Question 1

On 1 July 2017, Bolan Ltd purchased 40% of the shares of Rex Ltd for $151 680 and signed a joint venture agreement with the two other shareholders in Rex Ltd. At that date, equity of Rex Ltd consisted of:

Share capital                                   $300 000

Retained earnings                               26 400

 

At 1 July 2017, the identifiable assets and liabilities of Rex Ltd were recorded at amounts equal to their fair values.

 

Information about income and changes in equity for both companies for the year ended 30 June 2020 was as shown.

Bolan Ltd Rex Ltd
Profit before tax Income tax expense

Profit

Retained earnings (1/7/19)

 

Dividend paid

Dividend declared

 

Retained earnings (30/6/20)

$ 62 400

(25 440)

36 960

 43 200

 80 160

(12 000)

 (24 000)

 (36 000)

$ 44 160

$ 56 400

 (12 960)

43 440

 38 400

 81 840

(9 600)

(12 000)

  (21 600)

$ 60 240

 

Additional information

  • Bolan Ltd recognised the final dividend revenue from Rex Ltd before receipt of cash. Rex Ltd declared a $14 400 dividend in June 2019, this being paid in August 2019.
  • On 31 December 2019, Rex Ltd sold Bolan Ltd a motor vehicle for $28 800. The vehicle had originally cost Rex Ltd $43 200 and was written down to $21 600 for both tax and accounting purposes at time of sale to Bolan Ltd. Both companies depreciated motor vehicles at the rate of 20% p.a. on cost.
  • The beginning inventory of Rex Ltd included goods at $9 600 bought from Bolan Ltd; their cost to Bolan Ltd was $7 680.
  • The ending inventory of Bolan Ltd included goods purchased from Rex Ltd at a profit before tax of $3 840.
  • The tax rate is 30%.

Required

  1. Prepare the journal entries in the records of Bolan Ltd to account for the investment in Rex Ltd in accordance with AASB 128 for the year ended 30 June 2020 assuming Bolan Ltd does not prepare consolidated financial statements.\
  2. Prepare the consolidated worksheet entries in relation to the investment in Rex Ltd, assuming Bolan Ltd does prepare consolidated financial statements at 30 June 2020.

In both parts show in addition to the journal entries the calculation of the NCI’s share of the profit after the adjustments for inter entity transfers.

 

Question 2

 

On 1 July 2017, Ormolu Ltd paid $330 960 for 75% of the share capital of Clock Ltd. At this date, the equity of Clock Ltd consisted of:

 

Share capital (280 000 shares)

General reserve

Retained earnings

$ 280 000

112 000

56 000

 

A comparison of the carrying amounts and fair values of Clock Ltd’s assets at the acquisition date showed the following:

 

Carrying   amount Fair Value
Land $257 600 $280 000
Plant (cost $210 000) 140 000 168 000
Inventory 91 000 126 000
Accounts receivable 56 000 49 000
Goodwill 5 600

 

In relation to these assets, the following information is available:

  • The plant had a further 5-year life but was sold on 1 January 2019.
  • All the inventory was sold by 30 June 2018.
  • All the accounts receivable were collected by 30 June 2018.

Any valuation reserves arising on consolidation are transferred on realisation of the asset to retained earnings. Ormolu Ltd uses the partial goodwill method.

 

The following transactions occurred between 1 July 2017 and 30 June 2019:

 

2018
Jan.      19 Clock Ltd transferred $28 000 from general reserve to retained earnings.
Feb.     24 Clock Ltd paid an $11 200 dividend, half being from profits earned prior to1 July 2017.
April   23 Clock Ltd sold inventory to Ormolu Ltd for $70 000 recording a before-tax profit of $14 000. Both companies use a perpetual inventory system. The tax rate is 30%.
June     28 Clock Ltd declared a $21 000 dividend.
30 Clock Ltd recorded a profit of $182 000. One-quarter of the inventory sold by Clock Ltd to Ormolu Ltd on 23 April 2018 is still on hand in Ormolu Ltd.
Aug.     30 The $21 000 dividend declared by Clock Ltd was paid.
Sept.  29 2019 The remaining inventory in Ormolu Ltd sold to it by Clock Ltd was sold outside the group.
Jan.      19 Clock Ltd paid a $22 400 dividend.
June     30 Clock Ltd recorded a profit of $210 000.

 

Required

Prepare the consolidation worksheet JOURNAL ENTRIES for the preparation of consolidated financial statements by Ormolu Ltd at 30 June 2019.

Note a consolidation worksheet is NOT required.

Your answer should include an acquisition analysis with a calculation of goodwill/gain on bargain purchase, business combination valuation entries, pre-acquisition entries, the NCI share of equity at acquisition date, from acquisition date to the beginning of the year of consolidation, and for the year of consolidation, dividend adjustments, intragroup sales, and asset disposals.

  

Question 3

 

Cashless Ltd went into voluntary liquidation on 1 April 2019.

 

  Cashless Ltd

Statement of Financial Position

 
as at 1 April 2019
    Liabilities and equity Share capital:

280 000 ordinary shares  fully paid

Retained earnings

Mortgage loan

Debentures

Bank overdraft

Accounts payable

Other payables

 

 

 

$322 000

7 000

105 000

70 000

56 000

56 000

  33 600

Assets

Land and buildings (net)

Plant (net)

Bank deposit

Accounts receivable

Investments Inventory

 

$175 000

280 000

7 000

68 600

35 000

84 000

 

           

                $649 600         $649 600 

 

Additional information

  • The liquidator discovered that debenture interest of $5 250 was due on 1 April 2019. The overdraft with the Katherine Bank had been secured by a mortgage over the plant. The bank has agreed that the liquidator may sell the plant and use the proceeds to repay the overdraft. The mortgage loan is secured over land and buildings which will be sold by the mortgagee to repay the amount owing. The inventory has been used as a circulating security for the debentures. The other payables were loans from directors that were made on 1 December 2018.

 

  • The sale of the assets realised the following amounts:

 

   Land and buildings

Less: Rates and selling expenses   Less: Mortgage loan

$  280 000

(11 200)

(105 000)

 

 

$163 800

Plant and equipment

Bank deposit

Accounts receivable

Investments

Inventory

273 000

8 400

63 000

21 000

 70 000

 

(c) The following payments were made by the liquidator:

 

$ 599 200
Debentures

Debenture interest

Bank overdraft

Accounts payable (after creditors’ discounts)

Other payables

Additional amounts not recorded in the records:

Liquidator’s remuneration

Liquidation expenses

Holiday pay — employee

Retrenchment payment — employee

Income tax penalty

 

$70 000

5 250

56 000

53 200

33 600

 

17 500

7 700

7 000

2 800

     2 100

$255 150

 

You are required to prepare the following accounts, using T accounts, and not journal entries:

  1. The Liquidation Account.
  2. The Liquidator’s Statement of Receipts and Payments
  3. The Shareholders’ Distribution account.

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