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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.

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My Assignment Help. (2021). Consolidation: Principles And Accounting Essay.. Retrieved from https://myassignmenthelp.com/free-samples/bfa605-financial-and-corporate-accounting/shareholder-equity.html.

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My Assignment Help (2021) Consolidation: Principles And Accounting Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/bfa605-financial-and-corporate-accounting/shareholder-equity.html
[Accessed 19 August 2024].

My Assignment Help. 'Consolidation: Principles And Accounting Essay.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/bfa605-financial-and-corporate-accounting/shareholder-equity.html> accessed 19 August 2024.

My Assignment Help. Consolidation: Principles And Accounting Essay. [Internet]. My Assignment Help. 2021 [cited 19 August 2024]. Available from: https://myassignmenthelp.com/free-samples/bfa605-financial-and-corporate-accounting/shareholder-equity.html.

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