Question 4 Tanjiro Ltd (35 marks) On 1 January 2019, Tanjiro Ltd acquired 75% of the issued shares of Inosuke Ltd on an ex-div. basis for $5 million. On the acquisition date, the accounts of Inosuke Ltd included the following balances: Share capital ordinary shares ($1.50 share) General reserve Gold reserve Retained earnings Goodwill $1,500,000 800,000 1,000,000 980,000 100 000 At the acquisition date, all the identifiable assets and liabilities of Inosuke Ltd were recorded at amounts equal to fair value except for: Carrying amount Fair value 1 Plant and machinery (Cost = $800,000) $655,000 $ 880,000 2 Customer contracts 60,000 230,000 The plant and machinery are expected to have a further useful life of 20 years. The customer contracts have a 15 years life of which 9 years remain. The subsidiary constructed an underground power generator in a designated rural area with an estimated useful life of 10 years at the acquisition date. It is required by the local government to dismantle the plant, remove it and return the site to its original condition. Inosuke Ltd estimated these costs to be: Dismantling the plant $100,000 Environmental remediation costs $170,000 Replacement of flora and fauna $20,000 $290,000 [The discount rate applicable to Inosuke Sdn Bhd's credit risk profile is 12%] An extract of the financial information of Tanjiro Ltd and Inosuke Ltd for the financial year ended 30 April 2023 showed the following financial information: Vincenzo Ltd Cassano Ltd Share capital - ordinary shares $ 3,150,000 $ 1,500,000 Retained earnings (at 30/4/2023) 1,895,814 1,530,500 Retained earnings (at 1/5/2022) 1,357,075 1,150,000 Gold reserve 445,000 1,200,000 General reserve 2,100,000 300,000 Diamond reserve 350,000 Interim dividends paid 300,000 402,500 Profit for the year 1,688,739 283,000 Investment in Inosuke Ltd 5,000,000 Fair value of non-controlling interest (at 1/1/2019) 1,200,000 Question 4 Tanjiro Ltd (contd.) Additional information: (0) The opening inventories of Tanjiro Ltd on 1 May 2022 included items purchased from Inosuke Ltd for $510,000, that had cost Inosuke Ltd $250,000 to make. 70% of these inventories was sold to Rengoku Ltd by the current financial year end. (ii) Tanjiro Ltd charges Inosuke Ltd $3,000 per month in rental of a warehouse since 1 July 2019. Inosuke Ltd has not paid Tanjiro Ltd 5 months of rental in the current financial year. ) On 1 July 2019, Tanjiro Ltd provided some advances and loans to Inosuke Ltd of $680,000 for working capital purposes. The interest of 13% per annum on the advances and loans are recorded on an accrual basis and are payable bi-annually at the end of every June and December. In the previous financial year, the subsidiary had repaid Tanjiro Ltd an amount of $200,000. (iv) Inosuke Ltd sold inventories to Tanjiro Ltd for $430,000, at a cost plus 25% pricing basis on 2 December 2022. An amount of $180,000 of these inventories were still on hand as at year end. (v) Tanjiro Ltd sold inventories to Inosuke Ltd for $80,000 that had cost Tanjiro Ltd $110,000 to make. At year end, half of these inventories were still on hand. (vi) On 1 March 2020, Inosuke Ltd sold an equipment to Tanjiro Ltd for $330,000 when it was purchased for $550,000 on the day itself. The equipment has a further useful life of 10 years with an estimated useful life of $20,000. The Group depreciates its equipment using straight-line depreciation method. (vii) Goodwill is tested on an annual basis for impairment. Previously, the directors of the Group estimated that 15% of the total purchased goodwill was impaired in the third financial year of acquisition. It was later decided that it had a further 10% impairment in the current financial year. (vii) The constitution of the Group allows directors to declare dividends at any time and this is not subject to any approval, authorization or discretion. The tax rate is 24%. Tanjiro Ltd uses the full goodwill method to prepare its consolidated financial statements in compliance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements. Any adjustments for differences between carrying amounts at the acquisition date and fair values are made on consolidation. Question 4 Tanjiro Ltd (contd.) Revaluation surplus recognized on consolidation (RSROC) is created for fair value adjustments at Group level which are transferred to retained earnings when assets are sold or fully consumed. The full effects of intragroup transactions are eliminated upon consolidation Required: (a) Prepare the acquisition analysis of the Investment in Inosuke Ltd as at 1 January 2019. (5.5 marks) (b) Prepare consolidation worksheet journal entries necessary to consolidate Tanjiro Ltd and its subsidiary for the financial year ended 30 April 2023, in accordance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements: (0) Fair value adjustments upon consolidation (RSROC entries) (ii) Pre-acquisition entries Elimination of intragroup transactions (iv) NCI adjustments Show all workings. Narrations are not required. Use three decimal places for discount factor related calculations. Question 4 Tanjiro Ltd (35 marks) On 1 January 2019, Tanjiro Ltd acquired 75% of the issued shares of Inosuke Ltd on an ex-div. basis for $5 million. On the acquisition date, the accounts of Inosuke Ltd included the following balances: Share capital ordinary shares ($1.50 share) General reserve Gold reserve Retained earnings Goodwill $1,500,000 800,000 1,000,000 980,000 100 000 At the acquisition date, all the identifiable assets and liabilities of Inosuke Ltd were recorded at amounts equal to fair value except for: Carrying amount Fair value 1 Plant and machinery (Cost = $800,000) $655,000 $ 880,000 2 Customer contracts 60,000 230,000 The plant and machinery are expected to have a further useful life of 20 years. The customer contracts have a 15 years life of which 9 years remain. The subsidiary constructed an underground power generator in a designated rural area with an estimated useful life of 10 years at the acquisition date. It is required by the local government to dismantle the plant, remove it and return the site to its original condition. Inosuke Ltd estimated these costs to be: Dismantling the plant $100,000 Environmental remediation costs $170,000 Replacement of flora and fauna $20,000 $290,000 [The discount rate applicable to Inosuke Sdn Bhd's credit risk profile is 12%] An extract of the financial information of Tanjiro Ltd and Inosuke Ltd for the financial year ended 30 April 2023 showed the following financial information: Vincenzo Ltd Cassano Ltd Share capital - ordinary shares $ 3,150,000 $ 1,500,000 Retained earnings (at 30/4/2023) 1,895,814 1,530,500 Retained earnings (at 1/5/2022) 1,357,075 1,150,000 Gold reserve 445,000 1,200,000 General reserve 2,100,000 300,000 Diamond reserve 350,000 Interim dividends paid 300,000 402,500 Profit for the year 1,688,739 283,000 Investment in Inosuke Ltd 5,000,000 Fair value of non-controlling interest (at 1/1/2019) 1,200,000 Question 4 Tanjiro Ltd (contd.) Additional information: (0) The opening inventories of Tanjiro Ltd on 1 May 2022 included items purchased from Inosuke Ltd for $510,000, that had cost Inosuke Ltd $250,000 to make. 70% of these inventories was sold to Rengoku Ltd by the current financial year end. (ii) Tanjiro Ltd charges Inosuke Ltd $3,000 per month in rental of a warehouse since 1 July 2019. Inosuke Ltd has not paid Tanjiro Ltd 5 months of rental in the current financial year. ) On 1 July 2019, Tanjiro Ltd provided some advances and loans to Inosuke Ltd of $680,000 for working capital purposes. The interest of 13% per annum on the advances and loans are recorded on an accrual basis and are payable bi-annually at the end of every June and December. In the previous financial year, the subsidiary had repaid Tanjiro Ltd an amount of $200,000. (iv) Inosuke Ltd sold inventories to Tanjiro Ltd for $430,000, at a cost plus 25% pricing basis on 2 December 2022. An amount of $180,000 of these inventories were still on hand as at year end. (v) Tanjiro Ltd sold inventories to Inosuke Ltd for $80,000 that had cost Tanjiro Ltd $110,000 to make. At year end, half of these inventories were still on hand. (vi) On 1 March 2020, Inosuke Ltd sold an equipment to Tanjiro Ltd for $330,000 when it was purchased for $550,000 on the day itself. The equipment has a further useful life of 10 years with an estimated useful life of $20,000. The Group depreciates its equipment using straight-line depreciation method. (vii) Goodwill is tested on an annual basis for impairment. Previously, the directors of the Group estimated that 15% of the total purchased goodwill was impaired in the third financial year of acquisition. It was later decided that it had a further 10% impairment in the current financial year. (vii) The constitution of the Group allows directors to declare dividends at any time and this is not subject to any approval, authorization or discretion. The tax rate is 24%. Tanjiro Ltd uses the full goodwill method to prepare its consolidated financial statements in compliance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements. Any adjustments for differences between carrying amounts at the acquisition date and fair values are made on consolidation. Question 4 Tanjiro Ltd (contd.) Revaluation surplus recognized on consolidation (RSROC) is created for fair value adjustments at Group level which are transferred to retained earnings when assets are sold or fully consumed. The full effects of intragroup transactions are eliminated upon consolidation Required: (a) Prepare the acquisition analysis of the Investment in Inosuke Ltd as at 1 January 2019. (5.5 marks) (b) Prepare consolidation worksheet journal entries necessary to consolidate Tanjiro Ltd and its subsidiary for the financial year ended 30 April 2023, in accordance with AASB 3/IFRS 3 Business Combinations and AASB 10/IFRS 10 Consolidated Financial Statements: (0) Fair value adjustments upon consolidation (RSROC entries) (ii) Pre-acquisition entries Elimination of intragroup transactions (iv) NCI adjustments Show all workings. Narrations are not required. Use three decimal places for discount factor related calculations