ACC567 Financial Accounting 2

Question 1 – Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests

On 1 July 2015, Sweets Ltd purchased 80% of the issued shares of Savoury Ltd for $890,000. At the date of acquisition, the equity of Savoury Ltd consisted of share capital and retained earnings of $500,000 and $425,000 respectively. At the date of acquisition, all assets of Savoury Ltd were recorded at fair value, except for inventory, that had a fair value which was $10,000 higher than its carrying amount. All of this inventory was on-sold to external parties by 30 June 2016.

As at 30 June 2017, the following financial statements have been extracted from the financial records of Sweets Ltd and Savoury Ltd:

Sweets Ltd
Savoury Ltd
Sales revenue 3,035,000 2,250,000
Cost of goods sold (1,280,000) (595,000)
Gross profit 1,755,000 1,655,000
Dividend revenue – from Savoury Ltd 400,000
Interest revenue 9,000
Profit on sale of plant 87,500 27,000
Administrative expenses (196,000) (170,000)
Depreciation (61,250) (130,000)
Interest expense (9,000)
Other expenses (362,750) (275,000)
Profit before tax 1,631,500 1,098,000
Tax expense (490,000) (330,000)
Profit after tax 1,141,500 768,000
Retained earnings 1 July 2016 798,500 722,000
1,940,000 1,490,000
Dividends paid (600,000) (500,000)
Retained earnings 30 June 2017 1,340,000 990,000
Retained earnings 1,340,000 990,000
Share capital 1,025,000 500,000
Current liabilities
Accounts payable 142,000 110,000
Tax payable 253,000 213,000
Non-current liabilities
Loan from Sweets Ltd 300,000
2,760,000 2,113,000
Current assets
Cash 410,000 428,000
Accounts receivable 194,000 288,000
Inventory 266,000 300,000
Non-current assets
Land and buildings 370,000 621,000
PI ant – at cost 558,000 820,000
Less: accumulated depreciation (228,000) (344,000)
Loan to Savoury Ltd 300,000
Investment in Savoury Ltd 890,000
2,760,000 2,113,000

The following additional information is provided for the year ended 30 June 2017:

(a) Sweets Ltd uses the partial goodwill method when accounting for non-controlling interests.

(b) During the year ended 30 June 2017, Sweets Ltd made inventory sales to Savoury Ltd of $240,000, while Savoury Ltd made inventory sales to Sweets Ltd of $312,000.

(c) By 30 June 2017, all of the inventory sold by Sweets Ltd to Savoury Ltd during the year had been on-sold to external parties.

(d) The closing inventory of Sweets Ltd at 30 June 2017 includes inventory acquired from Savoury Ltd at a cost of $84,000. This had cost Savoury Ltd $25,000 to produce.

(e) The directors believe that the goodwill acquired was impaired by $5,000 in the current financial year.

(f) On 1 July 2016, Sweets Ltd sold an item of plant to Savoury Ltd for $190,000, when its carrying amount in Sweets Ltd’s financial statements was $102,500 (cost $237,500 less accumulated depreciation of $135,000). This plant was assessed as having a remaining useful life of six years, with no residual value.

(g) On 1 July 2016, Savoury Ltd sold an item of plant to Sweets Ltd for $40,000, when its carrying amount in Savoury Ltd’s financial statements was $13,000 (cost $50,000 less accumulated depreciation of $37,000). This plant was assessed as having a remaining useful life of four years, with no residual value.

(h) On 1 January 2017, Sweets Ltd loaned Savoury Ltd $300,000. Interest on the loan for the year ended 30 June 2017 amounted to $9,000, and was paid by Savoury Ltd on 30 June 2017.

(i) The tax rate is 30%.


i) With reference to the relevant accounting standards, explain why the relationship between Sweets Ltd and Savoury Ltd is a parent-subsidiary relationship and not an associate relationship, even though Sweets Ltd does not own 100% of the shares in Savoury Ltd.

ii) Prepare the acquisition analysis and consolidation journal entries (including NCI entries) necessary for the preparation of consolidated financial statements for Sweets Ltd and its subsidiary, Savoury Ltd, for the financial year ended 30 June 2017.

iii) Prepare the acquisition analysis assuming that Sweets Ltd uses the full goodwill method when accounting for non-controlling interests. Assume that the fair value of the non-controlling interest at 1 July 2015 was $200,000.

Question 2 – Accounting for associates

On 1 July 2015, Richmond Ltd acquired 40% of the share capital of Carlton Ltd, for $160,000. The equity of Carlton Ltd on that date was:

Share capital $250,000
Retained earnings $95,000

All of the identifiable net assets of Carlton Ltd were recorded at fair value.

The following information is provided for Carlton Ltd for the year ended 30 June 2017:

Operating profit before tax 380,000
Income tax expense (114,000)
Operating profit after tax 266,000
Retained earnings at 1 July 2016 257,000
Dividends paid (100,000)
Retained earnings at 30 June 2017 423,000

Additional information:

  • The closing inventory of Richmond Ltd included goods purchased from Carlton Ltd during the year for $6,000. Their cost to Carlton Ltd was $4,000.
  • The closing inventory of Carlton Ltd included goods purchased from Richmond Ltd during the year for $12,000. Their cost to Richmond Ltd was $9,000.
  • During the year ended 30 June 2017, Carlton Ltd revalued land upwards $50,000, resulting in asset revaluation surplus of $35,000 being recognised in equity.
  • The tax rate is 30%.


i) Prepare an acquisition analysis in relation to the acquisition made by Richmond Ltd.

ii) Prepare the consolidation journal entries to account for Richmond Ltd’s investment in Carlton Ltd for the year ended 30 June 2017 in accordance with AASB 128, assuming that Richmond Ltd does prepare consolidated financial statements. Show all workings.

Question 3 – Foreign currency transactions

Aussie Ltd is an Australian company for which the Australian dollar is the functional and presentation currency. The company has entered into a number of foreign activities, and these include the following:

(a) Aussie Ltd sold inventory to a customer in Hong Kong for HK$600,000. The order was received on 10 May 2016, with delivery made on 30 May 2016. Under the conditions of the contract, title to the goods passed to the customer on delivery. Payment in respect of these inventories was received on 19 July 2016. The following exchange rates are applicable:

10 May 2016:      A$1.00  = HK$7.30

30 May 2016:      A$1.00  = HK$8.20

30 June 2016:     A$1.00  = HK$8.60

19 July 2016:       A$1.00  = HK$8.50

(b) On 1 January 2016, Aussie Ltd borrowed US$500,000 from US Bank. The exchange rate on that date was A$1.00 = US$0.65. On 30 June 2016, the interest owing to US Bank on the loan is US$3,000. The exchange rate on 30 June 2016 is A$1.00 = US$0.70.


i) Prepare the journal entries between 10 May 2016 – 19 July 2016 to record the foreign currency transaction entered into by Aussie Ltd for the sale of inventory to the customer in Hong Kong.

ii) Prepare the journal entries to record and account for the loan from US Bank for the period 1 January 2016 – 30 June 2016. Show all workings.



  1. Show all necessary workings.
  2. Round all figures to nearest dollar.


Question 4 – Accounting for leases

On 1 July 2017, Fantastic Ltd entered into a lease agreement with Green Power Ltd, agreeing to lease a truck from Green Power Ltd for three years. Details of the lease are as follows:

Fair value of truck at inception of lease                           $188,995

Residual value at end of lease term                                $50,000

Residual value guaranteed by lessee                              $20,000

Annual payments (1st payment due on 30 June 2018)      $60,000

Interest rate implicit in the lease                                    6%

The annual lease payments of $60,000 include reimbursement of insurance and maintenance costs of $5,000. The lease is cancellable, but cancellation will incur a monetary penalty equivalent to 2 years’ lease payments. The estimated useful life of the truck is five years, and it has an estimated residual value of $20,000 at the end of that time. Fantastic Ltd intends to return the truck to Green Power Ltd at the end of the lease term. The truck is to be depreciated using the straight-line method.


(i) Discuss whether this is a finance lease or operating lease taking into account all the relevant information provided above. Justify your answer.

(ii) Prepare a schedule of lease payments for Fantastic Ltd.

(iii) What is the amount of amortisation in relation to the leased truck to be recorded in Fantastic Ltd’s books for the year ended 30 June 2018? Explain your answer.

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