Question 5.

The following financial information of Parem Ltd and its subsidiary Sublit Ltd has been extracted from their financial records at 30 June 2017.

Detailed reconciliation of opening	Parem Ltd ($)	Sublit Ltd ($)
and closing retained earnings
Sales revenue	98,000	95,000
Cost of goods sold	55,000	85,000
Gross profit	43,000	10,000
Other revenue	2,000	-
Gain on sale of land		15,000
Depreciation expense	3,000	3,000
Other expenses	5,000	2,000
Profit before tax	37,000	20,000
Tax expense	11,100	6,000
Profit for the year	25,900	14,000
Retained earnings 30 June 2016	120,000	45,000
Retained earnings 30 June 2017	145,900	59,000
Statement of financial position	Parem Ltd ($)	Sublit Ltd ($)
Shareholders equity
Retained earnings	145,900	59,000
Share capital	40,000	40,000
Other reserves	50,000
Current liabilities
Accounts payable	50,000	80,000
Deferred tax liability	30,000	40,000
Total liabilities and equity	315,900	219,000
Current assets
Cash	60,900	79,000
Inventory	100,000	100,000
Non-current assets
Land	30,000	-
Machinery-at cost	80,000	15,000
Accumulated depreciation	-20,000	-10,000
Investment in Sublit Ltd	60,000
Deferred tax asset	5,000	35,000
Total assets	315,900	219,000

Additional information:

Parem Ltd acquired its 60% interest in Sublit Ltd on 1 July 2015 for $60,000. At that date the capital and reserves of Sublit Ltd were: Share capital $40,000 Retained earnings $20,000 Total $60,000

The management of Parem Ltd measures the non-controlling interest in Sublit Ltd at fair value.

At the date of acquisition, all assets of Sublit Ltd were stated at fair value except for machinery. The fair value of machinery was greater than the carrying value by $3,000. The cost of machinery was $15,000 and accumulated depreciation was $5,000, with a remaining useful life of 3 years.

The opening inventory (Brickplaster) of Parem Ltd as at 1 July 2016 included inventory acquired from Sublit Ltd for $60,000, which had cost $40,000 to produce. This inventory was sold outside the group during the current period.

During the year ending 30 June 2017, Sublit Ltd sold Cement to Parem Ltd for $50,000. The closing inventory in Parem Ltd includes Cement inventory acquired from Sublit at a cost of $5,000.

During the year ending 30 June 2017, Sublit Ltd paid $5,000 management fees to Parem Ltd

The income tax rate is 30%. Each entity pays its own tax.

The current year is considered as year ending 30 June 2017.

Required: Prepare and show:

(a) Consolidation journal entries for the elimination of Parem Ltds investment in Sublit Ltd for the year ending 30 June 2017. Show detailed workings for each answer in a format that includes a description of each entry. (5 marks)

(b) Consolidation journal entry on the pre-tax sale of brickplaster inventory sold by Sublit Ltd Parem Ltd in the previous period and its associated tax effect in the current period which was sold outside the group in the year ending 30 June 2017. (4 marks)

(c) Consolidation journal entries for the fair value adjustment of the machinery in Sublit Ltd to be done at the date of acquisition to prepare group accounts for the ending 30 June 2017. (6 marks)

(d) Consolidation journal entries relating to depreciation resulting because of fair value adjustment of the machinery to prepare group accounts for the ending 30 June 2017. (3 marks)

(e) Consolidation journal entries relating to tax effect result from the depreciation entry resulting because of fair value adjustment of the machinery to prepare group accounts for the ending 30 June 2017. (3 marks)

(f) Consolidation journal entries Parem Ltd sold Cement to Sublit during the year ending 30 June 2017, the closing inventory, and the tax effect because of the closing inventory of Cement. (6 marks)

(g) Consolidation entry for Sublit Ltd paying management fees to Parem Ltd during the year ending 30 June 2017. (2 marks)

(h) Itemise and show the non-controlling interest including goodwill assigned on the acquisition date (i.e. 1 July 2015). (4 marks)

(i) Itemise and show the non-controlling interest in the movements in share capital and reserves between the date of Parem Ltds acquisition of Sublit Ltd (1 July 2015) and the beginning of the current reporting period (1 July 2016). (5 marks)

(j) Itemise and show the non-controlling interests in equity item for the year ending 30 June 2017. (7 marks)

(k) If we assume that Parem Ltd acquired its 100% interest in Sublit Ltd on 1 July 2015 for $60,000. At that date the capital and reserves of Sublit Ltd were: Share capital $40,000; Retained earnings $20,000. It is also assumed that there were no fair value adjustments necessary for assets in Sublit Ltd at the date of acquisition. Consolidation journal entries for the elimination of Parem Ltds investment in Sublit Ltd for the year ending 30 June 2017.