Z Co., at cost
2,200,000
800,000
Inventory
Intercompany receivable
Amount due from Audio
Accounts receivable
Cash
Total assets
760,000
60,000
600,000
45,000
7,265,000
500,000
100,000
700,000
100,000
3,600,000
Equity and liabilities
Share capital
1,200,000
800,000
Retained earnings
4,160,000
2,340,000
Total equity
Accounts paybale
Intercompany payable
Total equity and liabilities
5,360,000
1,805,000
100,000
7,265,000
3,140,000
460,000
3,600,000
Adjustments
Dr ($)
Cr ($)
Consolidated
$
-
11
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 4
CONSOLIDATION AND EQUITY METHOD
P Co. acquired an interest in Y Co. and Z Co. Details of the acquisition are as follows:
Date of acquisition
Percentage acquired by P Co.
At date of acquisition
Share capital
Retained earnings
Total stockholders’ equity
Y Co.
1 January 2004
90%
Z Co.
1 January 2005
30%
$500,000
700,000
$1,200,000
$200,000
400,00
$600,000
Differences between fair value and book value at acquisition date were for the following assets:
Y Co.
Inventory
Intangibles
Book value
$220,000
Z Co.
Fair value
$320,000
Book value
Fair value
$300,000
Inventory of Y Co. at acquisition date was sold to third parties within 6 months of acquisition.
Intangible asset of Z Co. had a remaining useful life of five years from the date of acquisition. The fair
value of non-controlling interests of Y Co. at acquisition date was $140,000.
The financial statements of P Co., Y Co. and Z Co. for the year ended 31 December 2006 are shown
below:
12
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Additional information:
(a) On 1 November 2005, Y Co. sold inventory to P Co. at a transfer price of $200,000 at cost plus
42.86%. The subsequent resale of this batch of inventory is as follows:
Resold to third parties during 2005
Resold to third parties during 2006
In inventory as at 31 December 2006
20%
60%
20%
(b) In 2006, P Co. sold inventory to Y Co. as follows:
Transfer price of inventory
Gross profit margin
Percentage resold to third parties during 2006
$120,000
16.667%
80%
(c) On 1 January 2006, Z Co. transferred an item of equipment to P Co. at a transfer price of
$172,000. The original cost of the equipment, which was purchased by Z Co. on 1 January 2005,
was $180,000. The original useful life of the equipment was five years and there is no change
in the remaining useful upon transfer. The equipment has no residual value.
(d) P Co. recognized interest expense charged by Y Co. and Z Co. during 2006 as follows:
Interest expense charged by Y Co.
Interest expense charged by Z Co.
$1,500
$1,000
The same amounts were recorded as interest income by Y Co. and Z Co. respectively.
(e) Ignore tax implications.
(f) All dividends have been paid by 31 December 2006.
Required:
Prepare the consolidation and equity accounting entries for 2006 and prepare a consolidation
worksheet for the year ended 31 December 2006.
13
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
14
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 5
CONSOLIDATION AND EQUITY METHOD
Horror Ltd. is principally engaged in the film production industry. In February 2007, Horror Ltd.
made an offer to the shareholders of Sorrow Ltd. to acquire a controlling interest in Sorrow Ltd.,
which operates a number of cinema circuits in Hong Kong. Horror Ltd. was prepared to pay HK$1.50
cash per share to owners of the shares of Sorrow Ltd. By 1 April 2007, 75% of the shares had changed
hands and were now in the possession of Horror Ltd. Sorrow Ltd.’s retained earnings were recorded
at HK$160 million on date of acquisition.
On 1 April 2008, Horror Ltd. acquired 25% of the shares of Anger Ltd., which operates a chain of DVD
retail shops, for a consideration of HK$150 million. Anger Ltd.’s retained earnings were recorded at
HK$120 million. The acquisition of the shares of Sorrow Ltd. and Anger Ltd. is as follows:
Share capital (par value of $1) at acquisition date
Date of
%
acquisition
acquired
HK$’000
Sorrow Ltd.
1 April 2007
75
400,000
Anger Ltd.
1 April 2008
25
400,000
The fair value of the identifiable net assets of Sorrow Ltd. and Anger Ltd. at the date of acquisition
was the same as the carrying amount of those assets except that
(1) Anger Ltd. held a customer list, which at 1 April 2008 had a fair value of HK$10 million. This
list had not been recognized in the financial statements of Anger Ltd. The customer list had a
remaining term of five years at that date. Anger Ltd. still holds this list at the year-end.
(2) The fair values of equipment held by Sorrow Ltd. at 1 April 2007 had a fair value of HK$4
million greater than their carrying amount. The useful life of such equipment is expected to be
four years since acquisition date.
The companies have not issued further any shares since acquisitions. It is the group policy that noncontrolling interest shall be measured at non-controlling interest’s proportionate share of the
subsidiary’s identifiable net assets. The statements of profit or loss of the three companies for the year
ended 31 March 2010 are summarised as follow:
Revenue
Less: Cost of sales
Gross profit
Other income
Distribution and administrative
costs
Depreciation and amortisation
Profit before tax
Tax
Profit for the year
Dividends declared and paid
Retained earnings, 1/4/2009
Retained earnings, 31/3/2010
Horror Ltd.
HK$'000
878,900
(374,400)
504,500
14,000
Sorrow Ltd.
HK$'000
389,200
(112,400)
276,800
16,000
Anger Ltd.
HK$'000
300,000
(120,000)
180,000
15,000
(216,200)
(30,000)
272,300
(112,400)
159,900
(2,000)
750,100
908,000
(115,800)
(10,000)
167,000
(49,000)
118,000
(800)
191,000
308,200
(120,000)
(10,000)
65,000
(22,500)
42,500
(1,000)
180,000
221,500
15
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
During the year ended 31 March 2010, Horror Ltd. supplied concession items (e.g. snacks to be sold)
to Sorrow Ltd. for the cinema circuits and DVDs to Anger Ltd. at an invoiced price of HK$100 million
and HK$15 million respectively (Hint: Treat these items simply as inventories). Horror Ltd. invoiced
goods to its subsidiary at cost plus 25% and to its associated company at cost plus 20%. One-fourth
(1/4) of the concession items and one-fifth (1/5) of the DVDs were still in Sorrow Ltd.’s and Anger
Ltd.’s inventory respectively at 31 March 2010. The companies settled all the outstanding balances
arisen from these transactions prior to 31 March 2010.
On top of the above, during the year ended 31 March 2010, Horror Ltd. transferred old DVDs to
Sorrow Ltd., at a price of HK$5 million, to be placed in their cinemas for sale. These old DVDs which
cost Horror Ltd. $7 million, are slow-moving and only 20% of these DVDs were sold by 31 March 2010.
On 1 April 2008, Sorrow Ltd. sold equipment to Horror Ltd. for $60 million for cash. The equipment
was originally purchased by Sorrow Ltd. at a purchase price of $72 million on 1 April 2006, with an
estimated useful life of 8 years. Sorrow Ltd. and Horror Ltd. both adopted an accounting policy
which depreciates plant and equipment using straight-line method with no residual value. The
equipment was then estimated by the directors of Horror Ltd., on the date of transfer from Sorrow
Ltd., to have a remaining useful life of 6 years.
On 1 January 2010, Horror Ltd. purchased an equity instrument of 3.5 million Playfish cash (a currency
of a mysterious place) which was its fair value. The instrument was classified as trading securities.
Horror Ltd. has not recorded any change in the value of the instrument since purchase. The relevant
exchange rates and fair values were as follows:
1 January 2010
31 March 2010
1 Playfish cash =
HK$1.74
HK$1.79
Fair value of instrument in Playfish cash (‘000)
3,500
4,000
The goodwill of Sorrow Ltd. has not suffered any impairment since acquisition; however, due to the
adverse business environment of the DVD retail industry arising from pirated DVDs, the value of
Anger Ltd. has been impaired by $1 million at 31 March 2010.
Subsequent to the end of this current year, as the accounting manager of the group, you are required
to prepare the consolidated financial statements to be presented to the board of directors for
discussion and approval. You can ignore any taxation implications in this question.
Required:
(1) Prepare the consolidated adjustment journal entries and equity adjustment entries to prepare
for the consolidated financial statements for the group.
(2) Prepare the consolidated statement of profit or loss for the year ended 31 March 2010 for the
group using the worksheet attached.
(3) Calculate the balance of non-controlling interests and the investment in associate to be
included in the consolidated statement of financial position as at 31 March 2010 for the group.
16
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Horror Ltd.
HK$'000
Sorrow Ltd.
HK$'000
Revenue
878,900
389,200
Less: Cost of sales
(374,400)
(112,400)
Gross profit
Other income
504,500
14,000
276,800
16,000
Distribution and administrative costs (216,200)
Depreciation and amortisation
(30,000)
(115,800)
(10,000)
Profit before tax
Tax
Profit for the year
272,300
(112,400)
159,900
167,000
(49,000)
118,000
Dividends declared
Retained earnings, 1/4/2009
(2,000)
750,100
(800)
191,000
Retained earnings, 31/3/2010
908,000
308,200
Consolidation Adjustments
Dr. (HK$'000) Cr. (HK$'000)
Consolidated
HK$'000
17
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 6
CONSOLIDATION
EXAMINATION DECEMBER 2012)
AND
EQUITY
METHOD
(ADAPTED
FROM
QP
Assume that you are the accounting manager of Asia Polyethylene Limited (APE), which is a
company incorporated in Hong Kong. APE and its subsidiaries (APE Group) are principally engaged
in the production and distribution of high density polyethylene (HDPE) which is widely used for the
production of plastic bags, bottle caps and fluid containers in Hong Kong. Now, APE intends to
expand its business for the production and distribution of HDPE worldwide.
Embu Polyethylene (EPE), Faima Polyethylene (FPE) and Gensi Polyethelyene (GPE)
APE acquired 80% of the shares of EPE for HK$26.55 million on 1 April 2009. At the acquisition date,
EPE’s reported retained earnings were HK$12.25 million. The excess of APE’s acquisition cost over its
share of EPE’s book value was assigned to plant and equipment that had a fair value of HK$2.5
million greater than book value and a remaining life of five years at the acquisition date, and the
balance to goodwill. Non-controlling interests are to be measured at their fair value at acquisition
date, i.e. HK$6 million. The investment in EPE is carried at cost. There has been no change in the
share capital of EPE since the date of acquisition.
On 1 April 2011, APE acquired 30% of the HK$1 ordinary shares in FPE for HK$7.45 million. FPE
should be accounted for as an associate. The book value of FPE’s net assets was the same as their fair
value as at acquisition date. There has been no change in the share capital of FPE since the date of
acquisition.
On 31 March 2012, APE acquired 100% of the HK$1 ordinary shares in GPE for HK$20.5 million. The
excess of GPE’s acquisition cost over the GPE’s book value was assigned to an internally-generated
patent that had a fair value of HK$1 million at the acquisition date, and the balance to goodwill. The
investment in GPE is carried at cost.
An extract of the financial statements of the four companies for the year ended 31 March 2012 is
shown below:
Sales
Cost of sales
Other income (including gain
on disposal and EPE's dividends)
Depreciation expense
Interest expense
Other expenses
Profit for the year
Retained earnings, 1 April 2011
Dividends declared and paid
Retained earnings, 31 March 2012
APE
HK$'000
80,000
(55,000)
EPE
HK$'000
35,750
(24,500)
FPE
HK$'000
18,000
(12,000)
GPE
HK$'000
20,000
(11,000)
3,700
(8,000)
(5,900)
(3,800)
11,000
44,000
(3,500)
51,500
(1,700)
(1,600)
(4,200)
3,750
22,500
(1,250)
25,000
(400)
(550)
(2,850)
2,200
11,250
13,450
(4,000)
(500)
(2,500)
2,000
10,000
12,000
18
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Plant and equipment, net
Investment in EPE, cost
Investment in FPE, cost
Investment in GPE, cost
Other investments
Inventory
Receivables
Cash and cash equivalents
Total assets
APE
HK$'000
43,000
26,550
7,450
20,500
250
41,250
10,000
7,500
156,500
EPE
HK$'000
19,000
1,250
20,000
11,000
8,750
60,000
FPE
HK$'000
10,800
10,400
9,000
5,800
36,000
GPE
HK$'000
20,000
2,000
4,000
3,000
29,000
Share capital (HK$1 par)
Retained earnings
Payables
Total liabilities and equities
30,000
51,500
75,000
156,500
15,000
25,000
20,000
60,000
7,500
13,450
15,050
36,000
7,000
12,000
10,000
29,000
On 1 April 2011, APE held inventory of HK$2.5 million purchased from EPE during the year ended 31
March 2011; these goods had been manufactured by EPE at a cost of HK$1.6 million. During the year
ended 31 March 2012, EPE sold goods costing HK$6 million to APE for HK$9 million. APE sold the
inventory of HK$2.5 million on hand at the beginning of the year, but held 35% of its current year’s
purchases from EPE on 31 March 2012.
APE sold plant and equipment at a transfer price of HK$10 million (with an original carrying amount
of HK$8 million) to FPE on 1 April 2011. On that date, that plant and equipment had a remaining
useful life of five years.
Required:
Prepare:
(i)
the consolidated statement of profit or loss of APE for the year ended 31 March 2012;
(ii)
the consolidated statement of financial position of APE as at 31 March 2012; and
(iii)
the consolidated statement of changes in equity of APE for the year ended 31 March 2012.
19
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
APE
HK$'000
80,000
(55,000)
EPE
HK$'000
35,750
(24,500)
Other income (including gain
on disposal and EPE's dividends)
Depreciation expense
Interest expense
Other expenses
3,700
(8,000)
(5,900)
(3,800)
(1,700)
(1,600)
(4,200)
Profit for the year
11,000
3,750
Retained earnings, 1 April 2011
44,000
22,500
Dividends declared
Retained earnings, 31 March 2012
(3,500)
51,500
(1,250)
25,000
Sales
Cost of sales
HK$'000
HK$'000
Adjustments
Dr. (HK$'000) Cr. (HK$'000)
Consolidated
HK$'000
20
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Plant and equipment, net
APE
HK$'000
43,000
EPE
HK$'000
19,000
Investment in EPE, cost
Investement in FPE, cost
Investment in GPE, cost
Other investments
26,550
7,450
20,500
250
1,250
Inventory
Receivables
Cash and cash equivalents
Total assets
41,250
10,000
7,500
156,500
20,000
11,000
8,750
60,000
Share captial (HK$1 par)
30,000
15,000
Retained earnings
51,500
25,000
Payables
Total liabilities and equities
75,000
156,500
20,000
60,000
HK$'000
HK$'000
Adjustments
Dr. (HK$'000) Cr. (HK$'000)
Consolidated
HK$'000
21
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 7
CONSOLIDATION
Investment in Frog Ltd.
Piglet Ltd. purchased a 60% holding in equity of Frog Ltd. on 1 August 2011 for an immediate cash
payment of GG 510 million. On that date, the fair values of the net assets of Frog Ltd. were similar to
the carrying values in the books of Frog Ltd. except that the fair value of certain plant and equipment
was GG 24 million in excess of its carrying value. These plant and equipment had a useful economic
life of 4 years from the date of acquisition. The revised values have not been incorporated into the
books of Frog Ltd. The non-controlling interest had a fair value of GG 300 million on 1 August 2011.
No impairment of goodwill had occurred by 31 July 2013. For the year ended 31 July 2012, Frog Ltd.
was break even (i.e. earning nil profit) and did not declare any dividends for that year. Frog Ltd.
declared and paid GG 10 million dividends for the year ended 31 July 2013. The exchange rate on
which dividends were paid was GG 1.25 per HK$1. Piglet Ltd. recognised its dividends within
“investment income”. The relevant exchange rates were as follows:
Date
Exchange rate (GG per HK$1)
1 August 2011
1.35
31 July 2012
1.33
31 July 2013
1.25
Average for the year ended 31 July 2012
1.30
Average for the year ended 31 July 2013
1.28
Investment in Strek Ltd.
On 1 December 2012, Piglet Ltd. purchased a 70% holding in equity of Strek Ltd. The purchase price
was HK$790 million paid in cash. The fair value of non-controlling interest at 1 December 2012 was
assessed to be HK$300 million. On 31 July 2013, impairment losses against consolidated goodwill
amounting to HK$17 million has to be recognised.
On 1 December 2012, Strek Ltd. held an internally generated customer database which had a fair value
of HK$24 million. It was expected that the database can benefit the Group for a further 4 years from 1
December 2012.
During the three months ended 31 July 2013, Strek Ltd. sold goods to Piglet Ltd. for HK$24 million.
These goods were sold at a mark-up on cost of 60%. One third of the goods remained in the inventory
of Piglet Ltd. at 31 July 2013.
Strek Ltd. declared a dividend of HK$50 million during the year from post-acquisition profits. Piglet
Ltd. has recognised its share of this dividend within “investment income”.
The Group accounted for the two business combinations using full goodwill approach. The three
companies have not issued any shares for the past few years. It is assumed that income statement
items accrue evenly throughout the current year.
Transactions to be updated
Piglet Ltd. purchased two properties on 1 August 2012. Property 1, which cost GG 2.66 million, was
rented to independent third party. Property 2, which also cost GG 2.66 million, was rented to its own
director. Piglet Ltd. properly accounted for the above purchase transactions on 1 August 2012.
However, the accountant of Piglet Ltd. was uncertain about the subsequent treatment of Property 1
and Property 2 and did not record anything afterwards. Piglet Ltd. adopted fair value model for
investment property in accordance with HKAS 40 and cost model for property, plant and equipment
in accordance with HKAS 16. The fair values of Property 1 and Property 2 on 31 July 2013 were GG
2.75 million and GG 2.5 million respectively. Both properties have an economic useful life of 20 years.
22
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Required:
Translate the financial statements of Frog Ltd. using the closing rate method. Prepare the
consolidated journal entries and correction journal entries (if any). Prepare the consolidated
statement of profit or loss for Piglet Group for the year ended 31 July 2013. Round your
calculations to 2 decimal places.
23
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
24
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 8
2015)
CONSOLIDATION (ADAPTED FROM ACCA EXAMINATION DECEMBER
Kutchen, a public listed company, operates in the technology sector and has investments in other
entities operating in the sector. The draft statements of financial position at 31 March 2015 are as
follows:
The following information is relevant to the preparation of the group financial statements:
1. On 1 October 2014, Kutchen acquired 70% of the equity interests of House, a public limited
company. The purchase consideration comprised 20 million shares of $1 of Kutchen at the
acquisition date and 5 million shares on 31 March 2016 if House’s net profit after taxation was
at least $4 million for the year ending on that date. The market price of Kutchen’s shares on 1
October 2014 was $2 per share and that of House was $4.2 per share. It is felt that there is a
20% chance of the profit target being met.
Kutchen wishes to measure the non-controlling interest at fair value at the date of acquisition.
At acquisition, the fair value of the non-controlling interest (NCI) in House was based upon
quoted market prices. On 1 October 2014, the fair value of the identifiable net assets acquired
was $48 million and retained earnings of House were $18 million and other components of
equity was $3 million. The excess in fair value is due to non-depreciable land. No entries had
been made in the financial statements of Kutchen for the acquisition of House. House has not
declared any dividends during the year ended 31 March 2015.
2. On 1 April 2014, Kutchen acquired 80% of the equity interests of Mach, a privately owned
entity, for a consideration of $57 million. The consideration comprised cash of $52 million and
the transfer of non-depreciable land with a fair value of $5 million. The carrying amount of the
land at the acquisition date was $3 million and the land has only recently been transferred to
25
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
the seller of the shares in Mach and is still carried at $3 million in the financial records of
Kutchen at 31 March 2015. The only consideration shown in the financial records of Kutchen is
the cash paid for the shares of Mach.
At the date of acquisition, the identifiable net assets of Mach had a fair value of $55 million,
retained earnings were $12 million and other components of equity were $4 million. The
excess in fair value is due to non-depreciable land. Mach had made a net profit attributable to
ordinary shareholders of $3.6 million for the year up to 31 March 2014. Mach has not declared
any dividends during the year ended 31 March 2015.
Kutchen wishes to measure the non-controlling interest at fair value at the date of acquisition.
The NCI is to be fair valued using a public entity market multiple method. Kutchen has
identified two companies who are comparable to Mach and who are trading at an average
price to earnings ratio (P/E ratio) of 21. Kutchen has adjusted the P/E ratio to 19 for
differences between the entities and Mach, for the purpose of fair valuing the NCI.
Required:
Prepare the consolidated statement of financial position for the Kutchen Group as at 31 March 2015.
26
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
BNVR
NOICBIS7
27
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
PRACTICE QUESTION 9 – CONSOLIDATION & IMPAIRMENT OF GOODWILL (ADAPTED FROM
HKICPA/MODULE A/DECEMBER 2015)
Highway Holdings Limited (“HHL”) is a company incorporated in Hong Kong and is principally
engaged in the distribution and marketing of electronic products. HHL has grown significantly over
the last few years through mergers and acquisitions.
Alison Electronic Limited
On 1 January 2010, HHL acquired an 80% interest in Alison Electronic Limited (“AEL”) for HK$500
million when the equity of AEL was:
HK$’000
Share capital
150,000
Retained earnings
250,000
400,000
The carrying amount of assets and liabilities of AEL were the same as their fair value.
Best Product Limited
On 30 November 2014, HHL acquired a 65% interest in Best Product Limited (“BPL”) for HK$260
million when the equity of BPL was:
HK$’000
Share capital
285,000
Retained earnings
50,000
335,000
The carrying amount of assets and liabilities of BPL were the same as their fair value except for plant
and equipment for which the fair value was HK$15 million greater than the carrying amount. The
plant and equipment had a remaining economic life (same as useful life) of 10 years and depreciation
of plant and equipment is charged to cost of sales account.
Additional information
(i)
It is assumed that all the synergy arising from the business combinations rests with the
acquires (i.e. AEL and BPL) and thus allocation of goodwill upon acquisition is not required.
(ii)
HHL and its subsidiaries (the “Group”) have a financial reporting period ending at 31 March.
(iii)
It is the Group’s policy to measure the non-controlling interest as the proportionate share of
the fair value of the identifiable net assets of the subsidiary at the acquisition date.
(iv)
Depreciation is recognised so as to write off the cost of assets over their useful lives, using a
straight-line method. Depreciation is time apportioned from the date of acquisition.
(v)
On 1 April 2014, AEL sold a freehold property to HHL for HK$100 million (land element
HK$24 million). The property originally cost HK$110 million (land element HK$20 million) on
1 April 2006. The property’s total useful life was 40 years on 1 April 2006 and there has been
no change in the useful life. AEL has credited the gain on disposal to other income and gains
account.
(vi)
On 1 April 2014, BPL borrowed HK$120 million at 8% per annum (assume at the market
interest rate) from HHL. Interest is payable twice yearly on 1 October and 1 April, HHL and
BPL have accounted for the interest income and expense and interest receivable and payable
up to 31 March 2015.
(vii) HHL has accounted for its dividend received from AEL in other income and gains account.
(viii) Impairment tests conducted on 31 March 2015 revealed that, due to unexpected economic
downturn, the recoverable amount for AEL is HK$700 million and that for BPL is HK$330
million while the book values of the relevant assets of AEL and BPL for impairment review
28
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
(ix)
(excluding goodwill) are HK$450 million and HK$300 million respectively after adjusting the
effects of unrealised profits and fair value adjustments on consolidation. No impairment
losses had previously been recognised.
Tax implication is ignored.
The following is the financial information in relation to HHL, AEL and BPL as at 31 March 2015:
Required:
(a) Calculate the goodwill to be recognised in the consolidated financial statements of HHL at the
date of acquisition of AEL and BPL.
(b) Explain and calculate the impairment loss of the goodwill to be recognised in the consolidated
financial statements of HHL for the year ended 31 March 2015.
(c) Prepare:
(i)
the consolidated statement of profit or loss of HHL for the year ended 31 March 2015;
(ii)
the reconciliation of opening and closing consolidated retained earnings of HHL for the
year ended 31 March 2015; and
(iii)
the consolidated statement of financial position of HHL as at 31 March 2015.
29
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – PRACTICE QUESTIONS
Statement of profit or loss for the year ended 31 March 2015
HHL
AEL
HK$'000
HK$'000
Sales
600,000
400,000
Cost of sales
(400,000)
(330,000)
Administrative expenses
(100,000)
(50,000)
Other income and gains
23,000
-
Finance costs
Profit/(loss) for the year/period
123,000
(5,000)
15,000
Retained earnings, 1 April
137,000
277,000
Dividends declared and paid
Retained earnings, 31 March
(20,000)
240,000
(5,000)
287,000
Statement of financial position as at 31 March 2015
HHL
AEL
HK$'000
HK$'000
Assets
Other non-current assets
492,000
372,200
Investment in AEL
Investment in BPL
Current assets
Inventory
Trade and other receivables
Cash
Total assets
Equity and liabilities
Share capital
Retained earnings
Non-current liabilities
Current liabilities
Total equity and liability
500,000
260,000
-
116,000
62,000
10,000
1,440,000
85,000
65,000
800
523,000
958,000
150,000
240,000
1,198,000
153,000
89,000
1,440,000
287,000
437,000
76,000
10,000
523,000
BPL
HK$'000
BPL
HK$'000
Adjustments
Dr. (HK$'000) Cr. (HK$'000)
Consolidated
HK$'000
Adjustments
Dr. (HK$'000) Cr. (HK$'000)
Consolidated
HK$'000
30
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 1
Y Co.
CJ1: Inventories
Dr. Retained earnings, beginning balance
Cr. Business combination valuation reserve
CJ2&3A: Pre-acquisition elimination entries
Dr. Share capital
Dr. Retained earnings, acquisition date
Dr. Business combination valuation reserve
Dr. Goodwill
Cr. Investments
Cr. NCI (B/S)
CJ4A: Intra-group inventory transfer
Dr. Retained earnings, beginning balance
Cr. Cost of goods sold
Cr. Inventories
100K
1,000K
500K
100K
500K
144K
CJ4B: Intra-group balances
Dr. Intercompany payable
Cr. Intercompany receivable
200K
CJ3B: Share of movement in retained earnings to NCI
Dr. Retained earnings, beginning balance
Cr. NCI (B/S) [[(900 – 500) – 100 (Step 1) – 144 (Step 4A)] x 10%]
15.6K
CJ3C: Share of current year’s profit to NCI
Dr. NCI (I/S)
Cr. NCI (B/S) [[960 + 128 (Step 4A)] x 10%]
108.8K
CJ5: Dividend elimination
Dr. Dividend income
Dr. NCI (B/S)
Cr. Retained earnings - Dividends declared
180K
20K
Z Co.
EA1: Reclassification of investment
Dr. Investment in associate
Cr. Investments
EA2i: Share of associate’s movement in retained earnings
Dr. Investment in associate [[(560 – 400) – 240/5] x 30%]
Cr. Retained earnings, beginning balance
EA2ii: Share of associate’s current year’s profits
Dr. Investment in associate
[[500 – 240/5 – (296 – 288) + (296 – 288)/4] x 30%]
Cr. Share of associate’s profits
EA5: Dividends reclassification
Dr. Dividend income
Cr. Investment in associate
600K
33.6K
100K
1,900K
200K
128K
16K
200K
15.6K
108.8K
200K
600K
33.6K
133.8K
133.8K
18K
18K
1
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Income statement for the year ended 31 December 2005
P Co.
Y Co.
$'000
$'000
Profit before tax
3,000
1,200
Tax expense
Profit after tax for the year
Profit attributable to NCI
Profit attributable to the parent
Dividends declared and paid
Retained earnings, beginning
(600)
2,400
(300)
1,000
(200)
900
Retained earnings, ending
3,100
1,660
(240)
960
Statements of financial position as at 31 December 2005
P Co.
Y Co.
$'000
$'000
Assets
Fixed assets, net book value
3,200
1,500
Investment in Y Co., at cost
1,900
Investment in Z Co., at cost
600
Investment in associate
Goodwill
Inventory
Intercompany receivable
Accounts receivable
Cash
Total assets
Equity and liabilities
Share capital
Retained earnings
BCVR
NCI (B/S)
Total equity
Accounts paybale
Intercompany payable
Total equity and liabilities
Adjustments
Dr ($'000) Cr ($'000)
CJ5
180
128 CJ4A
EA5
18
133.8 EA2ii
800
530
20
7,050
600
200
300
80
2,680
1,000
3,100
1,000
1,660
4,100
2,750
200
7,050
2,660
20
2,680
CJ3C
108.8
CJ1
CJ2,3A
CJ4A
CJ3B
100
500
144
15.6
1,066.4
EA1
EA2i
EA2ii
CJ2,3A
200 CJ5
33.6 EA2i
CJ4B
(840)
3,423.8
(108.8)
3,315
(300)
1,174
495.4
4,189
Adjustments
Dr ($'000) Cr ($'000)
Consolidated
$'000
600
33.6
133.8
500
1,900 CJ2,3A
600 EA1
18 EA5
16 CJ4A
200 CJ4B
CJ2,3A
above
CJ2,3A
CJ5
Consolidated
$'000
4,263.8
1,000
1,066.4
100
20
200
495.4
100
200
15.6
108.8
above
CJ1
CJ2,3A
CJ3B
CJ3C
4,700
749.4
500
1,384
830
100
8,263.4
1,000
4,189
304.4
5,493.4
2,770
8,263.4
2
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 2
S Co.
CJ1A: In-process R&D
Dr. In-process R&D
Cr. Business combination valuation reserve
Dr. Retained earnings, beginning balance
Cr. In-process R&D
1,000K
100K
CJ1B: Inventories
Dr. Retained earnings, beginning balance
Cr. Business combination valuation reserve
50K
CJ1C: Contingent liability
Dr. Business combination valuation reserve
Cr. Other expenses
50K
CJ2&3A: Pre-acquisition elimination entries
Dr. Share capital
Dr. Retained earnings, acquisition date
Dr. Business combination valuation reserve
Dr. Goodwill
Cr. Investments
Cr. NCI (B/S)
CJ4A: Intra-group inventory transfer
Dr. Retained earnings, beginning balance
Cr. Cost of goods sold
CJ4B: Intra-group inventory transfer
Dr. Sales
Cr. Cost of goods sold
Cr. Inventories
CJ3B: Share of movement in retained earnings to NCI
Dr. NCI (B/S)
[[(250 – 120) – 100 (Step 1A) – 50 (Step 1B) – 4 (Step 4A)] x 30%]
Cr. Retained earnings, beginning balance
CJ3C: Share of current year’s profit to NCI
Dr. NCI (I/S)
Cr. NCI (B/S)
[[368 + 50 (Step 1C) – 16 (Step 4B) + 4 (Step 4A)] x 30%]
CJ5: Dividend elimination
Dr. Dividend income
Dr. NCI (B/S)
Cr. Retained earnings - Dividends declared
A Co.
EA1: Reclassification of investment
Dr. Investment in associate
Cr. Investments
300K
120K
1,000K
1,580K
1,000K
100K
50K
50K
2,100K
900K
4K
4K
200K
184K
16K
7.2K
7.2K
121.8K
70K
30K
200K
121.8K
100K
200K
3
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
EA2i: Share of associate’s movement in retained earnings
Dr. Investment in associate [[(160 – 120) – 40/5 – (70 - 50) + (70 – 50) x (1
- 30%)] x 40%]
Cr. Retained earnings, beginning balance
10.4K
10.4K
EA2ii: Share of associate’s current year’s profits
Dr. Investment in associate
[[483.6 – 40/5 + (70 – 50) x 30%] x 40%]
Cr. Share of associate’s profits
192.64K
192.64K
EA5: Dividends reclassification
Dr. Dividend income
Cr. Investment in associate
24K
Income statement for the year ended 31 December 2003
P Co.
S Co.
$'000
$'000
Sales
5,000
3,500
Cost of sales
(4,000)
(3,000)
Gross profit
Other income
1,000
140
500
30
Operating expenses
Share of associate's profit
Profit before tax
Tax expense
Profit after tax for the year
Profit attributable to NCI
Profit attributable to parent
Dividends declared and paid
Retained earnings, beginning
(150)
(70)
990
(198)
792
460
(92)
368
(50)
2,500
(100)
250
Retained earnings, ending
3,242
518
Adjustments
Dr ($'000) Cr ($'000)
CJ4B
200
4 CJ4A
184 CJ4B
CJ5
EA5
50 CJ1C
192.64 EA2ii
121.8
CJ1A
CJ1B
CJ2&3A
CJ4A
100
50
120
4
689.8
Consolidated
$'000
8,300
(6,812)
1,488
76
70
24
CJ3C
24K
100 CJ5
7.2 CJ3B
10.4 EA2i
548.24
(170)
192.64
1,586.64
(290)
1,296.64
(121.8)
1,174.84
(50)
2,493.6
3,618.44
Statements of financial position as at 31 December 2003
P Co.
S Co.
Adjustments
Consolidated
$'000
$'000
Dr ($'000) Cr ($'000)
$'000
Assets
Fixed assets, net book value
4,000
40
4,040
Investment in Y Co., at cost
2,100
2,100 CJ2&3A
Investment in Z Co., at cost
200
200 EA1
In-process R&D
CJ1A
1,000
100 CJ1A
900
Goodwill
CJ2&3A
1,580
1,580
Investment in associate
EA1
200
24 EA5
379.04
EA2i
10.4
EA2ii
192.64
Inventory
2,000
450
16 CJ4B
2,434
Accounts receivable
1,000
350
1,350
Cash
120
40
160
Total assets
9,420
880
10,843.04
Equity and liabilities
Share capital
Retained earnings
BCVR
3,000
3,242
NCI (B/S)
Total equity
Accounts paybale
Total equity and liabilities
6,242
3,178
9,420
300 CJ2&3A
518
above
CJ1C
CJ2&3A
CJ3B
CJ5
818
62
880
300
689.8
50
1,000
7.2
30
548.24
1,000
50
900
121.8
above
CJ1A
CJ1B
CJ2&3A
CJ3C
3,000
3,618.44
984.6
7,603.04
3,240
10,843.04
4
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 3
Pre-consolidation journal entries
J1: Foreign currency transaction
Dr. Impairment loss (I/S)
Cr. PPE (net)
Calculations:
NBV DC 3,800,000 Rate = 10
$380,000
FV
DC 3,600,000 Rate = 12
$300,000
Impairment ($80,000)
Consolidation:
CJ1: BCVR entries
Dr. Retained Earnings, 1/1/2009
Cr. BCVR (320,000 – 220,000)
CJ2&3A: Pre-acquisition entries
Dr. Retained Earnings, pre-acquisition
Dr. Share Capital
Dr. BCVR
Dr. Goodwill
Cr. Investment in Studio Ltd.
Cr. NCI (B/S)
CJ4A: Upstream transfer of machinery
Dr. Retained Earnings, 1/1/2009 (gain on disposal)
Dr. PPE (180,000 – 162,000)
Cr. Accumulated Depreciation (180,000 /5)
Calculations:
NBV @ transfer = 180,000 – 180,000 / 5 = 144,000
Gain on transfer (unrealised) = 162,000 – 144,000 = 18,000
Dr. Accumulated Depreciation
Cr. Depreciation Expense
Cr. Retained Earnings, 1/1/2009 (18,000 / 4.5)
80,000
80,000
100,000
100,000
900,000
800,000
100,000
590,000
2,200,000
190,000
18,000
18,000
36,000
8,000
4,000
4,000
CJ4B: Downstream sale of inventory at a loss
Dr. Sales
Cr. Cost of Goods Sold
50,000
CJ4C: Intercompany balances
Dr. Intercompany Payable
Cr. Intercompany Receivable
100,000
CJ3B: Non-controlling interest movement from acquisition to beginning of current
year (1/1/2009)
Movement of retained earnings (1,200,000 – 900,000)
-) Excess cost of goods sold (from CJ1, BCVR)
-) Unrealised gain from disposal (from CJ4A)
+) Realised gain through depreciation (from CJ4A)
Dr. Retained Earnings, 1/1/2009
Cr. NCI (B/S)
CJ3C: Non-controlling interest for current year
Profit after tax
+) Realised gain through depreciation (from CJ4A)
Dr. NCI (I/S)
Cr. NCI (B/S)
CJ5: Dividends
Dr. Dividend Income (300,000 x 90%)
Dr. NCI (B/S) (300,000 x 10%)
Cr. Retained Earnings – Dividends declared
50,000
100,000
300,000
(100,000)
(18,000)
4,000
186,000
x 10%
18,600
18,600
18,600
1,440,000
4,000
1,444,000
x 10%
144,400
144,400
144,400
270,000
30,000
300,000
5
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Equity method:
Step 1: Initial acquisition – Reclassification of investments
Step 2: See below for the entry
Step 3: FV adjustment: Materialisation of contingent liability
Step 4: Goodwill impairment
Step 5: Dividend reclassification
Step 6: Intercompany sales
Unrealised gain @ transfer (100,000 – 70,000)
At the end of 2008, unrealized profit (30,000 x 80%)
In 2009, realized profit (30,000 x 60%)
EA1: Reclassification of investments
Dr. Investment in associate
Cr. Investment
EA2i: Share of movement of associates from acquisition to beginning of current
year, 1/1/2009
Movement of retained earnings (700,000 – 400,000)
-) Unrealised profit (from Step 6)
Dr. Investment in associate
Cr. Retained Earnings, 1/1/2009
EA2ii: Share of profits of current year
Profit after tax
+) Materialisation of current liability
+) Realised profit (from Step 6)
Dr. Investment in associate
Cr. Share of Associate’s profits
800,000
100,000
200,000
30,000
30,000
24,000
18,000
800,000
800,000
300,000
(24,000)
276,000
x 30%
82,800
82,800
82,800
468,000
100,000
18,000
586,000
x 30%
175,800
175,800
175,800
EA4: Goodwill impairment
Dr. Share of associate’s profits
Cr. Investment in associate
200,000
EA5: Dividend reclassification
Dr. Dividend Income
Cr. Investment in associate
30,000
200,000
30,000
6
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Income statement for the year ended 31 December 2009
Plasma
Studio
$
$
Profit before tax
4,200,000
1,800,000
Share of associate's profit/loss
Tax expense
Profit after tax for the year
Profit attributable to NCI
Profit attributable to parent
Dividends declared and paid
Retained earnings, beginning
Retained earnings, ending
(840,000)
3,360,000
(400,000)
1,200,000
(300,000)
1,200,000
4,160,000
2,340,000
Investment in Y Co., at cost
Investment in Z Co., at cost
Goodwill
Investment in associate
2,200,000
800,000
Inventory
Intercompany receivable
Amount due from Audio
Accounts receivable
Cash
Total assets
760,000
60,000
600,000
45,000
7,265,000
500,000
100,000
700,000
100,000
3,600,000
1,200,000
4,160,000
800,000
2,340,000
5,360,000
1,805,000
100,000
7,265,000
3,140,000
460,000
3,600,000
Total equity
Accounts paybale
Intercompany payable
Total equity and liabilities
CJ3C
144,400
CJ1
CJ2&3A
CJ4A
CJ3B
100,000
900,000
18,000
18,600
1,811,000
CJ4A
CJ4B
EA2ii
(360,000)
1,440,000
Statements of financial position as at 31 December 2009
Plasma
Studio
$
$
Assets
Fixed assets, net book value
2,800,000
2,200,000
Equity and liabilities
Share capital
Retained earnings
BCVR
NCI (B/S)
J1
CJ4B
CJ5
EA5
EA4
Adjustments
Dr ($)
Cr ($)
80,000
4,000
50,000
50,000
270,000
30,000
200,000
175,800
300,000
4,000
82,800
CJ5
CJ4A
EA2
616,600
18,000
8,000
CJ2&3A
EA1
EA2i
EA2ii
CJ2&3A
above
CJ2&3A
CJ5
CJ4C
590,000
800,000
82,800
175,800
800,000
1,811,000
100,000
30,000
100,000
80,000
36,000
2,200,000
800,000
200,000
30,000
(24,200)
(1,200,000)
4,399,800
(144,400)
4,255,400
(400,000)
1,450,200
5,305,600
Adjustments
Dr ($)
Cr ($)
CJ4A
CJ4A
Consolidated
$
5,624,000
Consolidated
$
J1
CJ4A
CJ2&3A
EA1
EA4
EA5
100,000
CJ4C
616,600
100,000
190,000
18,600
144,400
above
CJ1
CJ2&3A
CJ3B
CJ3C
4,910,000
590,000
828,600
1,260,000
60,000
1,300,000
145,000
9,093,600
1,200,000
5,305,600
323,000
6,828,600
2,265,000
9,093,600
7
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 4
Y Co.
CJ1: Inventories
Dr. Retained earnings, beginning balance
Cr. Business combination valuation reserve
CJ2&3A: Pre-acquisition elimination entries
Dr. Share capital
Dr. Retained earnings, acquisition date
Dr. Business combination valuation reserve
Dr. Goodwill
Cr. Investments
Cr. NCI (B/S)
CJ4A: Intra-group inventory transfer
Dr. Retained earnings, beginning balance
Cr. Cost of goods sold
Cr. Inventories
CJ4B: Intra-group inventory transfer
Dr. Sales
Cr. Cost of goods sold
Cr. Inventories
100K
500K
700K
100K
240K
48K
120K
CJ4C: Intra-group interest elimination
Dr. Interest income
Cr. Interest expense
1.5K
CJ4D: Intra-group balances
Dr. Intercompany payable
Cr. Intercompany receivable
40K
CJ3B: Share of movement in retained earnings to NCI
Dr. NCI (B/S) [[(800 – 700) – 100 (Step 1) – 48 (Step 4A)] x 10%]
Cr. Retained earnings, beginning balance
4.8K
CJ3C: Share of current year’s profit to NCI
Dr. NCI (I/S)
Cr. NCI (B/S) [[960 + 36 (Step 4A)] x 10%]
99.6K
CJ5: Dividend elimination
Dr. Dividend income
Dr. NCI (B/S)
Cr. Retained earnings - Dividends declared
108K
12K
Z Co.
EA1: Reclassification of investment
Dr. Investment in associate
Cr. Investments
EA2i: Share of associate’s movement in retained earnings
Dr. Investment in associate [[(700 – 400) – 300/5] x 30%]
Cr. Retained earnings, beginning balance
EA2ii: Share of associate’s current year’s profits
Dr. Investment in associate [[420 – 300/5 – 28 + 28/4] x 30%]
500K
72K
100K
1,400K
140K
36K
12K
116K
4K
1.5K
40K
4.8K
99.6K
120K
500K
72K
101.7K
8
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Cr. Share of associate’s profits
101.7K
EA5: Dividends reclassification
Dr. Dividend income
Cr. Investment in associate
30K
Income statement for the year ended 31 December 2006
P Co.
Y Co.
$'000
$'000
Profit before tax
2,800
1,200
Share of associate's profit
Tax expense
Profit after tax for the year
Profit attributable to NCI
Profit attributable to parent
Dividends declared and paid
Retained earnings, beginning
Retained earnings, ending
(560)
2,240
(240)
960
(200)
2,800
(120)
800
4,840
1,640
Statements of financial position as at 31 December 2006
P Co.
Y Co.
$'000
$'000
Assets
Fixed assets, net book value
2,340
1,000
Investment in Y Co., at cost
1,400
Investment in Z Co., at cost
500
Goodwill
Investment in associate
Inventory
Intercompany receivable
Accounts receivable
Cash
Total assets
Equity and liabilities
Share capital
Retained earnings
BCVR
NCI (B/S)
Total equity
Accounts paybale
Amount owing to Z Co.
Intercompany payable
Total equity and liabilities
CJ4B
CJ4C
CJ5
EA5
Adjustments
Dr ($'000) Cr ($'000)
120
36 CJ4A
1.5
116 CJ4B
108
1.5 CJ4C
30
101.7 EA2ii
560
550
1,200
30
6,030
40
800
100
2,490
1,000
4,840
500
1,640
5,840
100
50
40
6,030
2,140
350
2,490
CJ3C
99.6
CJ1
CJ2&3A
CJ4A
100
700
48
1207.1
120 CJ5
4.8 CJ3B
72 EA2i
CJ4D
101.7
(800)
3,195.7
(99.6)
3,096.1
(200)
2,828.8
5,724.9
Adjustments
Dr ($'000) Cr ($'000)
Consolidated
$'000
240
500
72
101.7
30 EA5
12 CJ4A
4 CJ4B
40 CJ4D
CJ2&3A
above
CJ2&3A
CJ3B
CJ5
Consolidated
$'000
3,894
452
1400 CJ2&3A
500 EA1
CJ2&3A
EA1
EA2i
EA2ii
30K
500
1207.1
100
4.8
12
40
452 above
100 CJ1
140 CJ2&3A
99.6 CJ3C
3,340
240
643.7
1,094
2,000
130
7,447.7
1,000
5,724.9
222.8
6,947.7
450
50
7,447.70
9
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 5
J1: Correction entries
Dr. Investment in trading securities
Cr. Gain on trading securities (I/S)
Calculations:
On 01/01/2010
Value of investment = PF 3,500K x 1.74
On 31/03/2010
Value of investment = PF 4,000K x 1.79
Increase in value of investments
CJ1: Fair value adjustments
Dr. Property, plant and equipment (net)
Cr. BCVR
Dr. Depreciation expense (4,000K / 4 x 1)
Dr. Retained Earnings, 1/4/2009 (4,000K / 4 x 2)
Cr. Accumulated Depreciation
CJ2&3A: Pre-acquisition entries
Dr. Retained Earnings, pre-acquisition
Dr. Share Capital
Dr. BCVR
Dr. Goodwill
Cr. Investment in Sorrow Ltd.
Cr. NCI (B/S)
CJ4A: Downstream sale of inventory
Dr. Sales
Cr. Cost of Goods Sold
Cr. Inventory [(100,000K – (100,000K/1.25)) x ¼]
CJ4B: Downstream sale of inventory (at loss)
Dr. Sales
Cr. Cost of Goods Sold
CJ4C: Upstream sale of machinery
Dr. PPE (72,000K – 60,000K)
Dr. Retained Earnings, 1/4/2009 (60,000K – 54,000K)
Cr. Accumulated Depreciation
Calculations: NBV @ transfer = 72,000K – 72,000K / 8 * 2 = 54,000K
Dr. Accumulated Depreciation
Cr. Depreciation Expense
Cr. Retained Earnings, 1/4/2009 (6,000K / 6)
CJ4D: Dividends distribution
Dr. Dividend Income
Dr. NCI (B/S)
Cr. Dividends Declared – Retained Earnings
1,070K
1,070K
HK$6,090K
HK$7,160K
HK$1,070K
4,000K
1,000K
2,000K
160,000K
400,000K
4,000K
27,000K
4,000K
3,000K
450,000K
141,000K
100,000K
95,000K
5,000K
5,000K
5,000K
12,000K
6,000K
2,000K
600K
200K
CJ3B: Share of net assets to NCI from date of acquisition to beginning of current
year
Dr. Retained Earnings, 1/4/2009
6,000K
Cr. NCI (B/S)
18,000K
1,000K
1,000K
800K
6,000K
10
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Calculations:
Movement of Retained Earnings between 1/4/2007 and 31/3/2009
(191,000K – 160,000K)
Less: Additional Depreciation from Fair value adjustment (BCVR)
Less: Unreaslied profit from upstream sale of PPE
Add: Realised profit through depreciation
CJ3C: Share of net assets to NCI for current period
Dr. NCI (I/S)
Cr. NCI (B/S)
Calculations:
Profit after tax
Less: Additional Depreciation from Fair value adjustment (BCVR)
Add: Realised profits through depreciation
Equity method:
Step 1: Initial acquisition – Reclassification of investments
Step 2: See below for the entry
Step 3: FV adjustment: amortisation of customer list (10,000K / 5)
Step 4: Goodwill impairment
Step 5: Dividend reclassification (1,000K x 25%)
Step 6: Intercompany sales in current year
Unrealised gain @ transfer (15,000K – 15,000K / 1.2 = 15,000K –
12,500K)
At 31/3/2010, unrealized profit (2,500K x 1/5)
EA1: Reclassification of investments
Dr. Investment in associate
Cr. Investments
EA2ii: Share of profits of current year
Profit after tax
Less: Excess amortisation (step 3)
Less: Unrealised profit (step 6)
Dr. Investment in associate
Cr. Share of Associate’s profits
EA2i: Share of profits of previous years after acquisition date
Movement in Retained Earnings (180,000K – 120,000K)
Less: Excess amortisation (step 3)
Dr. Investment in associate
Cr. Retained Earnings, 1/4/2009
31,000K
(2,000K)
(6,000K)
1,000K
24,000K
x 25%
6,000K
29,500K
29,500K
118,000K
(1,000K)
1,000K
118,000K
x 25%
29,500K
150,000K
2,000K
1,000K
250K
2,500K
500K
150,000K
42,500K
(2,000K)
(500K)
40,000K
x 25%
10,000K
10,000K
150,000K
10,000K
60,000K
(2,000K)
58,000K
x 25%
14,500K
14,500K
14,500K
11
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
EA4: Goodwill impairment
Dr. Share of Associate’s profits
Cr. Investment in associate
1,000K
EA5: Dividend reclassification
Dr. Dividend Income
Cr. Investment in associate
250K
1,000K
250K
Investment in associate @ 31/3/2010 = 150,000K + 14,500K + 10,000K
– 1,000K – 250K
NCI (B/S) @ 31/3/2010 = 141,000K + 6,000K + 29,500K – 200K
Horror Ltd.
HK$'000
Sorrow Ltd.
HK$'000
Revenue
878,900
389,200
Less: Cost of sales
(374,400)
(112,400)
Gross profit
Other income
504,500
14,000
276,800
16,000
Distribution and administrative costs
Depreciation and amortisation
Share of associate's profits
Profit before tax
Tax
Profit for the year
Profit attributable to NCI
Profit attributable to parent
Dividends declared
Retained earnings, 1/4/2009
(216,200)
(30,000)
(115,800)
(10,000)
272,300
(112,400)
159,900
167,000
(49,000)
118,000
(2,000)
750,100
(800)
191,000
Retained earnings, 31/3/2010
908,000
308,200
173,250K
176,300K
Consolidation Adjustments
Dr. (HK$'000) Cr. (HK$'000)
CJ4A
CJ4B
100,000
5,000
Consolidated
HK$'000
1,163,100
95,000 CJ4A
5,000 CJ4B
CJ4D
EA5
600
250
1,070 J1
CJ1
EA4
1,000
1,000
1,000 CJ4C
10,000 EA2ii
CJ3C
29,500
CJ1
CJ2&3A
CJ4C
CJ3B
2,000
160,000
6,000
6,000
800 CJ4D
1,000 CJ4C
14,500 EA2i
(386,800)
776,300
30,220
(332,000)
(40,000)
9,000
443,520
(161,400)
282,120
(29,500)
252,620
(2,000)
782,600
1,033,220
12
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 6
EPE
1: Plant and equipment
Dr. Plant and equipment
Cr. Business combination valuation reserve
Dr. Depreciation expense
Dr. Retained earnings, 1 April
Cr. Accumulated depreciation
2&3A: Pre-acquisition elimination entries
Dr. Share capital
Dr. Retained earnings, acquisition date
Dr. Business combination valuation reserve
Dr. Goodwill
Cr. Investments
Cr. NCI (B/S)
4: Intra-group inventory transfer
Dr. Retained earnings, 1 April
Dr. Sales
Cr. Cost of goods sold
Cr. Inventories
2,500K
500K
1,000K
15,000K
12,250K
2,500K
2,800K
900K
9,000K
3B: Share of movement in retained earnings to NCI
Dr. Retained earnings, 1 April
Cr. NCI (B/S) [[10,250K – 1,000K (Step 1) – 900 (Step 4)] x 20%]
1,670K
3C: Share of current year’s profit to NCI and dividend elimination
Dr. NCI (I/S)
Cr. NCI (B/S) [[3,750K – 500K (Step 1) – 150K (Step 4)] x 20%]
620K
Dr. Dividend income
Dr. NCI (B/S)
Cr. Retained earnings - Dividends declared
FPE
A1: Reclassification of investment
Dr. Investment in associate
Cr. Investments
A2: Share of associate’s current year’s profits
Dr. Investment in associate [[2,200 – 2,000 + 2,000/5] x 30%]
Cr. Share of associate’s profits
GPE
G1: Patent
Dr. Patent
Cr. Business combination valuation reserve
G2: Pre-acquisition elimination entries
Dr. Share capital
Dr. Retained earnings, acquisition date
Dr. Business combination valuation reserve
Dr. Goodwill
Cr. Investments
1,000K
250K
7,450K
180K
1,000K
7,000K
12,000K
1,000K
500K
2,500K
1,500K
26,550K
6,000K
8,850K
1,050K
1,670K
620K
1,250K
7,450K
180K
1,000K
20,500K
13
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Sales
Cost of sales
Other income (including gain
on disposal and EPE's dividends)
Depreciation expense
Interest expense
Other expenses
Share of associate's profit
Profit for the year
Profit attributable to NCI
Profit attributable to parent
Retained earnings, 1 April 2011
Dividends declared
Retained earnings, 31 March 2012
Plant and equipment, net
Investment in EPE, cost
Investement in FPE, cost
Investment in GPE, cost
Other investments
Investment in associate
APE
HK$'000
80,000
(55,000)
EPE
HK$'000
35,750
(24,500)
3,700
(8,000)
(5,900)
(3,800)
(1,700)
(1,600)
(4,200)
11,000
3,750
44,000
22,500
(3,500)
51,500
(1,250)
25,000
APE
HK$'000
43,000
26,550
7,450
20,500
250
EPE
HK$'000
19,000
1,250
HK$'000
3C
1
GPE
HK$'000
20,000
3C
620
1
2, 3A
4
3B
1,000
12,250
900
1,670
Patent
Inventory
Receivables
Cash and cash equivalents
Total assets
41,250
10,000
7,500
156,500
20,000
11,000
8,750
60,000
2,000
4,000
3,000
29,000
Share captial (HK$1 par)
30,000
15,000
7,000
Retained earnings
51,500
25,000
12,000
NCI (B/S)
75,000
156,500
20,000
60,000
1,250 3C
10,280
(3,500)
59,840
1
2, 3A
A1
G2
7,450
180
2,800
500
1,000
Consolidated
HK$'000
83,000
1,500
7,630
3,300
1,000
62,200
25,000
19,250
202,880
1,050 4
2, 3A
G2
G2
2, 3A
G2
3C
BCVR
180 A2
2,700
(10,200)
(7,500)
(8,000)
180
13,280
(620)
12,660
50,680
Adjustments
Dr. (HK$'000) Cr. (HK$'000)
1
2,500
1,500
26,550
7,450
20,500
A1
A2
2, 3A
G2
G1
Consolidated
HK$'000
106,750
(70,650)
1,000
500
26,940
Goodwill
Payables
Total liabilities and equities
Adjustments
Dr. (HK$'000) Cr. (HK$'000)
4
9,000
6,000 4
2,850 4
15,000
7,000
26,940
12,000
2,500
1,000
250
30,000
10,280
2,500
1,000
6,000
1,670
620
59,840
1
G1
2, 3A
3B
3C
8,040
105,000
202,880
10,000
29,000
Notes to Income statement:
Note: (1) GPE will not be included in the consolidated income statement as it was acquired at the
end of the year (therefore no sharing of post-acquisition profits). In case it was acquired in the
middle of the year, the group is able to share proportionately (e.g. acquired on 1 October, then you
have to insert a column for GPE for half year’s sales, COGS etc.). You can refer to one of the
practice questions in Lecture 7 for illustration.
14
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Note: (2) When doing the consolidation of GPE (in Step 2), you debit to Retained earnings ACQ for
the amount HK$12,000K (pre-acquisition elimination). Normally, you put it as an adjustment in
Retained earnings, 1 April 2011 (beginning) in the worksheet because in our previous examples,
the group either acquired the subsidiary for a number of years or at the beginning of the year;
therefore, the adjustment of REACQ can be put to RE beginning. However, in this case, we cannot put
it in the same way as it will affect the RE beginning which should be stated at HK$50,680K. Please
refer to the above posting for subsidiaries acquired in current year, which is adjusted to RE ending.
Notes to Balance sheet:
Note: (3) On the consolidated balance sheet, you have to insert the column for GPE because at 31
March 2012, GPE become part of the group and the items will be line-by-line aggregated to form
part of the consolidated balance sheet; therefore, provided that the subsidiary is included in the
group by the end of the year (i.e. obtained control), you have to insert the column for that particular
subsidiary for the preparation of the consolidated balance sheet.
APE Group
Consolidated Statement of Changes in Equity
For the year ended 31 March 2012
Attributable to owners of the
parent
Balance at 1 April
Profit for the year
Dividends
Dividends to NCI
Balance at 31 March
Share
capital
Retained
earnings
Subtotal
Attributable
to noncontrolling
interests
HK$'000
30,000
30,000
HK$'000
50,680
12,660
(3,500)
59,840
HK$'000
80,680
12,660
(3,500)
89,840
HK$'000
7,670
620
(250)
8,040
Total
HK$'000
88,350
13,280
(3,500)
(250)
97,880
15
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 7
16
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
(Foreign Subsidiary) Consolidation:
F1: Fair value differentials – PPE
Dr. Property, plant and equipment
Cr. Business combination valuation reserve
Cr. Foreign currency translation reserve
Dr. Depreciation expense
Dr. Retained earnings, 1/8/2012
Dr. Foreign currency translation reserve
Cr. Property, plant and equipment
19.2M
17.78M
1.42M
4.69M
4.62M
0.29M
9.6M
F2 & 3A: Pre-acquisition entries & Non-controlling interests @ acquisition date
Dr. Retained earnings, pre-acquisition
130.37M
Dr. Share capital
370.37M
Dr. Business combination valuation reserve
17.78M
Dr. Goodwill
81.48M
Cr. Investments
Cr. Non-controlling interests (B/S)
F2B: Translation of goodwill
Dr. Goodwill
Cr. Foreign currency translation reserve
6.52M
F3B: Share of net assets to NCI for prior period
Dr. Non-controlling interests (B/S)
Cr. Retained earnings, 1/8/2012
1.85M
F3C: Share of net assets to NCI for current period
Dr. Non-controlling interests (I/S)
Cr. Non-controlling interests (B/S)
29.38M
F3D: Share of foreign currency translation reserve to NCI
Dr. Foreign currency translation reserve
Cr. Non-controlling interests (B/S)
19.83M
F4: Dividends declaration
Dr. Dividend income
Dr. Non-controlling interests (B/S)
Cr. Retained earnings – Dividends declared
(Subsidiary) Consolidation:
S1: Fair value differentials – Customer database
Dr. Customer database – Intangible asset
Cr. Business combination valuation reserve
Dr. Amortisation expense
Cr. Customer database – Intangible asset
377.78M
222.22M
6.52M
1.85M
29.38M
19.83M
4.8M
3.2M
8M
24M
24M
4M
4M
17
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
S2 & 3A: Pre-acquisition entries & Non-controlling interests @ acquisition date
Dr. Share capital
700M
Dr. Retained earnings, pre-acquisition
226M
Dr. Business combination valuation reserve
24M
Dr. Goodwill
140M
Cr. Investments
Cr. Non-controlling interests (B/S)
790M
300M
S2B: Impairment of goodwill (full goodwill approach)
Dr. Impairment loss
Cr. Goodwill
17M
S4A: Upstream sale of inventory
Dr. Sales
Cr. Cost of goods sold
Cr. Inventory
S4B: Declaration of dividends
Dr. Dividend income
Dr. Non-controlling interests (B/S)
Cr. Retained earnings – Dividends declared
S3C: Share of net assets to NCI for current period
Dr. Non-controlling interests (I/S)
Cr. Non-controlling interests (B/S)
Profit after tax, post-acquisition
Less: Extra amortisation expense (from S1)
Less: Unrealised profit from unstream sales of inventory (from
S4A)
Less: Impairment loss (full goodwill approach, from S2B)
17M
24M
21M
3M
35M
15M
50M
24M
24M
104M
(4M)
(3M)
(17M)
80M
x 30%
24M
C1: Update Property 1 for fair value change
Dr. Investment property (HK$2.2M – HK$2M)
Cr. Gain on fair value change of investment property (I/S)
0.2M
C2: Update Property 2 for depreciation expense
Dr. Depreciation expense (HK$2M / 20)
Cr. Accumulated depreciation
0.1M
0.2M
0.1M
18
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 8
(House) Consolidation:
Correction entries C1: Investment
Dr. Investment
Cr. Share capital
Cr. Share premium
Cr. Shares to be issued (Equity) (5M x $2 x 20%)
42M
H1: Fair value differentials
Dr. Land
Cr. Business combination valuation reserve
14M
20M
20M
2M
14M
H2 & 3A: Pre-acquisition entries & Non-controlling interests @ acquisition date
Dr. Retained earnings, pre-acquisition
18M
Dr. Share capital
13M
Dr. Business combination valuation reserve
14M
Dr. Other reserves
3M
Dr. Goodwill
10.38M
Cr. Investments
Cr. Non-controlling interests (B/S) (13M x 30% x $4.2)
H3C: Share of net assets to NCI for current period – I/S
Dr. Non-controlling interests (I/S)
Cr. Non-controlling interests (B/S)
1.8M
H3D: Share of net assets to NCI for current period – Other reserves
Dr. Other reserves
Cr. Non-controlling interests (B/S)
0.6M
(Mach) Consolidation:
Correction entries C2: Land consideration
Dr. Land
Cr. Gain on disposal
Dr. Investment
Cr. Land
M1: Fair value differentials
Dr. Land
Cr. Business combination valuation reserve
42M
16.38M
1.8M
0.6M
2M
2M
5M
5M
13M
M2 & 3A: Pre-acquisition entries & Non-controlling interests @ acquisition date
Dr. Retained earnings, pre-acquisition
12M
Dr. Share capital
26M
Dr. Business combination valuation reserve
13M
Dr. Other reserves
4M
Dr. Goodwill
15.68M
Cr. Investments
Cr. Non-controlling interests (B/S) ($3.6M x 19 x 20%)
13M
57M
13.68M
19
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
M3C: Share of net assets to NCI for current period – I/S
Dr. Non-controlling interests (I/S)
Cr. Non-controlling interests (B/S)
0.6M
0.6M
H3D: Share of net assets to NCI for current period – Other reserves
No movement
20
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Practice Question 9
(a)
(b)
Since HHL measures non-controlling interests as its proportionate interest in the net
identifiable assets of a subsidiary at the acquisition date, rather than at fair value, goodwill
attributable to non-controlling interests is included in the recoverable amount of the related
cash-generating unit (BPL’s recoverable amount) but is not recognised in the parent’s
consolidated financial statements (C4 of Appendix C of HKAS 36).
Therefore, HHL should gross up the carrying amount of goodwill allocated to AEL and BPL
to include the goodwill attributable to the non-controlling interests. This adjusted carrying
amount is then compared with the recoverable amount of the unit to determine whether the
cash-generating unit is impaired.
21
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
(c)
AEL
Step 1: BCVR entries
Nil
Steps 2 and 3A: Pre-acquisition elimination entries and NCI @ acquisition date
Dr. Retained Earnings – pre-acq.
250,000K
Dr. Share Capital
150,000K
Dr. Goodwill
180,000K
Cr. Investment in AEL
500,000K
Cr. NCI (B/S)
80,000K
Step 4: Upstream sale of land & building
Land
Net book
value
prior to
transfer
Transfer price
Cost
20,000K
- Accumulated
depreciation
-
20,000K
Cost
(HK$110M –
HK$20M)
- Accumulated
depreciation
(HK$90M/40 x
8 years)
24,000K
Building
Net book
value
prior to
transfer
90,000K
(18,000K)
72,000K
Gain on disposal
4,000K
Dr. Gain on disposal – land
Dr. Gain on disposal - building
Dr. Building
Cr. Land
Cr. Accumulated Depreciation
4,000K
4,000K
14,000K
Dr. Accumulated Depreciation
Cr. Depreciation Expense
(HK$4,000K/32)
125K
125K
Share of movement up to 1/4/2014
Step 3C: NCI movement for current year
Profit for the year
-) Unrealised profit (from Step 4)
+) Realised profit, Building (from Step 4)
Share of movement for current year
76,000K
(HK$100,000K –
HK$24,000K)
Gain on disposal
4,000K
4,000K
18,000K
Step 3B: NCI movement up to beginning of current year
Movement in retained earnings
(HK$277,000K – HK$250,000K)
Dr. Retained Earnings, 1/4/2014
Cr. NCI (B/S)
Transfer price
5,400K
27,000K
x 20%
5,400K
5,400K
15,000K
(8,000K)
125K
7,125K
x 20%
1,425K
22
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
Dr. NCI (I/S)
Cr. NCI (B/S)
1,425K
1,425K
Step 5: Dividends elimination
Dr. Dividend income
4,000K
Dr. NCI (B/S)
1,000K
Cr. Retained Earnings – Dividend Declared
5,000K
BPL
Step 1: BCVR entries
Dr. PPE (net)
Cr. BCVR
15,000K
15,000K
Dr. Depreciation Expense
(HK$15,000K/10 x 4/12)
Cr. Accumulated Depreciation
500K
500K
Steps 2 and 3A: Pre-acquisition elimination entries and NCI @ acquisition date
Dr. Retained Earnings – pre-acq.
50,000K
Dr. Share Capital
285,000K
Dr. BCVR
15,000K
Dr. Goodwill
32,500K
Cr. Investment in BPL
260,000K
Cr. NCI (B/S)
122,500K
Step 4: Intercompany loan & balances
Dr. Loan Payable
Cr. Loan Receivable
120,000K
Dr. Interest payable
Cr. Interest receivable
(HK$120,000K x 8% x 6/12)
4,800K
Dr. Interest income
Cr. Interest expense
(HK$120,000K x 8% x 4/12)
3,200K
120,000K
4,800K
3,200K
Step 3C: NCI movement for current year
Loss for the period
-) Excess depreciation (from Step 1)
(9,000K)
( 500K)
(9,500K)
x
35%
(3,325K)
Share of movement for current period
Dr. NCI (B/S)
Cr. NCI (I/S)
Step 5: Goodwill impairment
Dr. Impairment loss
Cr. Goodwill
3,325K
13,000K
3,325K
13,000K
23
SCHOOL OF ACCOUNTANCY
ACCT 4111 ADVANCED FINANCIAL ACCOUNTING
GROUP ACCOUNTS FOR FINAL EXAMINATION – SOLUTIONS
500
13,000
4,000
4,000
4,000
3,200
125
1,127,000
(854,500)
(167,875)
7,800
3,200
1,425
3,325
(8,800)
103,625
1,900
105,525
158,600
5,000
11,650
(20,000)
244,125
18,000
500
120,000
4,000
500,000
260,000
13,000
1,150,925
250,000
5,400
50,000
335,525
14,000
125
15,000
180,000
32,500
4,800
150,000
285,000
1,000
3,325
15,000
335,525
120,000
4,800
199,500
228,000
155,200
11,700
1,745,325
958,000
80,000
5,400
1,425
122,500
15,000
11,650
205,000
244,125
1,407,125
229,000
109,200
1,745,325
24