ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION Page 1 of 5 PRACTICE CONSOLIDATION QUESTION NOTE: This is a straightforward question. It is NOT the exam question. The exam questions may cover transactions not covered by this question or may not include transactions covered in this question. On 1 July 2014, Pepper Ltd acquired all of the issued capital of Salt Ltd. As part of the settlement, Pepper Ltd issued the shareholders of Salt Ltd with 100,000 shares in Pepper Ltd. The shares in Pepper Ltd were listed on the ASX for $1.88 while the shares in Salt Ltd were listed at $2.00. Pepper Ltd also paid $44,830 cash and agreed to pay a further $50,000 on 1 July 2015. The appropriate interest rate being 6%. The shareholders’ equity of Salt Ltd at that date was: Issued capital $100,000 Retained earnings 25,000 $125,000 At the date of acquisition, all of the carrying amount of net assets of Salt Ltd were recorded at fair value except the following. i. The land, originally costing $60,000, had a fair value of $84,000. ii. The buildings had originally cost $220,000 and had accumulated depreciation of $40,000. The fair value of the buildings at date of acquisition was $360,000. It has a remaining useful life of 10 years. iii. As at 30 June 2014, Salt Ltd had disclosed information relating to a legal action in the notes to their accounts. They estimated a settlement of $10,000. The legal action was settled on the 1 June 2015 for $10,000. The attached worksheet shows the income statements, retained profits and balance sheets of the two companies for 30 June 2017. Additional information: a) The goodwill arising from the acquisition was impaired by $1,200 at the end of the current year and was impaired by $2,000 at the end of the financial year ended 30 June 2015. b) Inter-company sales of inventory during the year were: a. Pepper Ltd to Salt Ltd for $3,000 b. Salt Ltd to Pepper Ltd for $4,000 c) The entire inventory purchased by Salt Ltd had been sold outside the group by the end of the current year. However, the inventory purchased by Pepper Ltd remained unsold by the end of the year. Salt Ltd had recorded a profit of $1,500 on this sale. d) In September 2015, Salt Ltd has sold $2,000 inventory to Pepper Ltd. At the end of that financial year, 60% of this inventory had been sold outside the group by Pepper Ltd. The inventory had cost Salt Ltd $1,500. e) Interest on debentures is paid annually on 30 June. f) Pepper Ltd recognises dividends when received. (Please refer to the financial statements to determine the dividends). g) On the 1 July 2015, Pepper Ltd sold a building to Salt Ltd for $180,000. The building was purchased by Pepper Ltd on 1 July 2014 for $150,000 and was being depreciated straight-line over a useful life of 10 years. The remaining useful life is unchanged. Required: (a) Prepare the acquisition analysis using the template provided. (b) Prepare the consolidation elimination and adjusting journal entries required as at 30 June 2017. (c) Complete the consolidated worksheet as at 30 June 2017 on the template provided. ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION Page 2 of 5 Part A: Acquisition Analysis at 1 July 2014 Purchase consideration at fair value 100,000 shares in Pepper @ $1.88 188,000 Cash 44,830 Payable 1/7/2015 50,000 (1.06-1) = 50,000 x 0.943396 47,170 280,000 FV of INA Issued capital 100,000 Retained earnings 25,000 FVA – land (net of tax) FV $84,000- CA $60,000 = $24,000 – tax@ 30% = $7,200 16,800 FVA – building (net of tax) FV $360,000 – CA $180,000 = $180,000 – tax at 30% = $54,000 126,000 FVA – contingent liability (net tax) $10,000 – tax @ 30% = $3,000 (7,000) 260,800 Goodwill on acquisition 19,200 Fair value adjustment – depreciation calculation (3 years post DOA) Depreciation – sub $180,000/10 remaining years 18,000 Depreciation – economic entity $360,000/10 remaining years 36,000 Adjustment 18,000 Tax on depreciation adjustment @ 30% 5,400 Intra-entity asset transfer and depreciation calculation (2 years post transfer) Cost 1/7/2014 150,000 Less acc depreciation ($150,000/10 years) to 30/6/2015 15,000 Carrying amount 135,000 Selling price 180,000 Gain on sale 45,000 Tax on gain 13,500 Depreciation – Economic entity $135,000/9 remaining years 15,000 Depreciation – Parent entity $180,000/9 remaining years 20,000 Adjustment to reduce overstated depreciation recorded by parent (5,000) Tax on depreciation adjustment @ 30% 1,500 ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION Page 3 of 5 Part B: Consolidated Journal Entries as at 30/6/2017 DOA 1/7/2014 – 3 years post acquisition. Ref Account Debit $ Credit $ 1 Land 24,000 DTL 7,200 Fair value adjustment 16,800 (FVA to land on consolidation) 2 Accumulated depreciation 40,000 Building 40,000 (write-back accumulated depreciation for FVA adjustment) Building 180,000 DTL 54,000 Fair value adjustment 126,000 (FVA to building on consolidation) Depreciation expense (2017 expense) 18,000 Retained earnings 1/7/2016 (2016 & 2015 expense) 36,000 Accumulated
depreciation 54,000 (incremental depreciation on FVA – 3 years since DOA) DTL 16,200 Income tax expense (2017 expense) 5,400 Retained earnings 1/7/2016 (2016 & 2015 expense) 10,800 (tax on incremental depreciation on FVA on consolidation) Contingent – liability (FVA) – Settled on 1 June 2015 – i.e. prior Note: Contingent liability directly adjusted to Op RE in Elim Jnl 3 Issued capital 100,000 Retained earnings 1/7/2016 (25,000-7,000 Cont. Liab) 18,000 Goodwill 19,200 Fair value adjustment 142,800 Investment in Sub Ltd 280,000 (pre-acquisition elimination entry and recognise goodwill on consolidation) 4 Retained earnings 1/7/2016 (2015 expense) 2,000 Impairment loss (2017 expense) 1,200 Accumulated impairment – goodwill 3,200 (recognised goodwill impairment) 5 Sales 7,000 COGS 7,000 (eliminate intra-group sales) ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION Page 4 of 5 6 COGS 1,500 Inventory 1,500 DTA 450 Income tax expense 450 (eliminate URP in closing inventory and related tax) 7 Retained earnings 1/7/2016 140 Income tax expense 60 COGS 200 (eliminate URP in opening inventory and related tax) 8 Interest revenue 500 Borrowing costs 500 (eliminate interest on intra-group debenture holdings) 9 5% Debenture (liability) 10,000 5% Debenture in Subsidiary (asset) 10,000 (eliminate intra-group debenture holdings) 10 Dividend revenue 10,000 Dividend paid 10,000 (eliminate subs dividends paid to parent) 11 Retained earnings 1/7/2016 45,000 Accumulated depreciation 15,000 Building 30,000 DTA 13,500 Retained earnings 1/7/2016 13,500 Accumulated depreciation 10,000 Depreciation expense 5,000 Retained earnings 1/7/2016 5,000 Income tax expense 1,500 Retained earnings 1/7/2016 1,500 DTA 3,000 (eliminate unrealised gain on intra-group asset transfer and related tax and 2 years depreciation adjustment and related tax) Add lines as needed. If you cannot prepare the acquisition analysis and consolidation elimination and adjusting journal entries to this point within 90 minutes, you are not sufficiently prepared for the exam. ACCT3103 Advanced Financial Accounting PRACTICE QUESTION SOLUTION Page 5 of 5 Part C: Consolidated Worksheet for year ending 30 June 2017 Pepper Salt Sub Total DR REF CR Group Sales 296,000 440,000 736,000 7,000 5 729,000 less Cost of goods sold: 147,000 167,000 314,000 1,500 6/5 7 7,000 200 308,300 Gross Profit 149,000 273,000 422,000 420,700 Borrowing costs – 1,000 1,000 8 500 500 Other expenses 30,400 95,000 125,400 18,000 1,200 2/11 4 5,000 139,600 Dividend revenue 10,000 – 10,000 10,000 10 – Interest revenue 500 – 500 500 8 – Profit before income tax 129,100 177,000 306,100 280,600 Income tax expense 60,000 70,000 130,000 60 1,500 7/2 11/6 5,400 450 125,710 Net Profit 69,100 107,000 176,100 154,890 Retained profits 1.7.16 96,500 25,000 121,500 36,000 18,000 2,000 140 45,000 1,500 2 3/11 4/11 7 11 11 10,800 13,500 5,000 48,160 Profit available to distribute 165,600 132,000 297,600 203,050 Less Dividend paid 30,000 10,000 40,000 10 10,000 30,000 Retained profits 30.6.17 135,600 122,000 257,600 173,050 Reserves 100,000 – 100,000 100,000 Fair value adjustment 142,800 1 3/2 16,800 126,000 – Issued equity 300,000 100,000 400,000 100.000 3 300,000 Total Owners’ equity 535,600 222,000 757,600 573,050 Income tax payable 60,000 70,000 130,000 130,000 Other current liabilities 127,500 143,500 271,000 16,200 2/1 2 7,200 54,000 316,000 5% debentures – 20,000 20,000 10,000 9 10,000 Total Liabilities 187,500 233,500 421,000 456,000 Total Equity & Liabilities 723,100 455,500 1,178,600 1,029,050 ASSETS Inventory 48,000 60,000 108,000 6 1,500 106,500 Other current assets 45,100 51,500 96,600 450 13,500 6/11 11 3,000 107,550 Investment in Subsidiary 280,000 – 280,000 3 280,000 – 5% Debentures in Sub 10,000 – 10,000 9 10,000 – Land 200,000 120,000 320,000 24,000 1 344,000 Buildings 260,000 350,000 610,000 180,000 2 11 40,000 30,000 720,000 less acc. dep (120,000) (126,000) (246,000) 40,000 10,000 2 11 54,000 15,000 (265,000) Goodwill 19,200 3 19,200 Less acc. impairment 4 3,200 (3,200) Total Assets 723,100 455,500 1,178,600 698,550 698,550 1,029,050 NOTE: This is NOT the exam question. The purpose of this question to provide a review of the principles covered in lectures and the text. DO NOT restrict your revision effort to only the matters covered in the practice question.