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Case Study Financial information at 30 June 2020 of Great Ltd and its subsidiary company, Wall Ltd, is shown below. At 1 July 2017, the

Case Study Financial information at 30 June 2020 of Great Ltd and its subsidiary company, Wall Ltd, is shown below. At 1 July 2017, the date Great Ltd acquired its 80% shareholding in Wall Ltd, all the identifiable assets and liabilities of Wall Ltd were at fair value except for the following assets:

Carrying amount

Fair value

Plant (cost $75,000)

$49,000

$55,000

Land

29,000

37,000

The plant has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2017 was sold on 1 February 2018 for $40,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings. Great Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2017 was $31,500.

Great Ltd

Wall Ltd

Sales revenue

$

316,000

$

220,000

Other revenue:

Debenture interest

5,000

Management and consulting fees

5,000

Dividend from Wall Ltd

12,000

Total revenues

338,000

220,000

Cost of sales

130,000

85,000

Manufacturing expenses

90,000

60,000

Depreciation on plant

15,000

15,000

Administrative

15,000

8,000

Financial

11,000

5,000

Other expenses

14,000

12,000

Total expenses

275,000

185,000

Profit before tax

63,000

35,000

Income tax expense

(25,000

)

(17,000

)

Profit

38,000

18,000

Retained earnings (1/7/19)

50,000

45,000

88,000

63,000

Transfer to general reserve

3,000

Interim dividend paid

10,000

10,000

Final dividend declared

10,000

5,000

23,000

15,000

Retained earnings (30/6/20)

65,000

48,000

General reserve

50,000

10,000

Other components of equity

13,000

10,000

Share capital

300,000

100,000

Debentures

200,000

100,000

Current tax liability

25,000

17,000

Dividend payable

10,000

5,000

Deferred tax liability

7,000

Other liabilities

90,000

12,000

$

753,000

$

309,000

Financial assets

$

50,000

$

60,000

Debentures in Wall Ltd

100,000

Shares in Wall Ltd

131,600

Plant (cost)

120,000

102,000

Accumulated depreciation plant

(65,000

)

(55,000

)

Other depreciable assets

76,000

55,000

Accumulated depreciation

(40,000

)

(25,000

)

Inventory

90,000

85,000

Deferred tax asset

85,400

30,000

Land

201,000

57,000

Dividend receivable

4,000

$

753,000

$

309,000

Additional information

  1. At the acquisition date of 80% of its issued shares by Great Ltd, the equity of Wall Ltd was:

    Share capital (100,000 shares)

    $100,000

    General reserve

    3,000

    Retained earnings

    37,000

  2. Inventory on hand of Wall Ltd at 1 July 2019 included a quantity priced at $10,000 that had been sold to Wall Ltd by its parent. This inventory had cost Great Ltd $7,500. It was all sold by Wall Ltd during the year.
  3. In Great Ltds inventory at 30 June 2020 were various items sold to it by Wall Ltd at $5,000 above cost.
  4. During the year, intragroup sales by Wall Ltd to Great Ltd were $60,000. It was also learned that Wall Ltd had sold to Great Ltd an item from its inventory for $20,000 on 1 January 2019. Great Ltd had treated this item as an addition to its plant and machinery. The item was put into service as soon as received by Great Ltd and depreciation charged at 20% p.a. The item had been fully imported by Wall Ltd at a landed cost of $15,000.
  5. Management and consulting fees derived by Great Ltd were all from Wall Ltd and represented charges made for administration $2,200 and technical services $2,800. The latter were charged by Wall Ltd to manufacturing expenses.
  6. All debentures issued by Wall Ltd are held by Great Ltd.
  7. Other components of equity relate to movements in the fair values of the financial assets. The balance of this account at 1 July 2019 was $10,000 (Great Ltd) and $8,000 (Wall Ltd).
  8. The tax rate is 30%.

Required: Section 1

  1. Conduct the acquisition analysis.
  2. Prepare the consolidation journals as at 30 June 2020.
  3. What is the total amount of non-controlling interests?
  4. What is the total amount of Business Combination Revaluation Reserve (BCVR) shown in the group account?
  5. What is the total amount of Goodwill shown in the group account?

(Note: You must show all workings. The calculation figures will be marked.)

section two:

Jenny Chan is the accountant for Great Ltd. She is required to prepare a set of consolidated financial statements for the group. Jenny is concerned about the calculation of the NCI share of equity, particularly where there are intragroup transactions. The auditors have advised Jenny that when adjustments are made for intragroup transaction the effects of these transactions on the NCI should also be adjusted for. Jenny reports to Mr Frank Finn, the Chief Financial Officer of the company. He has asked Jenny to report to him on these issues raised by the auditor. In her report, Jenny will need to clarify how the adjustment to NCI is made and why. She has also been asked to explain why she has measured NCI in the subsidiary at fair value and to report on any alternative method that is available.From the above information, discuss the issues that Jenny must address in her report to Mr Finn. In your discussions please include references to applicable accounting standards and the amounts used in your consolidation workings (at least two examples for each argument are to be provided).

Section3. In making consolidation worksheet adjustments, sometimes tax-effect entries are made. Why? Make reference to applicable accounting standards and the amounts used in your consolidation workings (at least two examples for each argument are to be provided).

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