Consolidation: Principles And Accounting Essay.

Background Information

Topic 1: Consolidation: Principles, accounting requirements 

On 1 July 2017, Panda Ltd acquired all the issued shares of Smarty Ltd. Panda Ltd paid $250,000 more than the equity it acquired in the fair value of Smarty Ltd’s net assets. At the date of acquisition, the shareholder’s equity of Smarty Ltd was as follows.

	$
Share capital	100,000
Retained earnings	175,000
Total	275,000

All the assets and liabilities of Smarty Ltd were recorded at amounts equal to their fair values at the acquisition date, except for some assets detailed below.

	Remaining useful life	Cost	Carrying amount	Fair value
		$	$	$
Plant	5 years	180,000	90,000	120,000
Computer equipment	5 years	90,000	40,000	60,000

Required

1. Prepare the acquisition analysis at 1 July 2017.
2. Prepare the consolidation worksheet entries for Panda Ltd’s group at 1 July 2017.
3. Prepare the consolidation worksheet entries for Panda Ltd’s group at 30 June 2018.

On 1 July 2015, Ping Pong Ltd acquired all the issued shares of Sing Song Ltd. At the date of acquisition, the shareholders’ equity of Sing Song Ltd consisted of share capital $120,000; general reserve $25,000 and retained earnings $55,000. The identifiable net assets of Sing Song Ltd were recorded at amounts equal to their fair values, except for the following assets:

	Carrying amount	Fair value
	$	$
Land	100,000	130,000
Inventories	78,500	86,100
Machinery (cost $86,000)	52,000	56,000
Vehicles (cost $58,000)	47,000	53,000

The assets of Sing Song Ltd at acquisition date included goodwill recorded at $15,000 arising from a business combination transaction in 2011.  As at the date of acquisition, the vehicles and machinery were expected to have a further useful life of 6 and 8 years respectively, with benefits to be received evenly over those periods. Inventories on hand on 1 July 2015 was all sold by 31 January 2016. The land owned at 1 July 2015 was sold in September 2016 for $150,000. The machinery on hand at 1 July 2015 was sold on 1 January 2018 for $38,000. 

Adjustments for the differences between carrying amount and fair values of assets and liabilities on hand at acquisition date are recognised on consolidation. When assets are sold or derecognised, any related valuation reserves are transferred to retained earnings.

At 1 July 2015, Sing Song Ltd owned but had not recorded an internally generated brand name, an identifiable asset included as part of the business combination transaction. This brand name was considered by Ping Pong Ltd to have a fair value of $29,000 and an indefinite useful life. An impairment test conducted with respect to the brand name on 30 June 2018 concluded that its recoverable amount at that date was $2,000 less than its carrying amount.

In June 2017, Sing Song Ltd paid a share dividend worth $20,000 from the general reserve on hand at 1 July 2015.The trial balances of both companies at 30 June 2018 showed the following balances

	Ping Pong Ltd		Sing Song Ltd
	Dr ($)	Cr ($)	Dr ($)	Cr ($)
Sales revenue		450,000		320,000
Dividend revenue		17,000		-
Other income		11,400		17,000
Proceeds on sale of equipment		18,000		-
Proceeds on sale of machinery		-		38,000
Cost of sales	210,000		192,550
Income tax expense	30,000		32,000
Depreciation and other expenses	39,000		36,000
Carrying amount of equipment sold	21,000		-
Carrying amount of machinery sold	-		30,500
Dividend paid	10,000		5,000
Dividend declared	20,000		12,000
Transfer to general reserve	10,000		5,000
Share capital		200,000		140,000
General reserve		35,000		10,000
Retained earnings (1 July 2017)		51,300		67,500
Accounts payable		69,500		36,000
Loan payable (due 30 June 2022)		25,000		15,000
Dividend payable		20,000		12,000
Provisions		12,500		9,300
Current tax liability		43,000		34,000
Deferred tax liability		11,800		5,000
Accumulated depreciation-vehicles		16,400		60,000
Accumulated depreciation-equipment		-		34,500
8%Debentures (matures 30 June 2021)		25,000		-
Cash	2,500		1,250
Receivables	27,000		13,000
Inventories	39,700		24,500
Other current assets	15,200		8,200
Deferred tax assets	7,500		3,500
Vehicles	88,000		158,000
Equipment	-		42,000
Land	140,000		180,000
Financial assets	68,000		14,800
Goodwill	28,000		15,000
Shares in Sing Song Ltd	250,000		-
Debentures in Ping Pong Ltd	-		25,000
	1,005,900	1,005,900	798,300	798,300

Additional information

1. On 1 January 2018, Ping Pong Ltd sold an item of equipment to Sing Song Ltd for $18,000. The equipment had a carrying amount at the date of sale of $21,000. Both companies depreciate equipment at 20% on a straight line basis.
2. On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for $7,800. The machine had a carrying amount of $7,000 at the date of sale. Ping Pong Ltd recorded the machine as inventories. The inventories item was sold to an external party in November 2017 for $8,200.
3. All interests on the 8% debentures has been paid and brought to account in the records of both companies.
4. During the 2017-2018 financial year, Ping Pong Ltd sold inventories to Sing Song Ltd for $75,000. The cost of these inventories to ping pong Ltd was $70,000. Of these inventories, 25% is still on hand at 30 June 2018.
5. The transfer to the general reserve recorded by Sing Song Ltd in the current year was from retained earnings recorded at 1 July 2015. 
6. The tax rate is 30%.

Required:

1. Prepare an acquisition analysis.
2. Prepare the consolidation worksheet entriesnecessary to prepare the consolidated financial statements for the year ending 30 June 2018 for the group comprising Ping Pong Ltd and Sing Song Ltd.

Note: you are not required to prepare the consolidation worksheet and the consolidated financial statements.

Rationale

This assessment task will assess the following learning outcome/s:

• be able to explain the relationships that exist between a parent company and its subsidiary(ies), an investor and its investee, a company and its overseas subsidiaries.
• be able to prepare accounts for each of the above-mentioned business combinations in accordance with relevant professional and statutory reporting requirements.

Physical presentation of assignments:

All answers must be presented in minimum font size of 11, Arial or Times New Roman font style. If you have prepared your work in excel and copied and pasted your work into word or pdf (see requirements below), you must ensure that all work presented follow this presentation font size and format.

It is essential that presentation of assignments adheres to accepted standards in relation to neatness and layout, as you are practising to present material in a work situation.

You should submit a bibliography (using APA referencing style) with your assignment.

For practical questions:

• All journal entries must include narrations unless otherwise specified and presented in accordance to the format used in your key text;
• Any ledger accounts should preferably be shown in 'T' account format and dates and descriptions are included;
• Journal entries and ledger accounts must reflect the strict order of sequence of events; financial statements (including extracts) should include proper headings and accord with presentation standards.

1. Acquisition analysis

Share capital	100,000
Retained earnings	175,000
Plant	21,000
Computer equipment	14,000
Net fair value of identifiable assets and liabilities	310,000
Net fair value of identifiable assets and liabilities	310,000
Consideration transferred	250,000
Bargain purchase	60,000

Pre-acquisition entries

Retained earnings	175,000
Share capital	100,000
BCVR	35,000
Gain on bargain purchase		60,000
Shares in Smarty Ltd.		250,000

Worksheet entries

Accumulated depreciation on plant	90,000
Plant		60,000
Deferred tax liability		9,000
BCVR		21,000
Depreciation expense	6,000
Accumulated depreciation		6,000
Deferred tax liability	1,800
Income tax expense		1,800
Accumulated depreciation on computer equipment	50,000
Computer equipment		30,000
Deferred tax liability		6,000
BCVR		14,000
Depreciation expense	4,000
Accumulated depreciation		4,000
Deferred tax liability	1,200
Income tax expense		1,200

1. Acquisition analysis

Share capital	120,000
General reserve	25,000
Retained earnings	55,000
Land	21,000
Inventories	5,320
Machinery	2,800
Vehicles	4,200
Net fair value of identifiable assets and liabilities	233,320
Consideration transferred	250,000
Net fair value of identifiable assets and liabilities	233,320
Goodwill	16,680
Goodwill	16,680
Goodwill recorded	15,000
Unrecorded goodwill	1,680

Worksheet entries

Post-acquisition entries

BCVR entries

Accumulated depreciation Machinery	34,000
Machinery		30,000
Deferred tax liability		1,200
BCVR		2,800
Depreciation expense	350
Retained earnings	1,050
Accumulated depreciation		1,400
Deferred tax liability	420
Income tax expense		105
Retained earnings		315
Land	30,000
Deferred tax liability		9,000
BCVR		21,000
Inventory	7,600
Deferred tax liability		2,280
BCVR		5,320
Accumulated depreciation Vehicles	11,000
Vehicles		5,000
Deferred tax liability		1,800
BCVR		4,200
Depreciation expense	700
Retained earnings	2,100
Accumulated depreciation		2,800
Deferred tax liability	840
Income tax expense		210
Retained earnings		630
Goodwill	1,680
BCVR		1,680

Sale of equipment

Equipment	3,000
Loss on sale of equipment		3,000
Income tax expense	900
Deferred tax asset		900
Depreciation expense	300
Accumulated depreciation		300
Deferred tax asset	90
Income tax expense		90

Sale of machinery classified as Inventory

Proceeds on sale of machinery	7,800
Carrying amount of plant sold		7,000
Cost of sales		800

Interest expenses intercompany adjustments

Interest income	2,000
Interest expenses		2,000

 Inventory sale

Retained earnings	875
Income tax expense	375
Cost of sales		1,250

Transfer to general reserve

Retained earnings	5,000
General reserve		5,000

Pre-acquisition entries

Retained earnings	55,000
General reserve	25,000
Share capital	120,000
Business combination valuation reserve	50,000
Shares in Sing Song Ltd.		250,000

References

Australian Accounting Standards Board. (2015, July). AASB 10: Consolidated Financial Statements. Retrieved August 10, 2018, from https://www.legislation.gov.au: https://www.legislation.gov.au/Details/F2015L01617

Australian Accounting Standards Board. (2004, June). AASB 3: Business Combinations. Retrieved August 10, 2018, from https://www.legislation.gov.au: https://www.legislation.gov.au/Details/F2005B01399.