Question 4 (40 marks)

Part A (30 marks)

On 1 January 2013, Petyr Ltd acquired 80% of the share capital of Sansa Ltd for $4,400,000. At acquisition date, Sansa Ltd's balance sheet included:

Share capital

$5,000,000

Retained profits

350,000

General reserve

50,000

At acquisition date, all of Sansa Ltd's net assets were recorded at fair value except for:

Carrying Amount

Fair Value

Equipment (cost $67,000)

$50,000

$58,000

Additional information:

a)Petyr Ltd adopts the partial goodwill method.

b)The revalued equipment was still held at 30 June 2017, being depreciated on the straight-linebasis over 5 years.

c)On 1 January 2016, Sansa Ltd sold an item of equipment to Petyr Ltd, recognising a gain of $22,000 on the sale. This equipment was still held at 30 June 2017 and at the time of the sale it was estimated that it would have a further useful life of 10 years.

d)During the year ended 30 June 2017, Sansa Ltd sold a quantity of inventory to Petyr Ltd for $28,000. Sansa Ltd received a gain of $8,500 on the sale and Petyr Ltd still held 25% of this inventory at 30 June 2017.

e)During the year ended 30 June 2017, Petyr Ltd sold an item of plant to Sansa Ltd at a gain of $80,000. This machinery was held as inventory in the books of Sansa Ltd at 30 June 2017.

f) Financial statements for the year ended 30 June 2017 are reproduced below:

Petyr Ltd

Sansa Ltd

Sales

$3,283,750

$1,800,000

Cost of goods sold

(1,490,000)

(1,460,000)

Gross profit

1,793,750

340,000

Gain on sale of plant

80,000

-

Other income

16,250

-

Depreciation expense

(320,000)

(240,000)

Other expenses

(180,000)

(130,000)

Profit (loss) before income tax

1,390,000

(30,000)

Income tax expense/income

(440,000)

10,000

Profit (loss) after tax

950,000

(20,000)

Retained earnings at 01/07/16

1,100,000

600,000

Dividends paid

(500,000)

-

Dividend declared

-

(25,000)

Trans. from general reserve

-

15,000

Retained earnings at 30/06/17

1,550,000

570,000

Share capital

7,000,000

5,000,000

General reserve

-

35,000

Total Equity

8,550,000

5,605,000

Current tax liability

480,000

-

Other liabilities

960,000

855,000

Borrowings

-

1,500,000

Deferred tax liability

-

-

Total Liabilities

1,440,000

2,355,000

Total liabilities and equity

9,990,000

7,960,000

Inventory

420,000

543,750

Other current assets

930,000

2,180,000

Property, plant and equipment

4,210,000

1,992,500

Accumulated depreciation

(1,050,000)

(800,000)

Investments

5,400,000

3,583,750

Deferred tax asset

80,000

460,000

Total assets

9,990,000

7,960,000

Required:

1. Determine the gain on bargain purchase or goodwill as at acquisition date.(2 marks)

2. Prepare the consolidation journal entries for Petyr Ltd at 1 January 2013, immediately after acquisition.(4 marks)

3. Prepare the consolidation journal entries for Petyr Ltd as at 30 June 2017.(16 marks)

4.Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Petyr Ltd as at 30 June 2017.(8 marks)

(Source: adapted fromArthur, N., Luff, L., Keet, P. Accounting for corporate combinations and associations (7e), Pearson Education, Australia.)

Part B (10 marks)

On 1 July 2017, Tywin Ltd acquired 75% of the shares (cum div.) of Shae Ltd for $120,500. At this date the equity of Shae Ltd consisted of:

Share capital

$ 40,000

General reserve

3,000

Retained earnings

25,000

At the date of the business combination, all the identifiable assets and liabilities of Shae Ltd had carrying amounts equal to their fair values except for:

Carrying amount

Fair value

Plant (cost $60,000)

$40,000

$55,000

Inventory

25,000

31,000

Receivables

33,000

30,000

Additional information:

a) One of the liabilities of Shae Ltd at 1 July 2017 was a dividend payable of $5,000.

b) The tax rate is 30%

Required:

1. Prepare the acquisition analysis as at acquisition date using the partial goodwill method. Show all workings.(2 marks)
2. Prepare the acquisition analysis as at acquisition date using the full goodwill method and the fair value of the non-controlling interest at the date of acquisition is $20,000.
3. Show all workings.(3 marks)
4. What are some of the implications of allowing the group to have two options in accounting for goodwill on consolidation?(5 marks - maximum 350 words)

(Source: Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.)

Marking Guide - Question 4

Max. marks awarded

Part A

1)

Acquisition analysis with workings

2

2)

Consolidation journal entries provided immediately after acquisition date

4

3)

Consolidation journal entries provided as at 30 June 2017

16

4)

Consolidation worksheet

8

Part B

1)

Acquisition analysis with workings using the partial goodwill method

2

2)

Acquisition analysis with workings using the full goodwill method

3

3)

Explanation of implications

1

Contrasts differences between both methods

1.5

Provides example which is relevant to the question

1.5

References to accounting standard(s)

1

Total

40

Question 4 (40 marks) Part A (30 marks) On 1 January 2013, Petyr Ltd acquired 80% of the share capital of Sansa Ltd for $4,400,000. At acquisition date, Sansa Ltd's balance sheet included: Share capital Retained profits General reserve $5,000,000 350,000 50,000 At acquisition date, all of Sansa Ltd's net assets were recorded at fair value except for: Equipment (cost $67,000) Carrying Amount $50,000 Fair Value $58,000 Additional information: a) Petyr Ltd adopts the partial goodwill method. b) The revalued equipment was still held at 30 June 2017, being depreciated on the straight-line basis over 5 years. c) On 1 January 2016, Sansa Ltd sold an item of equipment to Petyr Ltd, recognising a gain of $22,000 on the sale. This equipment was still held at 30 June 2017 and at the time of the sale it was estimated that it would have a further useful life of 10 years. d) During the year ended 30 June 2017, Sansa Ltd sold a quantity of inventory to Petyr Ltd for $28,000. Sansa Ltd received a gain of $8,500 on the sale and Petyr Ltd still held 25% of this inventory at 30 June 2017. e) During the year ended 30 June 2017, Petyr Ltd sold an item of plant to Sansa Ltd at a gain of $80,000. This machinery was held as inventory in the books of Sansa Ltd at 30 June 2017. f) Financial statements for the year ended 30 June 2017 are reproduced below: Sales Cost of goods sold Gross profit Gain on sale of plant Other income Depreciation expense Other expenses Profit (loss) before income tax Income tax expense/income Profit (loss) after tax Retained earnings at 01/07/16 Dividends paid Dividend declared Trans. from general reserve Retained earnings at 30/06/17 Share capital General reserve Petyr Ltd $3,283,750 (1,490,000) 1,793,750 80,000 16,250 (320,000) (180,000) 1,390,000 (440,000) 950,000 1,100,000 (500,000) 1,550,000 7,000,000 - Sansa Ltd $1,800,000 (1,460,000) 340,000 (240,000) (130,000) (30,000) 10,000 (20,000) 600,000 (25,000) 15,000 570,000 5,000,000 35,000 Total Equity Current tax liability Other liabilities Borrowings Deferred tax liability Total Liabilities Total liabilities and equity Inventory Other current assets Property, plant and equipment Accumulated depreciation Investments Deferred tax asset Total assets 8,550,000 480,000 960,000 1,440,000 9,990,000 420,000 930,000 4,210,000 (1,050,000) 5,400,000 80,000 9,990,000 5,605,000 855,000 1,500,000 2,355,000 7,960,000 543,750 2,180,000 1,992,500 (800,000) 3,583,750 460,000 7,960,000 Required: 1. Determine the gain on bargain purchase or goodwill as at acquisition date. (2 marks) 2. Prepare the consolidation journal entries for Petyr Ltd at 1 January 2013, immediately after acquisition. (4 marks) 3. Prepare the consolidation journal entries for Petyr Ltd as at 30 June 2017. (16 marks) 4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Petyr Ltd as at 30 June 2017. (8 marks) (Source: adapted from Arthur, N., Luff, L., Keet, P. Accounting for corporate combinations and associations (7e), Pearson Education, Australia.) Part B (10 marks) On 1 July 2017, Tywin Ltd acquired 75% of the shares (cum div.) of Shae Ltd for $120,500. At this date the equity of Shae Ltd consisted of: Share capital General reserve Retained earnings $ 40,000 3,000 25,000 At the date of the business combination, all the identifiable assets and liabilities of Shae Ltd had carrying amounts equal to their fair values except for: Plant (cost $60,000) Inventory Receivables Carrying amount $40,000 25,000 33,000 Fair value $55,000 31,000 30,000 Additional information: a) One of the liabilities of Shae Ltd at 1 July 2017 was a dividend payable of $5,000. b) The tax rate is 30% Required: A. Prepare the acquisition analysis as at acquisition date using the partial goodwill method. Show all workings. (2 marks) B. Prepare the acquisition analysis as at acquisition date using the full goodwill method and the fair value of the non-controlling interest at the date of acquisition is $20,000. Show all workings. (3 marks) C. What are some of the implications of allowing the group to have two options in accounting for goodwill on consolidation? (5 marks - maximum 350 words) (Source: Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.) Marking Guide - Question 4 Part A 1) Acquisition analysis with workings 2) Consolidation journal entries provided immediately after acquisition date 3) Consolidation journal entries provided as at 30 June 2017 4) Consolidation worksheet Part B 1) Acquisition analysis with workings using the partial goodwill method 2) Acquisition analysis with workings using the full goodwill method 3) Explanation of implications Contrasts differences between both methods Provides example which is relevant to the question References to accounting standard(s) Total Max. marks awarded 2 4 16 8 2 3 1 1.5 1.5 1 40