Accounting Questions And Solutions Essay.

Question 1: Accounting for investment in Fry Ltd by Small Ltd

1.Small Ltd bought a 30% interest in a joint venture, Fry Ltd, for $50 000, on 1 July 2017. The equity of Fry Ltd at the acquisition date was

Required

(a) Prepare journal entries in the records of Small Ltd for each of the years ended 30 June 2018 to 2020 in relation to its investment in Fry Ltd. (Assume Small Ltd does not prepare consolidated financial statements.)

(b) Prepare the consolidation worksheet entries to account for Small Ltd’s interest in the joint venture, Fry Ltd. (Assume Small Ltd does prepare consolidated financial statements.) 

2.A liquidator was appointed after Rock Bottom Pty Ltd was declared insolvent on 1 July 2018. The company’s assets realised $14,250,000. This came from the sale of the secured land and buildings for $7,500,000 and other assets which were sold for $6,750,000.

The creditors totalled $16,350,000, and were made up of the following amounts: Secured creditor $9,000,000, receiver’s costs when realising secured asset $150,000, liquidator’s expenses $600,000, unsecured trade payables $2,400,000, tax payable $1,050,000, local government rates $300,000, staff wages payable $900,000, executive directors’ wages payable (5 directors) $450,000, staff leave entitlements $150,000, executive directors’ leave entitlements (5 directors) $150,000, unsecured bank overdraft $750,000, and dividends payable $450,000.

Required

You are required to rank the above creditors and then to calculate how much each creditor would be paid.

3.The following information has been extracted from the financial statements of Blake Ltd and its subsidiary Seven Ltd at 30 June 2019.

Other information

1. Blake Ltd acquired its 80 per cent interest in Seven Ltd on 1 July 2010. At that date the capital and reserves of Seven Ltd were:

Share capital          $172,000
Retained earnings $146,200
                              $318,200

At the date of acquisition all assets were considered to be fairly valued.
2. The management of Blake Ltd use the partial goodwill method.
3. During the year Blake Ltd made total sales to Seven Ltd of $55,900, while Seven Ltd sold $44,720 in inventory to Blake Ltd.
4. The opening inventory in Blake Ltd as at 1 July 2018 included inventory acquired from Seven Ltd for $36,120 that cost Seven Ltd $30,100 to produce.
5. The closing inventory in Blake Ltd includes inventory acquired from Seven Ltd at a cost of $28,896. This cost Seven Ltd $24,080 to produce.
6. The closing inventory of Seven Ltd includes inventory acquired from Blake Ltd at a cost of $10,320. This cost Blake Ltd $8,256 to produce.
7. The management of Blake Ltd believe that goodwill acquired was impaired by $2,580 in the year to 30th June 2019. The balance on the accumulated impairments of goodwill account brought forward was $19,350.
8. On 1 July 2018 Blake Ltd sold an item of plant to Seven Ltd for $99,760 when its carrying value in Blake Ltd's accounts was $69,660 (cost $116,100, accumulated depreciation
$46,440). This plant is assessed as having a remaining useful life of six years.
9. Seven Ltd paid $22,790 in management fees to Blake Ltd.
10. The tax rate is 30 per cent. 

Question 2: Calculation of payments to creditors of Rock Bottom Pty Ltd

Prepare the consolidation worksheet JOURNAL ENTRIES for the preparation of consolidated financial statements by Blake Ltd at 30 June 2019. NOTE a consolidation worksheet is NOT required. Your answer should include an acquisition analysis with a calculation of goodwill, preacquisition entries, dividend adjustments, intragroup sales and transfers, and a calculation of the non-controlling interest.

4.(a)Bill Handy, The finance director of Northern Australia Global Investments Ltd (NAGIL), is unsure whether he should consolidate some of the investments that the company owns. He has asked your advice as business adviser to NAGIL. The details of the investments are as follows: (a) NAGIL had provided a loan to Struggle Ltd (SL) some years ago. When it looked as if SL would be unable to repay the loan it was converted into equity which gave NAGIL a 70% holding in SL. SL continues to have a substantial accumulated losses balance and the company’s results have been consolidated with NAGIL for some time. NAGIL does not take an active role in the day to day operations of SL as it has no directors on the board and it takes no part in the operating or financing decisions of the company.

(b) NAGIL has also provided a loan to the Very Big Company Ltd (VBCL). Unfortunately due to an industrial economic downturn the VBCL has failed to meet its loan repayments as required by the loan contract. The board of NAGIL is concerned that not only would the VBCL continue to have problems but also that the whole of the loan would become unrecoverable. The board of VBCL has agreed, as part of a bailout package, that NAGIL would take charge of VBCL’s finances for the next four years. The NAGIL deputy chief finance officer would control all payments made by VBCL and no payments would be made without prior approval. NAGIL does not have board representation on VBCL which is appointed by the VBCL shareholders.

(c) The Medium Sized Company Ltd (MSCL) is part funded by NAGIL, which owns 50% of the shares, and by Sharp Players Ltd (SPL) which owns the other 50%. The votes of the ordinary shares in the annual general meetings and the board representation are shared equally between NAGIL and SPL. SPL and NAGIL have agreed that NAGIL will provide the finance on a standard commercial basis with the loan being secured by a mortgage on MSCL’s property. The agreement also stipulates that SPL will provide the necessary managerial and entrepreneurial expertise in return for a management fee. The management fee will be paid out of ASCL’s net profits after providing for all NAGIL’s loan interest payments. Where MSCL does not make a profit the interest payments will still take place but no management fee will be paid.

(d) Tom and Marjory Legless are founders of CrocsRUs an adventure travel company. They both sit on the board and own 60 per cent of the shares. They have recently retired from actively running the company and have sold the other 40 per cent of the shares to NAGIL who manages the company on their behalf, holding the other three seats on the board. Although Tom and Marjory keep a close eye on the business they let NAGIL make the major decisions.

Required

Write a report to Bill, advising him how the control requirements of AASB 10 apply in each of the above investments. State, for each investment, where the control rests, citing and explaining how the relevant paragraphs of AASB10 apply, and whether Bill should include the results of the investments within the consolidated accounts explaining the reasons for your decision. 

The report should take the format of a formal business report, written by your firm with yourself as lead author. Marks will be awarded for presentation style and an appropriate business format

Question 1: Accounting for investment in Fry Ltd by Small Ltd

1.The following are the desired calculations:

Part a:
When consolidation is not done
	Particulars	Debit	Credit
01.07.2017	Investment in Fry Ltd	50,000.00
	Cash		50,000.00
01.07.2018	Cash	24,000.00
	Investment in Fry Ltd		24,000.00
01.07.2019	Cash	4,500.00
	Investment in Fry Ltd		4,500.00
01.07.2019	Cash	3,000.00
	Investment in Fry Ltd		3,000.00

Part b
When consolidation is done
	Particulars	Debit	Credit
01.07.2017	Share Capital	9,000.00
	Retained earnings	36,000.00
	Goodwill	5,000.00
	To Investment in Fry Ltd		50,000.00
01.07.2018	Cash	24,000.00
	Profit and Loss		24,000.00
01.07.2019	Cash	4,500.00
	Profit and Loss		4,500.00
01.07.2019	Cash	3,000.00
	Profit and Loss		3,000.00

2.The following are the desired calculations:

Particulars	Amounts in $	Rank	Amounts to be paid
Secured creditors	90,00,000.00	2.00	90,00,000.00
Receivers cost	1,50,000.00	Pro rata	33,333.33
Liquidators costs	6,00,000.00	1.00	6,00,000.00
Unsecured trade payables	24,00,000.00	7.00	24,00,000.00
Tax payable	10,50,000.00	Pro rata	2,33,333.30
Local government rates	3,00,000.00	Pro rata	66,666.67
Staff wages payable	9,00,000.00	3.00	9,00,000.00
Executive directors wages payable	4,50,000.00	5.00	4,50,000.00
Staff leave entitlements	1,50,000.00	4.00	1,50,000.00
Executive directors leave entitlements	1,50,000.00	6.00	1,50,000.00
Unsecured bank overdraft	7,50,000.00	Pro rata	1,66,666.70
Dividend payable	4,50,000.00	Pro rata	1,00,000.00
Total	163,50,000.00		142,50,000.00
			-

Particulars	Amounts due	Weighted average	Amount payable
Receivers cost	1,50,000.00	33,333.33	0.05556
Tax payable	10,50,000.00	2,33,333.33	0.38889
Local government rates	3,00,000.00	66,666.67	0.11111
Unsecured bank overdraft	7,50,000.00	1,66,666.67	0.27778
Dividend payable	4,50,000.00	1,00,000.00	0.16667
Total	2700000	600000	1

(Australia debt solvers, 2018).

3.The following are the desired journal entries and the workings:

Acquisition analysis:

Particulars	Amounts in $
Investment in Steven	3,06,160.00
share capital	1,37,600.00
Total investment	4,43,760

 
Calculation of Goodwill

Particulars	Amounts in $
Investment in Steven	3,06,160.00
Less: share capital	1,37,600.00
Retained earnings	1,16,960.00
Goodwill	51,600.00

 
Pre-acquisition entries:

Particulars	Debit	Credit
Share capital	1,37,600.00
Retained earnings	1,16,960.00
Goodwill	51,600.00
To Investment in steven Ltd		3,06,160.00

Calculation of non-controlling interest:

Non-controlling interest:
Share capital	27,520.00
Retained earnings	23,392.00
Total	50,912.00

Dividend adjustments and intra sales and transfers
Transaction	Particulars	Debit	Credit
3	Sales	31,304.00
	To Accounts receivables		31,304.00
4	Profit and Loss	4,214.00
	To Accounts receivables		4,214.00
5	Profit and Loss	3,371.20
	To Accounts receivables		3,371.20
6	Profit and Loss	1,444.80
	To Accounts receivables		1,444.80
7	Impairment of Goodwill	2,580.00
	To Goodwill		2,580.00
8	Profit and Loss	21,070.00
	To Plant and equipment		21,070.00
9	Profit and Loss	15,953.00
	To Management fees		15,953.00

4.To Bill,

XYZ Company,

DFS Street, Australia-xxxxxx

Subject: clarification on the types of investments and the relevant treatment of the same

I do understand your concern and I am very much happy to help your goodself in making the relevant decision with regard to the accounting treatment for each one of the below stated investment.

As per AASB 10 which deals with the consolidation of the financial statements, an investor would have the control over the investee only when the same has been exposed or when the investor has the rights over the variable returns from the involvement with the investee and has the ability to affect the investee through its power.

Hence, it would be stated that an investor would have the control over the investee when the following occurs:

• An investor has the power over the investee
• There is an exposure of rights on the variable returns from the involvement with the investee
• There is an ability of the investor to use his power over the investee that would affect in the amount of the returns from the investor

For an investor to have a control over the investee, there is a wide range of operating and financing activities that effects their returns. The examples includes in the sale and purchase of the goods and services, management of the financial assets during the lifetime of the assets, selection, acquisition or the disposal of the assets, research and the development of the new products or the processes and determination of the structure of funding or obtaining of this funding.

The examples of the rights that would be able to give an investor power over the investee includes the rights in the form of voting rights on an investee, rights to appoint, reassign or remove in the key management personnel of the investee, right to appoint or remove in another entity that directs in the business activities of the business, right to direct in the investee to enter into the transaction for the benefits of the investor or any other rights as could have been specified in by the management (AASB, 2018).

Part a:

In the given case, NAGIL does not have say in the business operations or in the day to day management or in any other relevant business operations of Struggle Ltd. And so, the investment shall not be treated as that of a subsidiary. Hence, no consolidation shall be done.

Part b:

In the given case, Very Big Company Ltd shall be treated as a subsidiary and its financial statements shall be consolidated with that of NAGIL. This is mainly due to the reason that for the next 4 years, Very Big would be controlled in terms of the financial operations by NAGIL and no payments shall be made without its prior approval. This means a financial interest in the Very Big Limited.

Part c:

In the present case, MSCL will just obtain some expertise form NAGIL and there is nowhere mentioned that NAGIL shall have a say in its day to day business operations or would control in the same. In the absence of such an information, it cannot be stated that the MSCL is investee and NAGIL is an investor. And hence, no consolidation of the financial statements shall be done.

Part d:

In the present case, NAGIL shall be stated to have a control over Tom and Marjory Legless since it has a substantial say in the day to day functioning of the company. The company NAGIL also has 3 seats on the board and Tom and Marjory also has keeps a close eye on the business and the decisions takes in by NAGIL. This means that NAGIL has power over the investee which makes it important for the company to get their financial statements consolidated.

I hope that the above is helpful.

Regards,

ABC

References:

Australian Debt Solvers. (2018). Who Gets Paid First When a Company Goes into Liquidation? - Australian Debt Solvers. [online] Available at: https://australiandebtsolvers.com.au/research-centre/gets-paid-first-company-goes-liquidation/ [Accessed 2 Oct. 2018].

www.aasb.gov.au. (2018). https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 2 Oct. 2018].