Principles & Accounting Requirements & Intra-group Transactions - Acquisition Analysis Assessment Answers

Question 1  Consolidation: Principles and accounting requirements; and intra-group transactions Koala Ltd purchased all of the issued shares of Kingfisher Ltd on 1 July 2013. At acquisition date, the shareholders’ equity of Kingfisher Ltd consisted of:

$
Share capital	240,000
Retained earnings	60,000
300,000

At 30 June 2015, two years after acquisition, the accounts of the two companies appear as follows:

Koala Ltd	Kingfisher Ltd
$	$
Sales	500,000	220,000
Cost of sales	(266,000)	(92,000)
Gross profit	234,000	128,000
Depreciation expenses	50,000	30,000
Rent expenses	8,000
Other expenses	84,000	60,000
Total expenses	134,000	98,000
100,000	30,000
Other income
Profit on sale of equipment	14,000	-
Rent revenue	8,000	-
Total other income	22,000	-
Operating profit before tax	122,000	30,000
Income tax expense	(38,000)	(10,000)
Operating profit after tax	84,000	20,000
Retained earnings 1 July 2014	60,000	70,000
Available for appropriation	144,000	90,000
Dividends paid	(70,000)	-
Retained earnings 30 June 2015	74,000	90,000
Share capital	600,000	240,000
Creditors and borrowings	70,000	30,000
Other liabilities	120,000	10,000
864,000	370,000
Assets
Cash at bank	6,000	4,000
Accounts receivable	60,000	60,000
Inventory	50,000	20,000
Investments in Kingfisher Ltd	310,000	-
Property, plant and equipment	230,000	140,000
Accumulated depreciation	(120,000)	(42,000)
Land and buildings (net)	288,000	158,000
Other assets	40,000	30,000
864,000	370,000

Additional information: (a)        The identifiable net assets of Kingfisher Ltd were recorded at fair value at the date of acquisition, except for an item of property, plant and equipment (cost $35,000 and accumulated depreciation of $13,500) that had a fair value of $26,500. Property, plant and equipment is expected to have a remaining useful life of 10 years with no residual value. (b)        During the financial year, Kingfisher Ltd paid rent of $8,000 to Koala Ltd. (c)        The opening inventory of Kingfisher Ltd includes unrealised profit of $4,000 on inventory transferred from Koala Ltd during the prior financial year. This entire inventory was sold by Kingfisher Ltd to parties external to the group during the current financial year. (d)        Koala Ltd sold inventory to Kingfisher Ltd for $30,000 during the year. This inventory had an original cost to Koala Ltd of $20,000. Three quarters of this inventory was sold to external entities by Kingfisher Ltd during the year. (e)        An item of equipment owned by Koala Ltd, originally acquired on 1 July 2013, was sold to Kingfisher Ltd for $50,000 on 1 July 2014. At 1 July 2014, this equipment has a cost of $60,000 and accumulated depreciation of $12,000. Koala Ltd depreciated this asset at 20% per annum straight-line. On acquiring the asset, Kingfisher Ltd assessed that the equipment has a remaining economic useful life of four years and therefore has applied a 25% depreciation rate on a straight-line basis, from the date of transfer of the asset. (f)         The tax rate is 30%. Required:

1. Prepare an acquisition analysis and the consolidation journal entries necessary to prepare consolidated accounts for the year ending 30 June 2015 for the group comprising Koala Ltd and Kingfisher Ltd.
2. Prepared a consolidation worksheet for the year ending 30 June 2015.

	Marks allocated
Acquisition analysis	3
Consolidation worksheet entries	17
Consolidation worksheet	5
Total	25

Question 2 [10 marks]  Consolidation: Principles and accounting requirements; intra-group transactions and non-controlling interests On 1 July 2013, Canti Ltd purchased 70% of the issued shares of Fletcher Ltd for a cost of $2,000,000. At acquisition date, the shareholders’ equity of Fletcher Ltd consisted of share capital and retained earnings of $1,500,000 and $700,000 respectively. On the same date, all assets of Fletcher Ltd were recorded at fair value. As at 30 June 2015, two years after date of acquisition, the accounts of the two companies are as follows:

Canti Ltd	Fletcher Ltd
$	$
Sales revenue	400,000	100,000
Cost of goods sold	(100,000)	(40,000)
Other expenses	(60,000)	(30,000)
Other revenue	155,000	42,500
Profit	395,000	72,500
Tax	(85,000)	(17,500)
Profit after tax	310,000	55,000
Retained earnings 1 July 2014	1,000,000	800,000
1,310,000	855,000
Dividends paid	(200,000)	(40,000)
Retained earnings 30 June 2015	1,100,000	815,000
Shareholders’ equity
Retained earnings	1,110,000	815,000
Share capital	4,000,000	1,500,000
Current liabilities
Accounts payable	60,000	40,000
Non-current liabilities
Loans	600,000	250,000
5,770,000	2,605,000
Current assets
Cash	150,000	25,000
Accounts receivable	250,000	175,000
Inventory	500,000	300,000
Non-current assets
Land	1,400,000	1,105,000
Plant	1,470,000	1,000,000
Investment in Fletcher Ltd	2,000,000	-
5,770,000	2,605,000

The following information is provided for the financial year 30 June 2015. (a)        The management of Canti Ltd values any non-controlling interest at the proportionate share of Fletcher Ltd’s identifiable net assets. (b)        During the year, Fletcher Ltd made total sales to Canti Ltd of $22,500. At the year end, Canti Ltd has sold this entire inventory to external parties. (c)        The tax rate is 30%. Required: Prepare the consolidation worksheet entries necessary for the preparation of consolidated financial statements for Canti Ltd and its subsidiary, Fletcher Ltd, for the financial year ended 30 June 2015. Narrations are not required.

Marks allocated
Acquisition analysis	1.5
Consolidation worksheet entries	8.5
Total	10

Question 3 [15 marks] Accounting for associates On 1 July 2013, Tusmore Ltd acquired 40% of the ordinary shares of Fisher Ltd for $1,625,000. The remaining 60% of the ordinary shares of Fisher Ltd are owned by two shareholders, Glenside Ltd, which owns 40% of the shares, and Roger Unit Trust, which owns 20% of the shares. Fisher Ltd’s constitution provides that at general meetings of the company, ordinary shareholders are entitled to vote on resolutions and elect directors, on the basis of one vote per ordinary share. Fisher Ltd’s five-member board of directors consists of two representatives from Tusmore Ltd and Glenside Ltd each; and one representative from Roger Unit Trust. Each member of Fisher Ltd’s board of directors is entitled to one vote on issues or resolutions being considered by the board of directors. The statement of financial position of Fisher Ltd immediately before the investment was as follows:

$
Shareholders’ equity
Share capital	2,250,000
Retained earnings	375,000
Revaluation surplus	937,500
Liabilities
Accounts payable	437,500
Bank loans	1,937,500
Deferred tax liability	625,000
6,562,500
Assets
Cash	55,000
Accounts receivable	287,500
Inventory	550,000
Land	1,375,000
Buildings	4,050,000
Accumulated depreciation –Buildings	(675,000)
Plant and equipment	1,150,000
Accumulated depreciation –Plant and equipment	(230,000)
6,562,500

Additional information: (a)        On 1 July 2013, all of the identifiable net assets of Fisher Ltd were recorded at fair value except for land, which had a fair value of $1,687,500 on the same date. (b)        On 30 June 2014, the recoverable amount of goodwill relating to the purchase of Fisher Ltd by Tusmore Ltd was assessed to be $112,500. (c)        On 14 July 2013, Fisher Ltd declared and paid an interim dividend of $100,000, out of profits earned during the 2012-13 financial year. (d)        During the financial year 2013-14, Fisher Ltd earned a profit after income tax expense of $362,500, from which it paid a final dividend of $162,500. (e)        During the financial year 2014-15, Fisher Ltd earned a profit after income tax expense of $425,000, from which it declared a final dividend of $200,000. (f)         On 30 June 2015, Fisher Ltd revalued its land upwards by $125,000. (g)        The tax rate is 40%. Required:

1. Explain how Tusmore Ltd should classify its investment in Fisher Ltd. Support your answers with relevant authority from AASB 128.
2. Prepare the consolidation worksheet journal entries to account for Tusmore Ltd’s investment in Fisher Ltd, for the financial years ending 30 June 2014 and 30 June 2015, in accordance with AASB 128 assuming that Tusmore Ltd does prepare consolidated financial statements.

Marks allocated
Discussion on accounting method, with justification and reference made to AAB128.	4
Acquisition analysis	3
Journal entries	8
Total	15

Rationale This assessment task covers topics 1, 2, 3 & 4. 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.

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, consolidation journal entries and consolidation worksheet; supported with well presented workings; in accordance with relevant accounting principles.	-acquisition analysis was computed accurately; - at least 85% of the worksheet entries are accurately done in accordance with relevant accounting principles; -exemplary consolidation worksheet presented with all entries entered correctly and appropriate cross referencing are provided for all adjustments made.	-acquisition analysis was computed accurately; - at least 75% of the worksheet entries are accurately done in accordance with relevant accounting principles; -very well presented consolidation worksheet with almost all entries entered correctly and appropriate cross referencing are provided for all adjustments made.	-acquisition analysis was computed correctly with minor flaws; - at least 65% of the worksheet entries are accurately done in accordance with relevant accounting principles; -well presented consolidation worksheet with most entries entered correctly and appropriate cross referencing are provided for all adjustments made.	-acquisition analysis was computed correctly with some errors; -at least half of the worksheet entries are accurately done in accordance with relevant accounting principles; -consolidation worksheet presented using reasonable format with some entries entered correctly and appropriate cross referencing are provided for most of the adjustments made.
Question 2: Prepare relevant worksheet entries accurately in accordance with relevant accounting principles.	-acquisition analysis was computed accurately; and -at least 85% of the worksheet entries are accurately done in accordance with relevant accounting principles.	-acquisition analysis was computed accurately; and -at least 75% of the worksheet entries are accurately done in accordance with relevant accounting principles.	-acquisition analysis was computed correctly with minor flaws; and -at least 65% of the worksheet entries are accurately done in accordance with relevant accounting principles.	-acquisition analysis was computed correctly with some errors; and -at least half of the worksheet entries are accurately done in accordance with relevant accounting principles.
Question 3: Determine the appropriate accounting method accurately; and relevant journal entries are shown in accordance with relevant accounting principles.	-correct accounting method is discussed and justified perfectly with reference made to relevant accounting standards; -acquisition analysis was computed accurately; and -at least 85% of the worksheet entries are accurately done in accordance with relevant accounting principles.	-correct accounting method is discussed and justified accurately with reference made to relevant accounting standards; -acquisition analysis was computed accurately; and -at least 75% of the worksheet entries are accurately done in accordance with relevant accounting principles.	-correct accounting method is discussed and justified reasonably well with reference made to relevant accounting standards; -acquisition analysis was computed correctly with minor flaws; and -at least 65% of the worksheet entries are accurately done in accordance with relevant accounting principles.	-correct accounting method is discussed and justified sufficiently with reference made to relevant accounting standards occasionally; -acquisition analysis was computed correctly with some errors; and -at least half of the worksheet entries are accurately done in accordance with relevant accounting principles.

Answer 1

Acquisition analysis

Acquisition Analysis
Cost of acquisition		$310,000
Book value of net assets
Share Capital	$240,000
Retained Earnings	$60,000
Total book value of net assets	$300,000
Fair value adjustments
Plant   ($26,000 - $21,500) X 1-30%	$3,150
Total fair value adjustments	$3,150
FVINA	$303,150
% Acquired	100%	$303,150
Goodwill		$6,850

 

Consolidation work sheet entries

	Particulars	Dr	Cr
	BCVR Entries
1a	Acc depn - Equipment	$13,500
	Equipment		$9,000
	DTL		$1,350
	BCVR		$3,150
1b	Depn Expense (4500/10)	$450
	Retained Earnings(4500/10)	$450
	Acc depn - Equipment		$900
1c	DTL	$270
	Income Tax Expense (450*30%)		$135
	Retained Earnings (450*30%)		$135
	Pre-acqusition entry
2	Share Capital	$240,000
	Retained Earnings	$  60,000
	BCVR	$    3,150
	Goodwill	$    6,850
	Investment in Kingfisher Limited		$310,000
	Rent
3	Rent revenue	$8,000
	Rent expense		$8,000
	Unrealised profit in opening inventory
4	Retained  Earnings	$2,800
	Income Tax Expense (Unreal. Profit *Tax Rate)	$1,200
	Cost of sales (Unreal. Profits)		$4,000
	Unrealised profit in closing inventory
5a	Sales	$30,000
	COGS (balance)		$27,500
	Inventory (30000-20000)/4		$2,500
5b	Deferred Tax Asset (Unreal. Profit * TR) (2,500*30%)	$750
	Income Tax Expense		$750
	Transfer of plant
6a	Profit on sale of equipment (50000-48000)	$2,000
	Plant (Balance)		$2,000
6b	DTA	$600
	Income tax expense (2,000*30%)		$600

 

Consolidation worksheet

	Koala Ltd		Kingfisher Ltd	Adjusting Entries				Group
	$		$		Dr	Cr
Sales	$500,000		$220,000	5a	$30,000			$690,000
Cost of sales	-$266,000		-$92,000			$4,000	4	-$326,500
						$27,500	5a
Gross profit	$234,000		$128,000					$363,500
Depreciation expenses	$50,000		$30,000	1b	$450			$80,450
Rent expenses			$8,000			$8,000	3	$0
Other expenses	$84,000		$60,000					$144,000
Total expenses	$134,000		$98,000					$224,450
	$100,000		$30,000					$139,050
Other income
Profit on sale of equipment	$14,000		-	6a	$2,000			$12,000
Rent revenue	$8,000		-	3	$8,000			$0
Total other income	$22,000		-					$12,000
Operating profit before tax	$122,000		$30,000					$151,050
Income tax expense	-$38,000		-$10,000	4	$1,200	$135	1c
						$750	5b
						$600	6b	-$47,715
Operating profit after tax	$84,000		$20,000					$103,335
Retained earnings 1 July 2014	$60,000		$70,000	1b	$450	$135	1c
				2	$60,000
				4	$2,800			$66,885
Available for appropriation	$144,000		$90,000					$170,220
Dividends paid	-$70,000		-					-$70,000
Retained earnings 30 June 2015	$74,000		$90,000					$100,220
Share capital	$600,000		$240,000	2	$240,000			$600,000
Creditors and borrowings	$70,000		$30,000					$70,000
BCVR				2	$3,150	$3,150	1a	$0
DTL				1c	$270	$1,350	1a	$1,080
Other liabilities	$120,000		$10,000					$130,000
	$864,000		$370,000					$901,300
Assets
Goodwill				2	$6,850			$6,850
Cash at bank	$6,000		$4,000					$10,000
Accounts receivable	$60,000		$60,000					$120,000
Inventory	$50,000		$20,000			$2,500	5a	$67,500
Investments in Kingfisher Ltd	$310,000		-			$310,000	2	$0
DTA				5b	$750			$1,350
				6b	$600
Property, plant and equipment	$230,000		$140,000			$9,000	1a	$359,000
						$2,000	6a
Accumulated depreciation	-$120,000		-$42,000	1a	$13,500	$900	1b	-$149,400
Land and buildings (net)	$288,000		$158,000					$446,000
Other assets	$40,000		$30,000					$70,000
	$864,000		$370,000					$931,300

 

Answer 2

Acquisition Analysis
Net fair value of Identifiable assets & liabilities
Share Capital	$1,500,000
Retained earnings	$700,000
NFVIA		$2,200,000
a) Consideration Transferred	$2,000,000
b) Non-Controlling Interest	$660,000
Aggregate of a) and b)		$2,660,000
Goodwill		$460,000

 

1. Pre-acquisition entries
Share Capital	$1,050,000
Retained earnings	$490,000
Goodwill	$460,000
Shares in Fletcher Ltd		$2,000,000
2. NCI share of equity at 1 July 2013
Share Capital	$450,000
Retained earnings	$210,000
NCI		$660,000
(30% of balances)
3. NCI share of equity 1 July 13 to 30 June 15
Retained earnings	$30,000
NCI in profit	$16,500
NCI		$46,500
(30% of balances)
4. Dividend
Other revenue	$28,000
Dividends paid		$28,000
5. Sales
Sales	$15,750
Cost of goods sold		$15,750

 

Consolidated worksheet

	Canti Ltd		Fletcher Ltd	Adjusting Entries				Group
	$		$		Dr	Cr
Sales revenue	$400,000		$100,000	5	$15,750			$484,250
Cost of goods sold	-$100,000		-$40,000			$15,750	5	-$124,250
Other expenses	-$60,000		-$30,000					-$90,000
Other revenue	$155,000		$42,500	4	$28,000			$169,500
Profit	$395,000		$72,500					$439,500
Tax	-$85,000		-$17,500					-$102,500
Profit after tax	$310,000		$55,000	3	$16,500			$320,500
Retained earnings 1 July 2014	$1,000,000		$800,000	1	$490,000			$1,070,000
				2	$210,000
				3	$30,000
	$1,310,000		$855,000					$1,390,500
Dividends paid	-$200,000		-$40,000			$28,000	4	-$212,000
Retained earnings 30 June 2015	$1,100,000		$815,000					$1,178,500
Shareholders’ equity
Retained earnings	$1,110,000		$815,000					$1,178,500
Share capital	$4,000,000		$1,500,000	1	$1,050,000			$4,000,000
				2	$450,000
NCI						$660,000	2	$706,500
						$46,500	3
Current liabilities
Accounts payable	$60,000		$40,000					$100,000
Non-current liabilities
Loans	$600,000		$250,000					$850,000
	$5,770,000		$2,605,000					$6,835,000
Current assets
Cash	$150,000		$25,000					$175,000
Accounts receivable	$250,000		$175,000					$425,000
Inventory	$500,000		$300,000					$800,000
Non-current assets
Goodwill				1	$460,000			$460,000
Land	$1,400,000		$1,105,000					$2,505,000
Plant	$1,470,000		$1,000,000					$2,470,000
Investment in Fletcher Ltd	$2,000,000		-			$2,000,000	1
	$5,770,000		$2,605,000					$6,835,000

 

Answer 3

(1)

Tusmore Ltd should classify the investment in Fisher Ltd as “investment in associate”. AASB 128 defines associate as an entity over which investor has significant influence (Collier, 2012). Tusmore holds 40% of the ordinary shares of Fisher Ltd. It may be noted that more than 20% of the voting power indicates presumption of significant influence. Besides that Tusmore Ltd has board representation which is also an indication of significant influence (Considine, Parkes, Olesen, Speer, & Lee, 2010). Thus equity method of accounting should be used to account for the Tusmore Ltd.’s interest in Fisher Ltd.

(2)

Original investment	$1,625,000
Book value of net assets acquired 40% of 1,687,500	$675,000
Goodwill	$950,000

 

Particulars
Investment in Fisher Ltd	$1,625,000
Cash		$1,625,000
For year ended 30 June 2014
Share of profit or loss- Fisher Ltd	$95,000
Investment in Fisher Ltd		$95,000
Goodwill amortization
Dividends Income	$40,000
Investment in Fisher Ltd		$40,000
Investment in Fisher Ltd	$145,000
Share of profit or loss- Fisher Ltd		$145,000
Attributable portion of net profit
For year ended 30 June 2015
Dividend income	$65,000
Investment in Fisher Ltd		$65,000
(Dividends received)
Share of profit or loss- Fisher Ltd	$11,250
Investment in Fisher Ltd		$11,250
Goodwill amortization
Investment in Fisher Ltd	$170,000
Share of profit or loss- Fisher Ltd		$170,000
Attributable portion of net profit
Dividend income	$80,000
Investment in Fisher Ltd		$80,000
(Dividends received)
Share of profit or loss- Fisher Ltd	$11,250
Investment in Fisher Ltd		$11,250
Goodwill amortization