Proton Motors Ltd is a public company listed on the ASX. It is a major manufacturer of traditional automotive vehicles. Proton Motors Ltd is under continuous pressure to reduce costs, improve fuel efficiency and reduce emissions of its vehicles to comply with government regulations. Stricter emission regulations, lower battery costs, more widely available charging infrastructure, and increasing consumer acceptance have created new and strong momentum for the penetration of electrified vehicles. This has led to declining sales revenues for Proton Motors Ltd of its traditional automotive vehicles. The incremental borrowing rate for Proton Motors Ltd is 10%. The corporate tax rate is 30%.
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Re: Accounting Issues for year ended 30 June 2023 

From: Rana Carr 

Sent: 12 August 2023 

To: Kara Song
Dear Kara,
I am reaching out to you for assistance as our Chief Accountant is currently on long service leave. I need to understand the accounting implications of our recent takeover of Electron Ltd so that I can present the consolidated financial statements to the Board of directors and respond to any further questions they may have concerning the accounts for the year ended 30 June 2023. As I do not have any accounting experience, please explain the principles and concepts for me in simple language
 

As you know, we have recently acquired 100% of the issued shares of Electron Ltd on 1 July 2022 on a cum-div basis. The terms of the acquisition were that shareholders of Electron Ltd would receive $3,102,000 cash with half payable at the date of acquisition and the balance payable on 1 July 2023. Prior to the takeover, Electron Ltd had declared a final dividend of $30,000 which was paid on 1 October 2022. The acquisition of Electron Ltd is a strategic move which will enable us to diversify into fully autonomous electric vehicles and grow our business. Electron Ltd also has strong marketing, sales and distribution networks which have significantly increased our sales revenues and profits over the past year.

 

Our Chief Accountant has confirmed that at the date of acquisition, Electron Ltd had share capital of $2,211,000 and retained earnings of $750,000. All the assets of Electron Ltd were recorded at fair value in Electron Ltd's balance sheet, except for equipment for which the fair value of $91,000 was less than the carrying amount, this being cost of $116,000 less accumulated depreciation of $21,000. It was also discovered that Electron Ltd had not recorded its patent for wireless charging of its EV battery. This has a fair value of $115,000. Electron Ltd also had reported via note the existence of a contingent liability at 30 June 2022, in relation to a court case over product defects of its autonomous emergency braking system. No monetary amount was disclosed, but the company's lawyers believe that the probable payout to settle the case is $210,000. 

 

Our Accounts Clerk prepared an acquisition analysis and calculated goodwill of $141,000 (being $3,102,000 less the subsidiary's equity acquired of $2,961,000) to be reported in the accounts. Is this correct? What journal entries (if any) do I need to make for 30 June 2023? Please show all workings and explain each journal entry, as I need to be able to respond to questions from the Board of Directors. 

 

Prior to going on long service leave, The Chief Accountant identified two inter-company transactions for further consideration when preparing the consolidated accounts. Specific details of these transactions are shown in the next page:

 

1. On the 20th June 2023, Proton Motors Ltd sold inventories costing $120,000 to Electron Ltd for $100,000 on credit. At year-end, 70% of these goods remained in Electron Ltd's closing inventory. Electron Ltd paid the outstanding balance to Proton Motors Ltd on 5th July 2023. We have recognized a loss of $20,000 from the sale which has reduced our taxes. Is there anything else we need to do? Please provide any necessary journal entries.

 

2. At the beginning of the current period, Proton Motors Ltd sold some old machinery to Electron Ltd for $81,000. The machinery originally cost Proton Motors Ltd $500,000, is four years old and had accumulated depreciation of $400,000 at the date of the sale. The remaining useful life of the machinery was confirmed by independent experts engaged by Electron Ltd to be a further two years. The Chief Accountant was mumbling something about not recording these transactions. Won't the accounts then be incomplete? Please explain what I need to do with the transaction and show any journal entries necessary. 

Please respond by letter (not email) as I would like to present this to the Board. I look forward to hearing from you shortly.