Question 1 [40 marks]

Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests

Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.

Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.

All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:

Carrying amount

Fair value

$

$

Plant (cost $150,000)100,000

110,000

Land60,000

76,000

The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.

Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:

Parent Ltd

Subsidiary Ltd

$

$

Sales632,000

440,000

Other revenue:

Debenture interest10,000

-

Management and consulting fees10,000

-

Dividends from Subsidiary Ltd24,000

-

Total revenue676,000

440,000

Cost of sales260,000

170,000

Manufacturing expenses180,000

120,000

Depreciation on plant30,000

30,000

Administrative expenses30,000

16,000

Financial expenses22,000

10,000

Other expenses28,000

24,000

Total expenses550,000

370,000

Profit before tax126,000

70,000

Income tax expense(50,000)

(34,000)

Operating profit after tax76,000

36,000

Retained earnings 1 July 2016100,000

90,000

176,000

126,000

Transfer to general reserve6,000

-

Interim dividend paid20,000

20,000

Final dividends declared20,000

10,000

46,000

30,000

Retained earnings 30 June 2017130,000

96,000

General reserve100,000

20,000

Other components of equity26,000

20,000

Share capital600,000

200,000

Debentures400,000

200,000

Current tax liability50,000

34,000

Dividend payable20,000

10,000

Deferred tax liability-

14,000

Other liabilities180,000

24,000

1,506,000

618,000

Assets

Financial assets100,000

120,000

Debentures in Subsidiary Ltd200,000

-

Shares in Subsidiary Ltd263,200

-

Plant (cost)240,000

204,000

Accumulated depreciation - plant(130,000)

(110,000)

Other depreciable assets152,000

110,000

Accumulated depreciation(80,000)

(50,000)

Inventory180,000

170,000

Deferred tax asset170,800

60,000

Land402,000

114,000

Dividend receivable8,000

-

1,506,000

618,000

Additional information:

(a)The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.

(b)Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.

(c)On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.

(d)The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.

(e)All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.

(f)Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.

(g)The tax rate is 30%.

Required:

Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.

Note: show all necessary workings and narrations.

Question 1Max. marks allocated

Acquisition analysis5

Consolidation entries - accuracy35

Total40

Question 2 [10 marks]

Topic 4: Investment in associates

On 1 July 2015, Rules Ltd acquired 25% of the shares of Commercial Ltd for $200000. The acquisition of these shares gave Rules Ltd significant influence over Commercial Ltd. At this date, the equity of Commercial Ltd consisted of:

$Share capital

General reserve

Retained earnings

330000

50000

220000

At 1 July 2015, all the identifiable assets and liabilities of Commercial Ltd were recorded at amounts equal to their fair values except for:

Carrying amount

Fair value

$

$

Land600000

800000

Plant (cost $600000)500000

550000

The plant was considered to have a further useful life of 5 years. The land was revalued in the records of Commercial Ltd and the revaluation model applied in the measurement of the land. The tax rate is 30%.

At 30 June 2017, Commercial Ltd reported the following information:

$Profit before tax360000

Income tax expense(150000)

Profit after tax210000

Retained earnings at 1 July 2016410000

620000

Dividends paid(20000)

Dividends declared(25000)

Transfer to general reserve(15000)

(60000)

Retained earnings at 30 June 2017560000

Share capital320000

General reserve75000

Asset revaluation surplus155000

Total equity1110000

Commercial Ltd also reported other comprehensive income relating to gains on revaluation of land of $5000.

Required:

Prepare the journal entries in the books of Rules Ltd to account for the investment in Commercial Ltd under the equity method for the year ended 30 June 2017.

Question 2Max. marks allocated

Acquisition analysis2

Workings2

Consolidation entries6

Total10

Question 3 [10 marks]

Topic 5: Accounting for foreign currency transactions

Tassie Ltd is an Australian company with a reporting periods ending on 30 June. During the year ended 30 June 2017, Tassie Ltd purchased goods from Britania Ltd, a company based in London.

On 15 March 2017, Tassie Ltd ordered goods of 300000 from Luca Ltd under FOB London contract. On 11 May, the goods were shipped FOB London and arrived at Tassie Ltd's warehouse on the 2 July 2017. Tassie Ltd paid the 300000 due to Luca on the 14 August 2017.

Applicable exchange rates are as follows.

15 March 2017A$1.00 = 37p11 May 2017A$1.00 = 41p30 June 2017A$1.00 = 43p2 July 2017A$1.00 = 42p14 August 2017A$1.00 = 39p

Required:

(1)In accordance with AASB 121, prepare the relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018.

(2)Assuming that, instead of goods, Tassie Ltd was purchasing plant and equipment, which is installed ready for use on 15 July 2017 when the rate is still A$1.00=42p. Prepare relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018.

Question 3Max. marks allocated

Journal entries, supported by workings9

Overall presentation1

Total10

Rationale

This assessment task covers topics 1 to 5 inclusive. It has been designed to ensure that you are engaging the subject content on a regular basis. More specifically it seeks to assess your ability to:

1. be able to explain the relationships that exists between a parent company and its subsidiary(ies), an investor and its investee, a company and its overseas subsidiaries;

2. be able to prepare accounts for each of the above-mentioned business combinations in accordance with relevant professional and statutory reporting requirements;

3. be able to discuss the relevant accounting standards and statutory reporting requirements for foreign currency dealings, segment reporting, and leases.

Financial information at 30 June 2016 of Starr Ltd and its subsidiary company, Lennon Ltd include that shown below. At 1 July 2013, the date Starr Ltd acquired its 80% shareholding in Lennon Ltd, all the identifiable assets and liabilities of Lennon Ltd were at fair value except for the following assets: Carrying Amount Fair value Plant (cost $75 000) $ 50 000 $55,000 Land 30 000 38 000 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 2013 was sold on 1 February 2014 for $40,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings. Starr Ltd uses the full goodwill method. The fair value of the noncontrolling interest at 1 July 2013 was $31,500. Financial Information at 30 June 2016 Starr Ltd Lennon Ltd Sales revenue 316,000 220,000 Other revenue: Debenture interest 5,000 Management and consulting fees 5,000 Dividend from Lennon 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 Starr Ltd Lennon Ltd Income tax expense (25,000) (17,000) Profit 38,000 18,000 Retained earnings (1/07/15) 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 (30/06/16) 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 Lennon Ltd 100,000 Shares in Lennon 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 i. At the date of acquisition of 80% of its issued shares by Starr Ltd, the equity of Lennon Ltd was: Share Capital (100,000 shares) $100,000 General reserve 3,000 Retained earnings 37,000 ii. Inventory on hand of Lennon Ltd at 1 July 2015 included a quantity priced at $10,000 that had been sold to Lennon Ltd by its parent. This inventory had cost Starr Ltd $7,500. It was all sold by Lennon Ltd during the year. iii. During the year, intragroup sales by Lennon Ltd to Starr Ltd were $60,000. iv. An item of inventory of Lennon Ltd has been sold to Starr Ltd for $20,000 on 1 January 2015. Starr Ltd has treated this item as an addition to plant and machinery. The item was put into service as soon as it was received by Starr Ltd and depreciation charged at 20% p.a. The item had been fully imported by Lennon Ltd at a total cost of $15,000. v. Management and consulting fees derived by Starr Ltd were all from Lennon Ltd and represented charges made for administration $2,300 and technical services $2,700, with the latter charged by Lennon Ltd to manufacturing expenses. vi. All debentures issued by Lennon Ltd are held by Starr Ltd. vii. Other components of equity relate to movements in the fair values of the financial assets. The balance of this account at 1 July 2015 was $10,000 (Starr Ltd) and $8,000 (Lennon Ltd). viii. The tax rate is 30%. Required 1. Prepare: i. The acquisition analysis (using the full goodwill method); ii. The business combination valuation entries; iii.The preacquisition entries. Question 1 [40 marks] Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000. Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000. All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets: Carrying amount $ Plant (cost $150,000) Land Fair value $ 100,000 60,000 110,000 76,000 The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation. Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows: Sales Other revenue: Debenture interest Management and consulting fees Dividends from Subsidiary Ltd Total revenue Cost of sales Manufacturing expenses Depreciation on plant Administrative expenses Financial expenses Other expenses Total expenses Profit before tax Income tax expense Operating profit after tax Retained earnings 1 July 2016 Transfer to general reserve Interim dividend paid Final dividends declared Retained earnings 30 June 2017 General reserve Other components of equity Share capital Debentures Current tax liability Dividend payable Deferred tax liability Other liabilities Parent Ltd Subsidiary Ltd $ $ 632,000 440,000 10,000 10,000 24,000 676,000 260,000 180,000 30,000 30,000 22,000 28,000 550,000 126,000 (50,000) 76,000 100,000 176,000 6,000 20,000 20,000 46,000 130,000 100,000 26,000 600,000 400,000 50,000 20,000 180,000 1,506,000 440,000 170,000 120,000 30,000 16,000 10,000 24,000 370,000 70,000 (34,000) 36,000 90,000 126,000 20,000 10,000 30,000 96,000 20,000 20,000 200,000 200,000 34,000 10,000 14,000 24,000 618,000 Assets Financial assets Debentures in Subsidiary Ltd Shares in Subsidiary Ltd Plant (cost) Accumulated depreciation - plant Other depreciable assets Accumulated depreciation Inventory Deferred tax asset Land Dividend receivable 100,000 200,000 263,200 240,000 (130,000) 152,000 (80,000) 180,000 170,800 402,000 8,000 1,506,000 120,000 204,000 (110,000) 110,000 (50,000) 170,000 60,000 114,000 618,000 Additional information: (a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year. (b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year. (c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000. (d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd. (e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses. (f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd. (g) The tax rate is 30%. Required: Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd. Note: show all necessary workings and narrations. Question 1 Acquisition analysis Consolidation entries - accuracy Total Question 2 [10 marks] Topic 4: Investment in associates Max. marks allocated 5 35 40 On 1 July 2015, Rules Ltd acquired 25% of the shares of Commercial Ltd for $200 000. The acquisition of these shares gave Rules Ltd significant influence over Commercial Ltd. At this date, the equity of Commercial Ltd consisted of: $ 330 000 50 000 220 000 Share capital General reserve Retained earnings At 1 July 2015, all the identifiable assets and liabilities of Commercial Ltd were recorded at amounts equal to their fair values except for: Land Plant (cost $600 000) Carrying amount $ 600 000 500 000 Fair value $ 800 000 550 000 The plant was considered to have a further useful life of 5 years. The land was revalued in the records of Commercial Ltd and the revaluation model applied in the measurement of the land. The tax rate is 30%. At 30 June 2017, Commercial Ltd reported the following information: Profit before tax Income tax expense Profit after tax Retained earnings at 1 July 2016 Dividends paid Dividends declared Transfer to general reserve Retained earnings at 30 June 2017 Share capital General reserve Asset revaluation surplus Total equity $ 360 000 (150 000) 210 000 410 000 620 000 (20 000) (25 000) (15 000) (60 000) 560 000 320 000 75 000 155 000 1 110 000 Commercial Ltd also reported other comprehensive income relating to gains on revaluation of land of $5 000. Required: Prepare the journal entries in the books of Rules Ltd to account for the investment in Commercial Ltd under the equity method for the year ended 30 June 2017. Question 2 Acquisition analysis Workings Consolidation entries Total Max. marks allocated 2 2 6 10 Question 3 [10 marks] Topic 5: Accounting for foreign currency transactions Tassie Ltd is an Australian company with a reporting periods ending on 30 June. During the year ended 30 June 2017, Tassie Ltd purchased goods from Britania Ltd, a company based in London. On 15 March 2017, Tassie Ltd ordered goods of 300 000 from Luca Ltd under FOB London contract. On 11 May, the goods were shipped FOB London and arrived at Tassie Ltd's warehouse on the 2 July 2017. Tassie Ltd paid the 300 000 due to Luca on the 14 August 2017. Applicable exchange rates are as follows. 15 March 2017 A$1.00 = 37p 11 May 2017 A$1.00 = 41p 30 June 2017 A$1.00 = 43p 2 July 2017 A$1.00 = 42p 14 August 2017 A$1.00 = 39p Required: (1) In accordance with AASB 121, prepare the relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018. (2) Assuming that, instead of goods, Tassie Ltd was purchasing plant and equipment, which is installed ready for use on 15 July 2017 when the rate is still A$1.00=42p. Prepare relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018. Question 3 Journal entries, supported by workings Overall presentation Total Max. marks allocated 9 1 10 Rationale This assessment task covers topics 1 to 5 inclusive. It has been designed to ensure that you are engaging the subject content on a regular basis. More specifically it seeks to assess your ability to: 1. be able to explain the relationships that exists between a parent company and its subsidiary(ies), an investor and its investee, a company and its overseas subsidiaries; 2. be able to prepare accounts for each of the above-mentioned business combinations in accordance with relevant professional and statutory reporting requirements; 3. be able to discuss the relevant accounting standards and statutory reporting requirements for foreign currency dealings, segment reporting, and leases