Q1. 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:
| Share Capital | $ 30,000 |
| Retained Earnings | $ 120,000 |
All the identifiable assets and liabilities of Fry Ltd were recorded at amounts equal to their fair values. Profits and dividends for the years ended 30 June 2018 to 2020 were as follows:
| Profit before tax | Income tax expense | Dividends Paid | |
| 2018 | $80,000 | $30,000 | $80,000 |
| 2019 | $70,000 | $25,000 | $15,000 |
| 2020 | $60,000 | $20,000 | $10,000 |
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.)
Q2. 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 $450,000.
REQUIRED
You are required to rank the above creditors and then to calculate how much each creditor would be paid.
Q3. The following information has been extracted from the financial statements of Blake Ltd and its subsidiary Seven Ltd at 30 June 2019.
Blake Ltd ($) Seven Ltd ($)
| Reconciliation of opening and closing retained earnings | ||||
| Sales revenue | 593,400 | 498,800 | ||
| Cost of goods sold | (399,040) | (204,680) | ||
| Gross profit | 194,360 | 294,120 | ||
| Dividends revenue from Seven Ltd | 63,984 | — | ||
| Management fee revenue | 22,790 | — | ||
| Profit on sale of plant | 30,100 | — | ||
| Expenses | ||||
| Administrative expenses | (26,488) | (33,282) | ||
| Depreciation | (21,070) | (48,848) | ||
| Management fee expense | — | (22,790) | ||
| Other expenses | (86,946) | (66,220) | ||
| Profit before tax | 176,730 | 122,980 | ||
| Tax expense | (52,890) | (36,292) | ||
| Profit for the year | 123,840 | 86,688 | ||
| Retained earnings-30 June 2018 | 274,684 | 205,712 | ||
| 398,524 | 292,400 | |||
| Dividends paid | (118,164) | (79,980) | ||
| Retained earnings-30 June 2019 | 280,360 | 212,420 | ||
| Statements of financial position | ||||
| Shareholders’ equity | ||||
| Retained earnings | 280,360 | 212,420 | ||
| Share capital | 301,000 | 172,000 | ||
| Current liabilities | ||||
| Accounts payable | 47,042 | 39,818 | ||
| Tax payable | 35,518 | 21,500 | ||
| Non-current liabilities | ||||
| Loans | 149,210 | 99,760 | ||
| 813,130 | 545,498 | |||
| Current assets | ||||
| Accounts receivable | 51,084 | 53,578 | ||
| Inventory | 79,120 | 24,940 | ||
| Non-current assets Land and buildings | 192,640 | 280,360 | ||
| Plant -at cost | 257,871 | 305,988 | ||
| Accumulated depreciation | (73,745) | (119,368) | ||
| Investment in Seven Ltd | 306,160 |
— |
||
| 813,130 | 545,498 | |||
Other information
- 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.
- The management of Blake Ltd use the partial goodwill method.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Seven Ltd paid $22,790 in management fees to Blake Ltd.
- The tax rate is 30 per cent.
REQUIRED
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.
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