Question 2 - Consolidations: wholly-owned subsidiary & intra-group transfers [45 marks] ProQuest Ltd is a giant retail company based in Queensland with several renowned retail stores across metropolitan cities in Sydney, Melbourne and Brisbane. You are the newly appointed Group Accountant and are finalising the group accounts for ProQuest Ltd for the financial year ending 30 June 2024. As part of its expansion plans, ProQuest Ltd acquired all of the voting shares in Spotty Ltd on 1 July 2022 on an ex-div basis. It was determined that this acquisition constitutes a business combination in accordance with requirements in AASB3. On the date of acquisition, the shareholder's equity of Spotty Ltd was as follows: Share capital General reserve Retained earnings Total $ 125,000 27,500 70,250 222,750 You have a staff member, Jeff, who has been working as a Junior Accountant for ProQuest Ltd for a number of years and is completing a degree in accounting. At your request, Jeff provides more information about Spotty Ltd. On 1 July 2022, all the identifiable net assets of Spotty Ltd were recorded at fair value, except for the following assets (comments noted by Jeff): Plant Carrying amount ($) 120,000 Fair value ($) 125,000 Points to note Cost is $135,000, has a remaining useful life of 5 years on 1 July 2022, was later sold on 1 Jan 2024 for $97,500 Land Inventories 65,000 18,000 75,000 Sold on 1 Feb 2023 for $85,000 22,000 All sold to external parties by 30 June 2023 On 30 June 2024, the financial information of the two companies are as follows: ProQuest Ltd $ Spotty Ltd $ Revenue Expenses Trading profit 620,000 (202,000) 418,000 232,000 (101,000) 131,000 Gains (losses) on sale of non-current assets 15,000 4,000 Profit before tax 433,000 135,000 Income tax expense (130,680) (35,775) Profit for the period 302,320 99,225 Retained earnings 1 July 2023 151,500 116,500 Transfer from general reserve 15,000 4,000 468,820 219,725 Dividend paid (12,000) Retained earnings 30 June 2024 456,820 219,725 Share capital 400,000 125,000 General reserve 50,000 18,000 Page 3 of 5 Total equity 906,820 362,725 Accounts payable 89,560 25,670 Deferred tax liability 19,250 8,950 Other non-current liabilities 125.000 36,000 Total liabilities 233,810 70,620 Total equity and liabilities 1,140,630 433,345 Plant 425,000 209,000 Accumulated depreciation-plant (171,000) (97,500) Land 350,000 200,000 Brands 80,000 Shares in Spotty Ltd 250,000 Financial assets 65,280 53,500 Cash 61,590 30,845 Inventories 59,760 37,500 Goodwill 20,000 Accumulated impairment losses Total assets 1,140,630 433,345 Jeff also provides the following information in relation to some transactions involving ProQuest Ltd and Spotty Ltd: (a) Spotty Ltd had recorded a dividend payable of $4,800 in its book at 1 July 2022. (b) On the date of acquisition, Spotty Ltd had some internally generated brands that were (c) not recorded in its books in accordance with AASB138. After much investigation, you have determined that the fair value of the brands was valued at $12,500 on 1 July 2022. The brand was considered to have an indefinite life. On the date of acquisition, an item of contingent liability in accordance with AASB137 was not recorded by Spotty Ltd due to guidance provided in paragraphs 14(b) and 27 of AASB137. This was relating to a current court case in which Spotty Ltd was involved and a supplier was seeking compensation. After much research, you have arrived at a fair value of $21,000 on this liability as of 1 July 2022. This court case was then settled in May 2024 at which time Spotty Ltd was required to pay damages of $25,000. (d) In February 2023, Smart Ltd transferred $5,000 from the general reserve on hand at 1 July 2022 to retained earnings. Another amount of $4,000 (post-acquisition) was transferred in February 2024. Required: 1. Jeff is confused about several items that existed in Spotty Ltd's books at the date of consolidation. Discuss the accounting treatments for the purpose of business combinations, in accordance with AASB3, of the: a. internally generated brands not recognised in relation to AASB138; and (4 marks) b. contingent liabilities not recognised in relation to AASB137. (4 marks) 2. Prepare the acquisition analysis on 1 July 2022. (5 marks) 3. To get ready for the preparation of the consolidated financial statements for ProQuest Ltd's group for the financial year ending 30 June 2024, prepare the: a. consolidation worksheet entries; and (24 marks) b. consolidation worksheet. (8 marks) Note: you are not required to prepare the consolidation financial statements. Page 4 of 5 Question 3 - Consolidations: Intra-group transactions and non-controlling interests 120 marks] This question continues from Question 2 above. After some investigations, Jeff discovered more transactions that had occurred between ProQuest Ltd and Spotty Ltd for the year ending 30 June 2024, as summarised below. (a) On 1 October 2023, ProQuest Ltd made inventory sales to Spotty Ltd of $152,000. By 30 June 2024, Spotty Ltd's remaining inventory from these sales was valued at $25,000 (cost to ProQuest Ltd was $19,000). (b) On 1 July 2023, Spotty Ltd sold an item of plant to ProQuest Ltd for $348,000 when its carrying amount in Spotty Ltd's financial statements was $240,000 (cost $405,000 less accumulated depreciation of $165,000). This plant is assessed as having a remaining useful life of 5 years, with no residual value. (c) On 27 June 2024, Spotty Ltd declares a dividend of $20,000. At 30 June 2024, this dividend remains unpaid. Jeff is completing his final accounting subject that focuses heavily on consolidation accounting. He came across the concept of 'non-controlling interests' and he is wondering how this would have impacted the accounting treatments required for preparing the consolidated accounts for ProQuest Ltd Group. Required: 1. Discuss how the above transactions that occur between the two entities should be treated in accordance with AASB10. (3 marks) 2. Provide the adjusting entries required for these transactions, as required for the preparation of the consolidated financial statements of ProQuest Ltd Group. Please note that you are not required to prepare the consolidated financial statements. (9 marks) 3. Explain to Jeff the implications of the existence of non-controlling interests in the case of ProQuest Ltd Group, in relation to the preparation of the consolidated financial statements. (8 marks) Page 5 of 5