Due date: 18-Sep-2017
Return date: 11-Oct-2017
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Task
Complete all questions below. All workings, when appropriate, must be shown to substantiate your answers.
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
Land 60,000 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
$ $
Sales 632,000 440,000
Other revenue:
Debenture interest 10,000 -
Management and consulting fees 10,000 -
Dividends from Subsidiary Ltd 24,000 -
Total revenue 676,000 440,000
Cost of sales 260,000 170,000
Manufacturing expenses 180,000 120,000
Depreciation on plant 30,000 30,000
Administrative expenses 30,000 16,000
Financial expenses 22,000 10,000
Other expenses 28,000 24,000
Total expenses 550,000 370,000
Profit before tax 126,000 70,000
Income tax expense (50,000) (34,000)
Operating profit after tax 76,000 36,000
Retained earnings 1 July 2016 100,000 90,000
176,000 126,000
Transfer to general reserve 6,000 -
Interim dividend paid 20,000 20,000
Final dividends declared 20,000 10,000
46,000 30,000
Retained earnings 30 June 2017 130,000 96,000
General reserve 100,000 20,000
Other components of equity 26,000 20,000
Share capital 600,000 200,000
Debentures 400,000 200,000
Current tax liability 50,000 34,000
Dividend payable 20,000 10,000
Deferred tax liability - 14,000
Other liabilities 180,000 24,000
1,506,000 618,000
Assets
Financial assets 100,000 120,000
Debentures in Subsidiary Ltd 200,000 -
Shares in Subsidiary Ltd 263,200 -
Plant (cost) 240,000 204,000
Accumulated depreciation – plant (130,000) (110,000)
Other depreciable assets 152,000 110,000
Accumulated depreciation (80,000) (50,000)
Inventory 180,000 170,000
Deferred tax asset 170,800 60,000
Land 402,000 114,000
Dividend receivable 8,000 -
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 1 Max. marks allocated
Acquisition analysis 5
Consolidation entries - accuracy 35
Total 40
Question 2 [10 marks]
Topic 4: Investment in associates
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:
$
Share capital
General reserve
Retained earnings 330 000
50 000
220 000
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
$ $
Land 600 000 800 000
Plant (cost $600 000) 500 000 550 000
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 360 000
Income tax expense (150 000)
Profit after tax 210 000
Retained earnings at 1 July 2016 410 000
620 000
Dividends paid (20 000)
Dividends declared (25 000)
Transfer to general reserve (15 000)
(60 000)
Retained earnings at 30 June 2017 560 000
Share capital 320 000
General reserve 75 000
Asset revaluation surplus 155 000
Total equity 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 Max. marks allocated
Acquisition analysis 2
Workings 2
Consolidation entries 6
Total 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 Max. marks allocated
Journal entries, supported by workings 9
Overall presentation 1
Total 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.
Marking criteria
The marking guide for this task is provided below. The detailed allocation of marks for relevant questions has been provided above for your information.
Criteria High distinction Distinction Credit Pass
Question 1:
Prepare accurate acquisition analysis and consolidation journal entries necessary for the preparation of consolidated financial statements for group structures with a non-controlling interest, in accordance with relevant professional and statutory reporting requirements. Acquisition analysis and determination of goodwill or gain on bargain purchase is computed accurately.
At least 85% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Acquisition analysis and determination of goodwill or gain on bargain purchase is computed with very few minor errors.
At least 75% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Acquisition analysis and determination of goodwill or gain on bargain purchase is computed correctly with some minor errors.
At least 65% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements. Acquisition analysis and determination of goodwill or gain on bargain purchase is computed with a limited number of errors.
At least half of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Question 2:
Prepare accurate acquisition analysis and journal entries to account for investments in associates, in accordance with relevant professional and statutory reporting requirements. Acquisition analysis and determination of goodwill or excess is computed accurately.
At least 85% of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Appropriate workings are shown and accurate. Acquisition analysis and determination of goodwill or excess is computed with very few minor errors.
At least 75% of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Appropriate workings are shown with very few minor errors. Acquisition analysis and determination of goodwill or excess is computed correctly with some minor errors.
At least 65% of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Appropriate workings are shown, with some minor errors. Acquisition analysis and determination of goodwill or excess is computed with a limited number of errors.
At least half of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Some appropriate workings are shown and/or workings contain a limited number of errors.
Question 3:
Prepare accurate journal entries to account for foreign currency transactions, in accordance with relevant professional and statutory reporting requirements. At least 85% of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Appropriate workings are shown and accurate. At least 75% of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Appropriate workings are shown with very few minor errors. At least 65% of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Appropriate workings are shown, with some minor errors. At least half of the journal entries are prepared accurately in accordance with relevant statutory reporting requirements.
Some appropriate workings are shown and/or workings contain a limited number of errors.
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