Brandy Corporation owns 60 percent of Downer’s voting shares. During 20X3, Brandy produced 50,000 computer desks at a cost of $82 each and sold 20,000 of them to Downer for $94 each. Downer sold 14,000 of the desks to unaffiliated companies for $130 each prior to December 31, 20X3, and sold the remainder in early 20X4 for $140 each. Both companies use perpetual inventory systems. Tax rate is 30 percent.
- What amounts of cost of goods sold did Brandy and Downer record in 20X3?
- What amount of cost of goods sold must be reported in the consolidated income statement for 20X3?
- Prepare the necessary journal entry to eliminate the intra-gorup sales and cost of goods sold.
York Ltd. was registered on 1 July 2020. The next day, the directors issued a disclosure document inviting applicants for 700,000 ordinary shares with an issue price of $1. The shares were payable 20¢on application and 40¢ on allotment. By the end of July, the company had received exactly 700,000 applications, together with the correct application monies. The directors allotted these shares on 1 August. The correct allotment monies were received by the end of September. On 1 October 2020, the directors made a call of 25¢ per share. Call monies were due and payable by 31 October, and were received by then except in respect of one parcel of 10,000 shares.
- Prepare journal entries with explanations to record the transactions above.
- Prepare an extract from the balance sheet as at 31 October 2020, showing owners’ equity.
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The income statement of Price Ltd for the year ended 31 December 2020, reported the following condensed information:
Revenue from fees $600,000
Operating expenses 360,000
Income from operations 240,000
Income tax expense 60,000
Net income $180,000
Price’s balance sheet contained the following comparative data at December 31:
. 2020 2019
Accounts receivable $50,000 $45,000
Accounts payable 35,000 41,000
Income taxes payable 6,000 3,000
Price has no depreciable assets. Accounts payable pertains to operating expenses.
- Cash receipts from customers.
- Cash payments for operating expenses.
(b) Prepare the operating activities section of the statement of cash flows for 2020.
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On 1st January 2016, Soft Ltd acquired 70% of share capital of Hard Ltd for $8,175,000. Equity of Hard Ltd was:
Share capital $7,600,000
General reserve $2,100,000
Retained earnings $1,200,000
All assets of Hard Ltd were recorded at fair value on acquisition except for an item of marine equipment that had a higher fair value of $360,000 than its carrying amount. Cost of the marine equipment was $2,100,000 accumulated depreciation of $1,372,000.
- Use the worksheet below to compute Goodwill or Gain on acquisition and the Non-controlling interest using net method.
- Provide the necessary journal entries for Soft Ltd (parent) to eliminate Hard’s share of pre-acquisition capital and reserves.
- Prepare the journal entry to recognise the Non-controlling interest.
|Elimination of investment in Hard Ltd||Hard Ltd
|30% NCI $,000|
|Fair Value of consideration transferred|
|Less: FV of identifiable assets acquired and liabilities assumed|
|Share capital on acquisition date|
|Revalue surplus-acquisition date|
|Retained earnings-acquisition date|
|Fair value adjustment|
|Goodwill / Gain on acquisition|
Yellow River Ltd purchased a machine on 1 July 2016 at a cost of $1280,000. The machine is expected to have a useful life of 4 years (straight line basis) and no residual value. For taxation purposes, the ATO allows the company to depreciate the asset over 5 years.
The profit before tax for the company for the year ending 30 June 2017 is $1200,000. To calculate this profit the company has deducted $120,000 government-imposed penalties expense, and $160,000 wages expense that has not yet been paid. Also, the company has included $140,000 interest as income that the company has not yet received. During the year, the company has received $40000 in advance revenue that has not yet been earned. The company qualifies for off-setting deferred tax assets against deferred tax liabilities. The tax rate is 30%.
- Calculate the company’s taxable profit and hence its tax payable for 2017.
- Determine the deferred tax liability and/or deferred tax asset that will result.
- Prepare the necessary journal entries at 30 June 2017.
(a) Following are descriptions of several independent situations.
- Rockford Company has a subsidiary in Argentina. The subsidiary does not have much debt because of the high interest costs resulting from the average annual inflation rate exceeding 100 percent. Most of its sales and expense transactions are denominated in Argentinean pesos, and the subsidiary attempts to minimize its receivables and payables. Although the subsidiary owns a warehouse, the primary asset is inventory that it receives from Rockford. The Argentinean government requires all companies located in Argentina to provide the central government with a financial report using the Argentinean system of accounts and government-mandated forms for financial statements.
- JRB International, located in Dallas, Texas, is the world’s largest manufacturer of electronic stirrups. The company acquires the raw materials for its products from around the world and begins the assembly process in Dallas. It then sends the partially completed units to its subsidiary in Mexico for assembly completion. Mexico has been able to hold its inflation rate under 100 percent over the last three years. The subsidiary is required to pay its employees and local vendors in Mexican pesos. The parent company provides all financing for the Mexican subsidiary, and the subsidiary sends all of its production back to the warehouse in Dallas, from which it is shipped as orders are received. The subsidiary provides the Mexican government with financial statements.
- Huskie Inc. maintains a branch office in Great Britain. The branch office is fairly autonomous because it must find its own financing, set its own local marketing policies, and control its own costs. The branch receives weekly shipments from Huskie Inc., which it then conveys to its customers. The pound sterling is used to pay the subsidiary’s employees and to pay for the weekly shipments.
- Hola Company has a foreign subsidiary located in a rural area of Switzerland, right next to the Swiss–French border. The subsidiary hires virtually all its employees from France and makes most of its sales to companies in France. The majority of its cash transactions are maintained in the European euro. However, it is required to pay local property taxes and sales taxes in Swiss francs and to provide annual financial statements to the Swiss government.
For each of these independent cases, determine
- The foreign entity’s recording currency in which its books and records are maintained.
- The foreign entity’s functional currency.
- The process to be used to restate the foreign entity’s financial statements into the reporting currency of the U.S.-based parent company.
(b) Wahl Company’s 20X5 consolidated financial statements include two wholly owned subsidiaries, Wahl Company of Australia (Wahl A) and Wahl Company of France (Wahl F). Functional currencies are the U.S. dollar for Wahl A and the European euro for Wahl F.
- What are the objectives of translating a foreign subsidiary’s financial statements?
- How are gains and losses arising from the translation or remeasurement of each subsidiary’s financial statements measured and reported in Wahl’s consolidated financial statements?
- What exchange rate is used to incorporate each subsidiary’s equipment cost, accumulated depreciation, and depreciation expense in Wahl’s consolidated financial statements?
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