BFA301 Advanced Financial Accounting
Semester 2 2018 Case Study Assignment:
North Facing Ltd
Introduction
North Facing Ltd is a publicly listed company located in Southern Tasmania, being an outdoor equipment and hiking specialist store. Its mission is to ‘inspire, equip and enable people everywhere to appreciate the great outdoors and adventure’. The company, founded in 2000, has continued to grow and expand and is now seen as a major outdoor retailer in southern Australia.
North Facing Ltd has three entities which it controls:
• Mountain Clear Ltd (100% of the share capital owned).
• Step Forward Ltd (100% of the share capital owned).
• Food Right Ltd (70% of the share capital owned).
The three entities all provide specialist outdoor and hiking equipment to North Facing Ltd. Mountain Clear Ltd is a supplier of quality mountain clothing, Step Forward Ltd supplies Australian made hiking footware whilst Food Right Ltd specialises in gourmet quality food for long hikes.
You have been appointed as group accountant for North Facing Ltd. As such you are required to prepare consolidated financial statements for the Parent and its Subsidiaries for the year ended 30 June 2018.
General Information
a. All financial information has been presented in Australian dollars in the information below and the accompanying worksheets.
b. The management of North Facing Ltd values any non-controlling interest at the proportionate share of Food Right Ltd’s identifiable net assets, using the partial goodwill method under AASB 3 paragraph 19.
c. North Facing Ltd recognises a receivable for dividends when they are declared by a controlled entity.
d. All entities within the group use the perpetual inventory method.
e. The income tax rate is 30%.
Additional Information relating to Mountain Clear Ltd:
On 1 July 2013, North Facing Ltd purchased 100 per cent of the shares of Mountain Clear Ltd for $11 100 000 cash. An extract of Mountain Clear Ltd’s balance sheet immediately before the acquisition is shown below:
Mountain
Clear Ltd
Shareholders' equity
Share capital 7,000,000
Retained profits 4,200,000
Total 11,200,000
a. At the date of investment, all the identifiable net assets of Mountain Clear Ltd were considered to be recorded at fair value, except an item of equipment that had a carrying amount of $240 000 (purchased 1/7/2010, original cost $360 000 and accumulated depreciation of $120 000) but a fair value of $270 000. The equipment was not revalued in the books of Mountain Clear Ltd prior to consolidation. North Facing Ltd will continue to depreciate it at the same rate applied by Mountain Clear Ltd over its remaining life.
b. The opening inventory of North Facing Ltd at 1 July 2017 included inventory that had been sold to them by Mountain Clear Ltd on the 23 June 2017 at a profit of $78 000. All inventory had been sold to external entities by 30 June 2018.
c. Mountain Clear Ltd sold inventory on the 31 March 2018 to North Facing Ltd for $98 000. This inventory had cost Mountain Clear Ltd $69 000 to purchase. By 30 June 2018, half of the inventory had been sold to external entities.
d. Management fees of $80 000 were paid by Mountain Clear Ltd to North Facing Ltd on 01 April 2018.
e. North Facing Ltd purchased 5 000 debentures at their list price of $40 per debenture from Mountain Clear Ltd on 1 July 2014. Interest at 8% per annum had been paid on 30 June 2018.
Additional Information relating to Step Forward Ltd:
On 1 July 2011, North Facing Ltd purchased 100 per cent of the shares of Step Forward Ltd for $4 800 000 cash. An extract of Step Forward Ltd’s balance sheet immediately before the acquisition is shown below:
Step Forward Ltd
Shareholders' equity
Share capital 4,400,000
General reserve 60,000
Retained profits 80,000
Total 4,540,000
a. At the time of investment, all the identifiable net assets of Step Forward Ltd were considered to be recorded at fair value, except for land which had a carrying amount of $450 000 but a fair value of $545 000. The land had not been revalued in the books of Step Forward Ltd prior to consolidation.
b. The directors have applied the impairment test for goodwill annually. They have determined in addition to the cumulative goodwill impairment write-downs in prior years of $45 000, an additional write down of $12 000 is required as at 30 June 2018.
c. North Facing Ltd sold an item of plant and equipment to Step Forward Ltd on 31 December 2016 for $140 000. At the time, the plant and equipment had an original cost of $240 000 and accumulated depreciation of $120 000. North Facing Ltd had been depreciating the asset at 20% per annum on cost. When they acquired the asset the directors of Step Forward Ltd depreciated the asset over its remaining useful life.
d. Step Forward Ltd purchased $74 000 inventory from North Facing Ltd on the 30 May 2018 (this inventory had been purchased by North Facing Ltd for $56 000). Step Forward Ltd had not paid North Facing Ltd for these goods as at 30 June 2018. Step Forward Ltd sold these goods to an external party for $125 000 on the 13 August 2018.
e. North Facing Ltd loaned Step Forward Ltd $900 000 on the 01 July 2016, repayable 30 June 2022. Interest is charged at market rate of 9% per annum, payable annually on 30 June each year over the term of the loan.
f. Step Forward Ltd sold North Facing Ltd inventory for $50 000 on the 30 October 2017 (this inventory had been purchased by Step Forward Ltd for $22 000). The inventory had been sold to external entities by 30 June 2018.
Additional Information relating to Food Right Ltd (70% of shares owned by North Facing Ltd):
On 1 July 2015, North Facing Ltd purchased 70 per cent of the shares of Food Right Ltd for $1 400 000 cash. An extract of Food Right Ltd’s balance sheet immediately before the acquisition is shown below:
Food Right Ltd
Shareholders' equity
Share capital 1200 000
Retained profits 400 000
Total 1 600 000
a. Goodwill was determined to be impaired by $10 000 as at 30 June 2018.
b. North Facing Ltd leased a warehouse to Food Right Ltd during the year ended 30 June 2018 for $15 000.
c. The opening inventory of Food Right Ltd at 1 July 2017 included inventory sold to them by North facing Ltd at a profit of $4 800.
The working income statements and balance sheets of North Facing Pty Ltd, Mountain Clear Ltd, Step Forward Ltd and Food Right Ltd for the year ended 30 June 2018 are provided to you, as group accountant, by the financial accountants of the respective entities. They are shown in the accompanying excel spreadsheet document (in the worksheet tab).
Required
North Facing Ltd has asked that you prepare a consolidated Statement of Comprehensive Income, a consolidated Statement of Changes in Equity, a consolidated Statement of Financial Position and any applicable notes (please note: Note 1 is not required nor is a Consolidated Cash Flow Statement) for the group, for the year ended 30 June 2018 in accordance with applicable accounting standards.
Specific Requirements:
a. An acquisition analysis for each of the controlled entities.
b. All consolidation eliminations and adjusting journal entries (including non-controlling interest journal entries) required for the preparation and presentation of consolidated financial statements of North Facing Ltd and its controlled entities for the year ended 30 June 2018.
c. A completed consolidation worksheet incorporating the adjustments, eliminating and noncontrolling entries completed in (a & b) above. All adjusting items in the worksheet must have a reference to the corresponding journal entry.
Please use the accompanying excel spreadsheet document to complete the above steps a-c.
d. Professionally presented financial statements. This includes a consolidated Statement of Comprehensive Income; consolidated Statement of Changes in Equity and a consolidated Statement of Financial Position and any applicable notes (not Note 1) for North Facing Ltd and its controlled entities for the year ended 30 June 2018.
These financial reports are required to be set out in accordance with AASB 101 Presentation of Financial Statements. To apply AASB 101, you should follow the formats you learnt about in the pre-requisite unit BFA201 (or equivalent unit) plus any other requirements you have learnt in this unit for Consolidated Financial Statements (e.g. non-controlling interests). If required, please also refer to the illustrative examples provided by KPMG and Deloitte that can be found on MyLO.
For completion of the financial statements, please note the following:
• The financial statements will be an abridged version from two perspectives:
o Comparison figures have not been provided for the 2016/2017 year, thus are not required in the financial statements.
o Note 1 is not required as part of the Notes.
• Expenses need to be classified by nature in the consolidated financial statements.
• To assist with completion of the Statement of Changes in Equity, assume there were no other movements in Share capital or Reserves during the financial year other than what is provided in additional information above.
e. A short written report addressed to the management of North Facing Ltd (maximum 250 words) explaining why non-controlling interests are included in consolidated financial statements. Ensure that your report refers clearly to any applicable accounting standards.
The assignment is due on Thursday 20 September 2018 at 5.00pm and is worth 20% of your overall grade. Week 8 has been set aside as an independent study week to allow you time to dedicate to this assignment.
Please note the following:
• An electronic copy of your assignment needs to be submitted to the relevant BFA301 MyLO assignment dropbox by the due date and time. The file name is to include your name and student number.
• Please also submit a hard copy of the assignment in the assignment box on your relevant campus (collated in the order above under specific requirements).
• Do not attach a signed coversheet to the electronic assignment – ONLY the hard copy.
• Hard copies will not be returned. Marked up assignments will be available online together with feedback and graded rubrics once marks are released.
• This is an individual assignment. Under no circumstances should you share your workings or any part of your assignment with other students. This constitutes academic misconduct and action will be taken. All similarity reports on Turnitin will be thoroughly checked for matching with other assignments.
• Whilst it is essential that you use the accompanying excel spreadsheet document, you may alter the spreadsheets as you see fit. For example this may include (but is not limited to) the addition or removal of rows, the inclusion of formulas and use of the ‘AutoSum’ function, and/or linking of items between the spreadsheets.
• If you have any queries on the Case Study Assignment, please post your query to the Assignment Discussion area on MyLO.