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On 1 July 2016 Bells Ltd acquires 80 per cent of the equity capital of Torquay Ltd at the cost of $2 million. All assets

On 1 July 2016 Bells Ltd acquires 80 per cent of the equity capital of Torquay Ltd at the cost of $2 million. All assets of Torquay Ltd were fairly stated, and the total shareholders' funds of Torquay Ltd were $2.2 million, as follows:

Share capital

$1 500 000

Retained earnings

$700 000

$2 200 000

As of 30 June 2018 (that is, two years after the date of the acquisition) the financial statements of the two companies are as follows:

Bells Ltd

($000)

Torquay Ltd

($000)

A detailed reconciliation of opening and closing retained earnings

Sales revenue

480

115

Cost of goods sold

(100)

(40)

Other expenses

(80)

(15)

Other revenue

70

25

Profit before tax

370

85

Tax expense

60

30

Profit for the year

310

55

Retained earnings30 June 2017

1 000

800

1 310

855

Dividends paid

(160)

(30)

Dividend declared

(40)

(10)

Retained earnings30 June 2018

1 110

815

Statement of financial position

Shareholders' equity

Retained earnings

1 110

815

Share capital

4 000

1 500

Current liabilities

Accounts payable

20

30

Dividends payable

40

10

Non-current liabilities

Loans

600

250

Total of liabilities and equity

5 770

2 605

Current assets

Cash

150

25

Accounts receivable

242

175

Dividends receivable

8

-

Inventory

500

300

Non-current assets

Land

1400

1105

Plant

1870

1300

Accumulated depreciation

(400)

(300)

Investment in Torquay Ltd

2 000

-

Total assets

5 770

2 605

Other information:

  • The management of Bells Ltd values any non-controlling interest in Torquay Ltd at fair value.
  • During the current financial year, Torquay Ltd pays management fees of $10 000 to Bells Ltd. This item is included in 'other' expenses and income.
  • During the current financial year, Bells Ltd sold inventory to Torquay Ltd at a price of $30 000. The inventory cost Bells $22 000 to produce. Fifty per cent of this inventory is still on hand with Torquay Ltd at the end of the financial year. (Hint: as this unrealised profit relates to sales made by Bells Ltd then no adjustments are necessary when calculating non-controlling interests in Torquay Ltd.)
  • During the current financial year, Torquay Ltd sold inventory to Bells Ltd at a price of $20 000. The inventory cost Torquay Ltd $14 000 to produce. Forty per cent of this inventory is still on hand with Bells Ltd at the end of the financial year. (Hint: as this unrealised profit relates to sales made by Torquay Ltd then adjustments will be necessary when calculating non-controlling interests in Torquay Ltd.)
  • In the preceding financial year, Torquay Ltd sold inventory to Bells Ltd at a price of $11 000. The inventory cost Torquay Ltd $8000 to produce. At 30 June 2017, 20 per cent of this inventory was still held by Bells Ltd. (Hint: this information will be used to make an adjustment to non-controlling interests in Torquay Ltd.)
  • The management of Bells Ltd believes that goodwill acquired has subsequently been impaired. It was impaired by $12 000 in the year to 30 June 2017, and by a further $12 000 in the year to 30 June 2018. (Hint: because the non-controlling interest in Torquay is being valued at fair value, then this will mean that the non-controlling interest will incorporate a proportional share of goodwill. Therefore, any impairment in goodwill will impact the non-controlling interest in Torquay Ltd.)
  • On 1 July 2017 Torquay Ltd sold an item of plant to Bells Ltd for a price of $45 000 when its carrying amount in Torquay Ltd.'s accounts were $25 000 (cost $50 000, accumulated depreciation $25 000). This item of the plant was being depreciated over a further 10 years, with no expected residual value. (Hint: as this unrealised profit relates to a sale of plant made by Torquay Ltd then adjustments will be necessary when calculating non-controlling interests in Torquay Ltd.)
  • On 30 June 2018, the directors of Torquay Ltd declared and communicated to their shareholders that they would pay a final dividend amounting to $10 000. (Hint: dividends paid by Torquay will act to reduce the non-controlling interest in Torquay.)

Bells ltd. policy and procedures

The organisation has the following policies and procedures to consolidate the financial accounts:

Uniform Accounting Policies

Bells Ltd. shall prepare consolidated financial statements using uniform accounting policies for like transactions andother events in similar circumstances.

Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee. Changes in a parent's ownership interest in a subsidiary that do notresult in the parent losing control of the subsidiary areequity transactions (i.e. transactions with owners in their capacity as owners).

Non-Controlling Interests

Bells ltd. shall present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

Loss of Control

If Bells Ltd. loses control of a subsidiary, the parent:

  1. derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position;
  2. recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance withrelevant IFRSs; and
  3. recognises the gain or loss associated with the loss of control attributable to the former controlling interest.

Conversions and Consolidation procedures

Conversion procedures:

  1. In case if the transaction happens in a foreign currency, the organisation uses the current rates of transactions.

Consolidated financial statements:

combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries;

eliminate the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity of each subsidiary;

and eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full). Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements. AASB 112 Income Taxes applies to temporary differences that arise from the elimination of profits and losses resulting from intragroup transactions.

If the unrealised profit relates to sales made by Bells Ltd, then no adjustments are necessary when calculating non-controlling interests in Torquay Ltd.

If unrealised profit relates to a sale of the plant made by Torquay Ltd then adjustments will be necessary when calculating non-controlling interests in Torquay Ltd.

Prepare consolidated financial statements of Bells Ltd and its controlled entity for the reporting period ending 30 June 2018 in MS-Excel. (Follow the formats of the templates provided (Template A-E) to prepare consolidated financial statements in MS Excel.

To prepare the above specified financial statements, you will be required to:

  1. Prepare the required journal entries: (including tax affected accounts and shareholder's funds) To be recorded in the space provided in this document.
  2. To eliminate Bells Ltd.'s investment in Torquay Ltd at the acquisition date.
  3. Toeliminate intercompany sales because, from the perspective of the economic entity, the sales did not involve external parties. This will ensure that we do not overstate the total sales of the economic entity.
  4. To eliminate unrealised profit in closing inventory.
  5. For consideration of the tax paid or payable on the sale of inventory that is still held within the group
  6. For sale of inventory from Bell ltd. To Torquay Ltd.
  7. Elimination of unrealised profit in closing inventory.
  8. For consideration of the tax paid or payable on the sale of inventory that is still held within the group
  9. For unrealised profit in opening inventory
  10. For reversal of profit recognised on the sale of asset and reinstatement of cost and accumulated depreciation
  11. For tax implications of the intragroup sale of the plant.
  12. To reinstate accumulated depreciation in the statement of financial position
  13. For consideration of the tax effect of the reduction in depreciation expense.
  14. For impairment of goodwill
  15. For elimination of intragroup transactionsmanagement fees
  16. Dividends paid
  17. Dividends declared
  18. Dividends receivable
  19. The non-controlling interests on the acquisition date.
  20. The non-controlling interest in movements in contributed equity and reserves between the date of the parent entity's acquisition and the beginning of the current reporting period.
  21. The non-controlling interest in the current period's profit, as well as movements in reserves in the current period. In determining the non-controlling interest's share of current period profit or loss, gains and losses of the subsidiary that are unrealised from the economic entity's perspective will need to be adjusted for.
  22. Dividends paid by Torquay Ltd
  23. Calculate non-controlling interest and prepare journal entries for the following:
  24. Transfer the above consolidation journal entries to the consolidation worksheet. (Template A)
  25. Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2018. (Template B)
  26. Consolidated statement of changes in equity for the year ended 30 June 2018 for Bells Ltd and its controlled entity for Bells Ltd and its controlled entity. (Template C)
  27. Statement of changes in equity for the year ended 30 June 2018 for Bells ltd. (Template D)
  28. Consolidated statement of financial position at 30 June 2018 for Bells Ltd and its controlled entity. (Template E)

When preparing the above-specified statements, make sure that you:

  1. Record data in financial statements by following accounting standards:
  • AASB 10, Consolidated Financial Statements
  • AASB 116 Property, Plant and Equipment
  • AASB 136 Impairment of Assets
  • AASB 13 Fair Value Measurement
  • AASB 102 Inventories
  1. Code, classify and check data for accuracy and reliability in accordance with organisational policy, procedures.
  2. Identify and record the effects of taxation
  3. Ensure the structure and format of reports are clear and conform to statutory requirements and organisational procedures.
  4. Ensure that the financial statements are error-free.
  5. Transfer the data into MS Excel. Use the format of templates provided.

Space for journal entries to be performed.

Particulars Debit Credit

Template A: Consolidation worksheet

Eliminations and adjustments

Bells Ltd

($000)

Torquay Ltd

($000)

Dr ($000) Cr ($000) Consolidated statements ($000)
A detailed reconciliation of opening and closing retained earnings
Sales revenue
Cost of goods sold
Other expenses
Other Income
Profit before tax
Tax expense
Profit for the year
Non-controlling interest in earnings
Retained earnings30 June 2017
Dividends paid
Dividend declared
Retained earnings30 June 2018
Statement of financial position
Shareholders' equity
Share capital
Retained earnings b/d
Non-controlling interest
Current liabilities
Accounts payable
Dividends payable
Non-current liabilities
Loans
Total of liabilities and equity
Current assets
Cash

Template B: Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2018

Group Bells Ltd
Revenue
Cost of goods sold
Gross profit
Other Income
Other expenses
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income
Profit attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interest

Template C: Consolidated statement of changes in stakeholder equity for the year ended 30 June 2018

Attributable to owners of the parent
Share capital ($) Retained earnings ($) Total ($) Non-controlling interest ($) Total equity ($)
Balance at 1 July 2017
Total comprehensive income for the year
Dividends
Balance at 30 June 2018

Template D: Statement of changes in equity for the year ended 30 June 2018

Share capital ($) Retained earnings ($) Total equity ($)
Balance at 1 July 2017
Total comprehensive income for the year
Distributions
Balance at 30 June 2018

Template E: Consolidated statement of financial position at 30 June 2018 for Bells Ltd and its controlled entity

Group ($0) Bells Ltd ($0)
Consolidated statement of financial position
Current assets
Inventory
Accounts receivable
Dividend receivable
Cash
Total current assets
Non-current assets
Land
Plant
Accumulated depreciation
Goodwill
Accumulated impairment loss
Investment in Torquay Ltd
Deferred tax asset
Total non-current assets
Total assets
Current liabilities
Accounts payable
Dividends payable
Total current liabilities
Non-current liabilities
Loans
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Retained earnings
Non-controlling interest
Total equity

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