104232 CORPORATE ACCOUNTING III
ACCTING 3501
Official Reading Time: 10 mins
Writing Time: 180 mins
Total Duration 190 mins
Instructions to Candidate:
1. Include your name, ID number and signature here:
Name……………………………..ID………..……………..Signature……………………..
2. Answer ALL EIGHT (8) questions.
3. This is a Modified Open Book examination.
4. You should answer each question in the answer book
5. Please allocate your time according to the percentage contribution of the questions.
6. All examination materials, including this paper MUST BE RETURNED to the
examination supervisor at the conclusion of this examination.
Materials:
1 Blue Answer booklet.
ICAA Financial Reporting (or CPA Accounting) Handbook 2014 edition is permitted. The
Handbook may be marked with a highlighter or have text underlined ONLY. No other
writing or other marks may be included anywhere in the text. The use of tabs is
NOT permitted.
A calculator incapable of storing text is permitted
PLEASE DO NOT COMMENCE WRITING UNTIL INSTRUCTED TO DO SO
PLEASE SEE NEXT PAGE
104232 July 2014 RAA Examinations Page 2 of 11
QUESTION 1 – Total of 15 Marks
TWO PARTS – Candidates must attempt both parts. Parts A and B are
unrelated.
PART A
Capital Ltd holds 80% of the voting shares of Roget Ltd and the remaining 20% of the voting
shares of Roget Ltd are held by Hindmarsh Ltd. Capital Ltd and Hindmarsh Ltd have a contract
with each other in which, among other things, they agree that all significant operating and
financing decisions associated with their investment in Roget Ltd required the unanimous consent
of both Capital Ltd and Hindmarsh Ltd. In the event that they cannot agree on a decision, the
contract requires them to abide by the decision of an independent arbitrator.
Required:
Is the investment in Roget Ltd a subsidiary of either Capital Ltd and Hindmarsh Ltd
Explain how the investment should be recorded by those companies. Support your
answer by reference to the specific paragraphs of relevant accounting standards.
(8 marks)
PART B
Company A is a listed diversified retail company. Its stores are located mainly in Australia. It has
three main types of stores: general department stores, liquor stores and specialist toy stores.
Each of these stores has different products, customer types and distribution processes. In
accordance with AASB 8, Operating Segments, Company A has identified three business
segments: general department stores, liquor stores and specialist toy stores. All three business
units earn most of their revenue from external customers. Total consolidated revenue of
Company A is $600 million.
General
Department
Stores
$m
Liquor Stores
$m
Toy Stores
$m
All Segments
$m
Revenue 400 100 50 550
Segment profit 15 7 4 26
Assets 900 200 100 1200
Required:
Identify Company A’s reportable segments in accordance with AASB 8. Explain your
answer with reference to the provisions of AASB 8.
(7 marks)
(Total marks question 1: 8 + 7 = 15 marks)
104232 July 2014 RAA Examinations Page 3 of 11
QUESTION 2 – Total of 12 marks
Hobart Ltd, an Australian company, purchased all the issued share capital of Denver Ltd, a U.S.
company, on 1 January, 2014. At this date, the net assets of Denver Ltd were as follows:
US$
Property, plant and equipment 155,000
Accumulated depreciation (30,000)
125,000
Cash 10,000
Inventory 20,000
Accounts Receivable 10,000
Total Assets 165,000
Accounts Payable 15,000
Net Assets 150,000
The trial balance of Denver Ltd as at 31 December, 2014 was:
US$ US$
DR CR
Share Capital 100,000
Retained Earnings 50,000
Accounts Payable 42,000
Sales 90,000
Accumulated Depreciation – Plant & Equipment 45,000
Plant & Equipment 155,000
Accounts Receivable 40,000
Inventory 45,000
Cash 12,000
Cost of Goods Sold 30,000
Depreciation Expense 15,000
Other Expenses 30,000
327,000 327,000
Additional information:
1. No plant and equipment was acquired in the 2014 period.
2. All sales and expenses were incurred evenly over the year. The inventory on hand at the
end of the year was acquired during December 2014.
3. The functional currency of Denver Ltd is the US dollar.
4. Relevant exchange rates were (A$1 = US$):
1 January 2014 0.50
31 December 2014 0.58
Average for December 2014 0.57
Average for 2014 0.54
Required:
(a) Prepare the profit or loss statement and the statement of financial position for Denver
Ltd at 31 December 2014 in the presentation currency of Australian dollars.
(8 marks)
(b) Demonstrate that the foreign currency exchange reserve in your answer to part (a) is
correct.
(4 marks)
(Total marks question 2: 8 + 4 = 12 marks)
104232 July 2014 RAA Examinations Page 4 of 11
QUESTION 3 – Total of 13 marks
(a) On 1 May 2014, Parent Ltd commenced renting an office from its subsidiary at $1,600 per
month. At 30 June 2014, Parent Ltd had prepaid one month of rent in advance.
Required:
Prepare the adjusting journal entries required for the preparation of the consolidation
worksheet at 30 June 2014.
(2 marks)
(b) On 23 June 2014, Subsidiary Ltd sold inventory which cost $12,000 to Parent Ltd for
$16,000. By 30 June 2014, Parent Ltd had sold a third of the inventory to external parties.
The remainder was sold during July 2014. The tax rate is 30%.
Required:
(i) Prepare the adjusting journal entries relating to the information in part (b)
only that are required for the preparation of the consolidation worksheet at
30 June 2014. Show all calculations.
(3 marks)
(ii) Explain the rationale for each of your entries in (b)(i) above.
(6 marks)
(iii) Prepare the adjusting journal entries relating to the information in part (b)
only that are required for the preparation of the consolidation worksheet at
30 June 2015. Show all calculations.
(2 marks)
(Total marks question 3: 2 + 3 + 6 + 2 = 13 marks)
104232 July 2014 RAA Examinations Page 5 of 11
QUESTION 4 – Total of 15 marks
On 1 July 2013, Kay Ltd acquired 72% of the share capital of Bach Ltd for $805 000 when the
equity of Bach Ltd consisted of:
$
Share capital 400,000
Retained earnings 468,000
At the date of acquisition,
All of the identifiable assets and liabilities of Bach Ltd except for land were recorded at
amounts equal to fair value.
The carrying amount for land in the financial records of Bach Ltd was
$80,000. The fair value of land was $75,000.
The following information is relevant to preparing the consolidated financial statements for
the year ended 30 June 2014:
o Bach Ltd sold Kay Ltd inventory at a profit before tax of $5,000 (the
inventory cost Bach Ltd $16,000). One quarter of the inventory was still on
hand as a
t 30 June 2014.
o On 1 May 2014, Kay Ltd lent Bach Ltd $120,000 at 5% interest. Interest was
payable on 30 June 2014.
o The tax rate is 30%
The following figures were extracted from the consolidation worksheet for the year ended 30 June
2014:
Kay Ltd Bach Ltd
$ $
Net profit after tax 400 000 80 000
Add: Opening retained earnings 238 000 468 000
638 000 548 000
Less: Dividends paid 50 000 12 500
Closing retained earnings 588 000 535 500
Required:
(a) Determine the amount of goodwill or gain on bargain purchase involved in the
acquisition. Show all calculations.
(2 marks)
(b) Prepare the adjusting journal entries required for the preparation of the consolidation
worksheet at 30 June 2014. Show all calculations.
(9 marks)
(c) Measure the non-controlling interest in net profit after tax and closing retained
earnings for the year ended 30 June 2014.
(4 marks)
Total marks question 4: 2 + 9 + 4 = 15 marks
104232 July 2014 RAA Examinations Page 6 of 11
QUESTION 5 – Total of 7 marks
At 30 June 2014, High Ltd has a 28% investment in an associate, Low Ltd, which it has owned for
several years. The following information relates to the investment in the associate.
The investment originally cost $400,000. The fair value of the net assets of Low Ltd at the
date of acquisition was $1,000,000.
From the date of the investment and up to 30 June 2014, the retained earnings of Low Ltd
had increased by $220,000.
The net loss after tax of Low Ltd for the year ended 30 June 2014 was
$52,000.
During the year ended 30 June 2014, Low Ltd paid a dividend of $6,000.
During the year ended 30 June 2014, High Ltd sold Low Ltd inventory at a profit before
tax of $6,000. A quarter of the inventory is still on hand.
The tax rate is 30%.
Required:
(i) Assuming that High Ltd prepares consolidated financial statements and uses
the equity method to account for its investment in Low Ltd in its own financial
statements, prepare journal entries for the year ended 30 June 2014. Show all
calculations.
(5 marks)
(ii) Using the equity method, determine the amount of High Ltd’s investment in Low
Ltd at 30 June 2014. Show all calculations
(2 marks)
(Total marks question 5: 5 + 2 = 7 marks)
104232 July 2014 RAA Examinations Page 7 of 11
QUESTION 6 – Total of 8 marks (Two Parts – Both must be
attempted. Part A is unrelated to Part B)
Part A (6 marks)
In this problem, a reference to ownership relates to shareholdings. Taylor Ltd owns 90% of
Tilt Ltd, 60% of Harvey Ltd, 30% of Buenos Ltd and 21% of Carp Ltd. Assume that a
shareholding over 50% indicates control and a shareholding of over 20% indicates significant
influence.
Directors of the companies are:
Company Directors
Taylor David, Joseph, and Anne
Tilt Tim and Margaret (who are divorced)
Harvey George, Joan, and Graham
Buenos Charles and Caroline
Carp Liam and Lillian
Directors’ relatives include:
Director Relatives (relationship to director)
Margaret Roger (de facto)
Charles Hannah (daughter)
Lillian Stephen (husband)
David Todd (nephew)
Joseph William (uncle)
George Fred (grandson)
Joan Esther (sister)
Required:
Identify the related parties of Harvey Ltd in accordance with AASB 124, justifying your
answer by reference to the relevant paragraphs of the standard.
(6 marks)
Part B (2 marks)
Some company executives object to AASB 124 and similar regulations on the basis that the
required disclosures are an invasion of the executives’ privacy. Explain why it is important to
have mandatory related party disclosures
(2 marks)
(Total marks question 6: 6 + 2 = 8 marks)
104232 July 2014 RAA Examinations Page 8 of 11
QUESTION 7 – Total of 14 marks (Two Independent Parts – Both
Parts Must Be Attempted)
Part A
Coralie Ltd has entered into a joint operation arrangement with Mox Ltd to explore a
geographical region for minerals. Coralie Ltd has a 60% interest in the joint operation and
Mox Ltd has a 40% interest in the joint operation. Under the terms of the agreement, Coralie
Ltd would contribute certain drilling equipment to the operation. The fair value to be placed
on this equipment both for the purposes of the bookkeeping of the operation is $220,000.
The equipment is currently shown in the accounts of Coralie Ltd at cost of $180,000 less
accumulated depreciation of $40,000.
Required:
Provide the journal entry required in the books of Coralie Ltd to recognise its
contribution of this equipment to the joint operation.
(4 marks).
Part B
Red Gum Resources Ltd (RGX) is a mineral exploration company listed on the Australian
Securities Exchange. Its principal activities are described in its 2012 Annual Report as follows:
”Red Gum Resources Limited’s (“the Company”) principal activity during the Reporting Period
was mineral exploration and the accumulation and acquisition of prospective areas in Latin
America.
The Company’s corporate strategy is to
Explore and develop multi-commodity assets
Introduce opportunities which provide appropriate risk diversification and potential short
term re-rating
Grow through both organic and, as appropriate, inorganic strategies.”
Note 21 to the Annual Report provides the following segmental information under AASB 8:
104232 July 2014 RAA Examinations Page 9 of 11
104232 July 2014 RAA Examinations Page 10 of 11
Required:
a) Describe the segments chosen by the management of RGX and explain the
rationale for this choice of segments.
(2 marks)
b) Analyse the information provided in note 21 commenting upon each segment’s
contribution to the overall financial position and performance of RGX.
(8 marks)
(Total marks question 7: 4 + 10 = 14 marks)
104232 July 2014 RAA Examinations Page 11 of 11
QUESTION 8 – Total of 16 marks
(a)
(i) Explain the reasons for the journal entry on consolidation to eliminate pre-acquisition equity.
(2 marks)
(ii) Explain the accounting treatment associated with business combinations effected by
purchasing shares when those shares are cum dividend at acquisition date.
(2 marks)
(b)
Briefly explain how accounting for the acquisition of a business differs from the acquisition of an
entity’s shares. As part of your answer, identify relevant accounting standards.
(2 marks)
(c) Charter Ltd acquired all of the share capital of House Ltd for $287,500 on 1 July 2016 when
the equity of House Ltd consisted of:
$
Share capital
Retained earnings
200,000
65,000
At the date of acquisition, all of the identifiable assets and liabilities of House Ltd were
recorded at amounts equal to fair value, except for the following:
Carrying amount Fair value
$ $
Plant (cost $180 000) 120,000 155,000
Additional information: