Explain in detail, using the relevant journal entries, how the following transaction affects the NCI calculation of profit for the year ended 30 June 2017 and why? Rose Ltd owns 90% of the share capital of Petal Ltd. The income tax rate is 30%.In January 2017, Petal Ltd sells inventory to Rose Ltd for $25 000 cash. This inventory had previously cost Petal Ltd $15 000, and remains unsold by Rose Ltd at the end of the period.

hello, this question is regarding the presentation in company accounting. can someone the give the answer by using 5 powerpoint slide. so i can 5-7 minutes in the class.for study resource, i have attcahed a consolidation topic.

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Topic 8 Consolidation: non-controlling interest (cont'd) A quick recap... Wholly-owned subsidiary; no NCI Partly-owned subsidiary; has NCI NCI has an investment in the sub (part of the group) Therefore NCI has a right to: - sub's equity (Step 1), - sub's changes in equity up to beginning of current year (Step 2), and - sub's current year profit and trans'ns affecting profit (Step 3) Parent NCI Sub 2 Learning objectives 1. 2. To explain how the calculation of the NCI is affected by the existence of intragroup transactions: Dividends Transfers to/from reserves by subsidiary Inventory Depreciable assets Services and interest To explain how the NCI is affected by the existence of a gain on bargain purchase 3 Adjustments for intragroup transactions: dividends P Ltd S Ltd 60% (NCI is 40%) During the year S Ltd paid a dividend of $5,000 and declared a final dividend of $3,000. P 60% NCI 40% S Note: All entries that follow are consolidation worksheet adjustments (unless indicated otherwise) 4 Parent Co. Dr Cash Cr Dividend rev Sub Co. 3000 3000 Dr Dividend rec'ble 1800 Cr Dividend rev 1800 Dr Div paid Cr Cash Consolidation adjustment 5000 5000 Dr Div declared 3000 Cr Dividend payable 3000 Dr Dividend revenue 3000 Cr Div paid 3000 Dr Dividend revenue 1800 Cr Div declared 1800 (also adjust for Asset/Liability) 60% x 5,000 = 3,000 60% x 3,000 = 1,800 NCI Consolidation adjustment Dr Cash Cr Dividend rev 2000 2000 Dr Dividend rec'ble 1200 Cr Dividend rev 1200 Dr NCI Cr Div paid 2000 2000 Dr NCI Cr Div declared 1200 1200 40% x 5,000 = 2,000 40% x 3,000 = 1,200 5 Entries to record NCI share of equity (Step 3) NCI Dr Cr 2,000 NCI Dr Cr 1,200 Dividend Paid (40% x $5,000) Dividend Declared 2,000 1,200 (40% x $3,000) Nb. Dr to NCI = decrease in NCI; Cr to NCI = increase for NCI. Entries also required to adjust for intragroup dividends; (Parent's 60% share) 6 Transfers to/from reserves by Subsidiary P Ltd S Ltd 60% During the year, S Ltd made a transfer of $5,000 from general reserve to RE. Transfer from Gen Reserve [to RE] Dr 2,000 NCI Cr 2,000 NCI General Reserve (40% x $5,000) Dr Cr Or, combine into 1 entry: Transfer from Gen Reserve [to RE] Dr General Reserve Cr 2,000 2,000 2,000 2,000 entries reflect an in NCI share of retained earnings, and in NCI share of general reserve no change to sub's total equity, so no change to total NCI 7 Adjusting for the effects of Intragroup Transactions Entity concept of consolidation adopted by AASB 127 NCI based on sub's equity after - adjusting for the effects of intragroup transactions - and unrealised profit (loss). Consider: - inventory; - depreciable assets; and - services and interest Nb. focus on profits - but same concept applies also to losses from intragroup transactions 8 Concept of 'realisation' of profits and losses For a transaction to require adjustment to calculation of the NCI share of equity it must: - result in the subsidiary recording a profit (or loss), and - the asset is still on hand at year end, e.g. inventory relating to unrealised profit (or loss) a) Inventory If sub sells some inventory to parent at a profit and inventory still on hand at consolidation date - \"unrealised profit\" in closing inventory Need to eliminate \"unrealised profit\" from sub's profit when calculating NCI share of sub's equity P NCI S* * = unrealised profit; upstream transaction 9 Concept of 'realisation' of profits and losses No adjustment to NCI necessary for \"downstream\" sales (parent sub). Why? P* NCI * = unrealised profit S Profit becomes \"realised\" (for both group and NCI) when inventory sold to an external party Nb. Still continue to prepare consolidation worksheet entries to adjust for unrealised profit in closing (and opening) inventory and related taxeffect entries. 10 Concept of 'realisation' of profits and losses For intragroup transactions and NCI: Make the NCI adjustments (for effects of intragroup transactions) after any relevant consolidation adjustments, e.g. unrealised profits in closing inventory. Need to identify the direction of the intragroup transactions when NCI involved - \"upstream\" transactions (from Sub to Parent) impact on NCI. 11 Inventory example P Ltd S Ltd P NCI 60% NCI is 40% Current period ends 30 June 2013 Tax rate is 30% S* During the 2012-13 period, S Ltd sold inventory to P Ltd for $30,000. At 30 June 2013, ending inventory of P Ltd contains $5,000 profit made by S Ltd. Sales Cost of Sales Inventory Dr Cr Cr 30,000 Deferred Tax Asset Income Tax Expense Dr Cr 1,500 Nb. these entries are unaffected by the existence of an NCI 25,000 5,000 1,500 12 Assume S Ltd's net profit is $30,000. This includes all profit on transferred inventory. Overall, NCI is entitled to: 40% x ($30,000 profit - [$5,000 - $1,500]) inventory - tax = $10,600 In Step 3 NCI calculation, NCI is given a share of $30,000: NCI Share of Profit NCI Dr Cr 12,000 (40% x $30,000) 12,000 Now need to reduce NCI share of current period profit (40% x [$5,000 - $1,500]) NCI NCI Share of Profit Dr Cr Overall, NCI Share of Profit: $12 000 [share of sub's profit: 40% x $30,000] Step 3 + ($1,400) [adjust for intragroup trans. S P] Above = $10,600 1,400 1,400 13 From previous example: During 2012-13, S Ltd sold inventory to P Ltd. At 30 June 2013, ending inventory of P Ltd contains $5,000 profit made by S Ltd. All the inventory was sold by P Ltd in the 2013-14 period. Current period ends 30 June 2014 Nb. S Ltd made the profit in a prior period (year ended 30 June 2013). From the group's viewpoint, the profit was unrealised last period, but realised in the current period (year ended 30 June 2014). Retained Earnings (1/7/13) Dr Income Tax Expense Dr Cost of Sales Cr 3,500 1,500 P NCI S* 5,000 unrealised last period - the NCI share of prior period profit must be decreased NCI Dr 1,400 Retained Earnings (1/7/13) Cr (40% x $3,500) 1,400 14 However, for the group the profit was realised this period, hence, NCI share of sub's current period profit must be increased. NCI Share of Profit NCI Dr Cr 1,400 1,400 (40% x [$5,000 - $1,500]) Combine 2 previous entries into 1 entry (no change to total NCI): NCI Share of Profit Retained Earnings (1/7/13) Dr Cr 1,400 1,400 15 Concept of 'realisation' of profits and losses (b) Depreciable assets May have unrealised profits in sales of depreciable assets from sub to parent Depreciable assets not sold (like inventory) - used internally and provide benefits to group. Measure 'usage' based on depreciation Sub's profit (on sale) realised as asset is depreciated - NCI also receives a share of the (increase in) sub's profit (over the life of the asset). 2 step approach: 1. Income from sale - profit is unrealised 2. Depreciation of asset - profit is gradually realised as asset is consumed 16 Depreciable assets - example On 1/7/12, S Ltd sold plant to P Ltd for $20,000. The carrying amount at date of sale was $15,000. Plant is depreciated at 20% p.a. Consolidation worksheet adj (30/6/13): Step 1: Income from sale Proceeds from Sale of Plant Carrying Amount of Plant Sold Plant Dr Cr Cr 20,000 Deferred Tax Asset Income Tax Expense Dr Cr 1,500 Also need to reduce NCI share of current period profit of sub NCI Dr 1,400 NCI Share of Profit Cr P NCI S* 15,000 5,000 1,500 (40% x [$5,000 - $1,500]) 1,400 17 Step 2: Depreciation of asset Accum. Depreciation Depreciation Expense (20% x $5,000 = $1,000 p.a.) Dr Cr 1,000 Income Tax Expense Deferred Tax Asset Dr Cr 300 1,000 300 Note: Profit on intragroup sale of plant is being realised at $700 p.a. ($1,000 [dep.] - $300 [tax]) Need to increase NCI share of current profit NCI Share of Profit Dr 280 NCI Cr 280 (40% x [$1,000 (dep.) - $300 (tax)]) 18 Thus in year of sale of plant by S Ltd: NCI $1,400 [unrealised profit on sale] NCI $280 [realisation of profit - via depreciation] Note: $280 x 5 years = $1,400 19 Consolidation worksheet entries at 30/6/15 (3 years after sale on 1/7/12) Step 1: Gain on sale Retained Earnings (1/7/14)* Deferred Tax Asset Plant *$3,500 = ($20,000 [sale proceeds] - $15,000 [carrying amount] - $1,500) [income tax expense] Dr Dr Cr 3,500 1,500 5,000 Profit is all unrealised Need to reduce NCI share of prior period's profits NCI Retained Earnings (1/7/14) (40% x $3,500) Dr Cr 1,400 1,400 20 Step 2: Depreciation Accum. Dep. [3 yrs] Depreciation Exp. Ret. Earnings (1/7/14) (20% x $5,000 = $1,000 p.a.) Dr Cr Cr 3,000 Income Tax Expense Retained Earnings(1/7/14) Deferred Tax Asset Dr Dr Cr 300 600 Need to update effect on NCI NCI Share of Profit Retained Earnings (1/7/14) NCI (40% x [$1,000 (dep.) - $300 (tax)] = $280 p. a.) Dr Dr Cr 280 560 1,000 2,000 30% 900 840 21 Concept of 'realisation' of profits and losses (c) Services and interest AASB 127 - only adjust for unrealised profits/losses regarding \"assets\" For services and interest (revenue/expense) - assumed profit/losses realised immediately Also, practical considerations - when realised? Thus no adjustments of sub's profit necessary for NCI for services and interest (but still need consolidation adjustments (i.e. elimination) for CFS). 22 S Ltd receives from P Ltd $1,000 for rent in relation to a building used by P Ltd in the current period. S Ltd records 'Rent revenue' P Ltd records 'Rent expense' Consolidation worksheet adjustment required i.e. Dr rent revenue Cr rent expense x x No NCI adjustment entry is required, as no unrealised profit 23 Summary - NCI NCI calculated using full goodwill or partial goodwill method if sub's assets below FV at acquisition date, then NCI% of BCVR allocated to NCI if revalued assets depreciable, then adjust (reduce) NCI share of sub's retained earnings and current profit for the \"extra\" depreciation less income tax relating to sub's assets adjust NCI (and BCVR) on sale of sub's inventory (if FV > CA at acquisition date) 24 Summary - NCI if sub's profit includes intragroup transactions \"upstream\" which involve unrealised profit (loss), then adjustment required for NCI share of sub's earnings profit (loss) from \"upstream\" transactions realised for NCI when asset sold externally (e.g. inventory) or used (e.g. non-current assets) Cr NCI = increase; Dr NCI = decrease Existence of gain on bargain purchase has NO effect on calculation of NCI* - NCI does not receive a share of the gain on bargain purchase *We are not told how much NCI paid for their interest 25 Gain on bargain purchase Assume a company has a balance sheet: - Equity - Identifiable Net Assets $100,000 $100,000 All assets at FV; Parent acquires 80% of the shares for $75,000 cash Net FV of subsidiary Net FV acquired by parent Consideration transferred Gain on bargain purchase = $100,000 = 80% x $100,000 = $80,000 = $75,000 = $80,000 - $75,000 = $5,000 26 Gain on bargain purchase Business combination valuation entry: None Pre-acquisition entry in year of acquisition: Equity [80% x $100,000] Dr Gain on bargain purchase Cr Shares in Subsidiary Ltd Cr Non-controlling interest (step 1): Equity [20% x $100,000] NCI Dr Cr 80,000 5,000 75,000 20,000 20,000 27 Lecture example (Consolidation worksheet entries only, using partial g/will method). Refer AYB340 Blackboard site for consolidation worksheet and consolidated financial statements Echidna Ltd - Emu Ltd 75% Echidna Ltd Emu Ltd Echidna Ltd NCI 75% 25% 28 partial goodwill method; 29 20 10 30 31 32 a) Ech NCI $80,000 b) $50,000 Ech NCI $10,000 x 75% $10,000 x 25% Emu Emu c) Ech NCI $55,000 d) Ech NCI $60,000 Emu $55,000 = 110% (sales) :.(50,000) = 100% (COGS) :. 5,000 = unrealised profit Emu $60,000 sales price (52,000) carrying amount :. 8,000 = unrealised gain 10 years dep'n 33 Acquisition Analysis (at 1 July 2009): Fair value of INA of Emu Ltd = ($400,000 + $50,000 + $40,000 + $30,000 + $40,000) (equity) $560,000 = = 75% x $560,000 $420,000* Consideration trf'd = = (75% x 400,000 shares) x $1.50 $450,000 Goodwill: Parent = = $450,000 - $420,000* $30,000 Net FV acquired by parent = 34 Consolidation worksheet entries: 30 June 2010 1.Business combination valuation entries: n/a Nb. All identifiable assets of Emu Ltd (sub.) recorded at FV, thus no valuation entries required ; goodwill recorded directly in pre-acq'n entry (partial method). 2.Pre-acquisition entry [75%] Retained Earnings (1/7/09) Share Capital General Reserve ARR (1/7/09) Other Comp. of Equity (1/7/09) Goodwill Shares in Emu Ltd Dr Dr Dr Dr Dr Dr Cr 30,000 300,000 37,500 30,000 22,500 30,000 (40x75%) (400x75%) (50x75%) (40x75%) (30x75%) 450,000 35 3. NCI in equity of Emu Ltd at 1/7/09 (Step 1) Retained Earnings (1/7/09) Share Capital General Reserve ARR (1/7/09) Other Comp. of Equity (1/7/09) NCI $140,000 Dr Dr Dr Dr Dr Cr 10,000 100,000 12,500 10,000 7,500 (40x25%) (400x25%) (50x25%) (40x25%) (30x25%) 140,000 Note: FVINA $560,000 x 25% = 36 4. NCI in equity of Emu Ltd from 1/7/09 - 30/6/10 (Step 3 - no Step 2) 1 July 200930 June 2010 1 July 2009 20 10 37 4. NCI in equity of Emu Ltd from 1/7/09 - 30/6/10 (Step 3 - no Step 2) NCI Share of Profit NCI (25% x $223,200 [sub's profit]) Dr Cr 55,800 Gains/Losses - ARR NCI (25% x [$60,000 - $40,000]) Dr Cr 5,000 Gain/Loss - Other Components of Equity Dr NCI Cr (25% x [$40,000 - $30,000]) 2,500 NCI Dr Cr 7,500 NCI Dr Cr 2,500 Dividend Paid (25% x $30,000) Dividend Declared (25% x $10,000) 55,800 5,000 2,500 7,500 2,500 38 5. Dividend paid Dividend Revenue Dividend Paid (75% x $30,000) Dr Cr 22,500 6. Dividend declared Dividend Payable Dividend Declared (75% x $10,000) Dr Cr 7,500 Dr Cr 7,500 Dr Cr 80,000 Dividend Revenue Dividend Receivable (75% x $10,000) 7. Advance Advance from Echidna Ltd (L) Advance to Emu Ltd (A) 22,500 7,500 7,500 80,000 39 8. Sale of inventory: Echidna Ltd to Emu Ltd Sales Revenue Cost of Sales Inventory (Cost = $55,000/1.10 = $50,000) Dr Cr Cr 55,000 Deferred Tax Asset Income Tax Expense Dr Cr 1,500 50,000 5,000 1,500 9. NCI adjustment Nil as \"downstream\" transaction (Parent Sub) 40 10. Sale of equipment: Emu Ltd to Echidna Ltd Proceeds of sale (Other income) Carrying Amt of Equipm't sold (Other exp) Equipment Dr Cr Cr 60,000 Deferred Tax Asset Income Tax Expense Dr Cr 2,400 Dr Cr 1,400 11. NCI adjustment: NCI () NCI Share of Profit (25% x ($8,000 - $2,400) 52,000 8,000 2,400 1,400 [unrealised profit on sale of equipment less income tax expense]) 41 12. Depreciation Accumulated Depreciation Depreciation Expense (10% x $8,000 = $800 p. a.) Dr Cr 800 Income Tax Expense Deferred Tax Asset Dr Cr 240 Dr Cr 140 13. NCI adjustment: NCI Share of Profit NCI () (25% x ($800 - $240) 800 240 140 [realisation of profit from sale of equipment less income tax expense]) Profit made by sub on sale of equipment = $8,000 - $2,400 (tax) = $5,600 NCI $1,400 (unrealised profit on sale): 25% x $5,600) NCI $140 (realised profit from sale - due to lower group dep'n exp. 42 25% x [$800 - $240]) Over 10 years $140 p.a. (realised profit) = $1,400 To complete this question: - Journal entries would then be posted to consolidation worksheet - Consolidated financial statements would then be prepared 43 Surviving consolidation 1. Go over your notes, textbook, & tutorial questions 2. Look at consolidation as a process (i.e. series of steps) 3. Practice, practice, practice. 4. See your tutor or me with specific questions 5. Remember there are also student learning advisors available at Level 1, B Block 44 Social and global reflections Consolidation of an Australian parent and Australian subsidiary involves the same (identical) accounting standards - AIFRS But other countries have slightly different versions of IFRS And not all countries follow IFRS How to consolidate when subsidiaries operate in countries with different (versions of) accounting standards? Follow the parent's accounting standards? Would the consolidated financial statements look different if the parent was based in NZ (NZIFRS) or Australia (AIFRS) Do we really have (perfectly comparable) global reporting standards? 45 For next week Readings: Leo, et al., Chapter 21 pp. 1071 - 1090 Collaborate Recording: see Blackboard for question details The transfer from general reserve in 2011-2012 and transfer from asset revaluation reserve 30 June 2013 are from pre-acquisition equity. Review question: see Blackboard for question details - use partial goodwill method (Profit of Kookaburra Ltd for year ended 30 June 2012 is $6,500. Note for Koala Ltd, last 2 lines on the trial balance should read: - Dividend paid $ 2,400 Dr; - 10% debentures nil). Excel extension for Q18.9 - use the 'draft spreadsheet' file on Blackboard, and input the formulae required to create a consolidated worksheet 46 For next week Tutorial questions: Ch 21.6 - prepare worksheet entries only Note: assume no change in the general reserve balance in the current year 2019. (Note: Excel consolidation worksheets available from the AYB340 Blackboard site). 47