EZY MANUFACTURING LTD (Ezy)
You are the accountant of Ezy Manufacturing Ltd (Ezy), a listed public company incorporated in Australia. Ezy is a paper and packaging company that is complimented by an extensive merchant distribution system, with primary markets and manufacturing operations in Asia Pacific region. In order to take complete control of its production facilities, Ezy implemented a policy of vertical integration and invested in two of its key suppliers.
The investments of Ezy as at 30 June 2019 are illustrated below:
RANGE PTY LTD (Range)
Range is a producer of uncoated paper, industrial and consumer packaging, and pulp. It has been one of the key suppliers of raw pulp in Australia for the last twenty (20) years. Ezy, Range’s major customer, purchased all ordinary shares of Range on 1 July 2015. Ezy issued 240,000 shares as part of the consideration and paid the balance $2,800 000 in cash. The shares in Ezy were trading on 1 July 2015 for $40 per share but subsequent to the acquisition of Range, fell to $34 per share as the market reacted badly to the purchase price paid by Ezy for its interest in Range.
The identifiable net assets of Range at the date of acquisition were represented by:
Share Capital $
400,000 Ordinary Shares 2,000,000
200,000 8% Preference Shares 1,000,000
General Reserve 1,000,000
Retained Earnings 1,500,000
Ezy holds all preference shares in Range. Preference shares are non-participating, cumulative and redeemable.
All assets of Range were stated at fair value in its accounts on 1 July 2015, except the following:
- An item of inventory recorded at $600,000 is obsolete and has an estimated value of only $100,000.
- Land recorded at $1,000,000 has been independently valued at $2,000,000.
- ‘Property, Plant and Equipment’ included a piece of equipment, which cost Range $750,000 on 1 July 2014 and had a useful life of 10 years. Due to change in technology, the equipment is now worthless.
At the date of acquisition, Range had internally generated patents that were not recognised in its accounting records, having a fair value of $15 000 and a remaining useful life of five years. Range had no intention of recognising these in its accounting records.
Since 1 July 2018, Range has traded extensively with Ezy. All sales made by Range to Ezy have been at cost plus 40%.
SWIFT WORKS LTD (SWL)
SWL provides Ezy with highly automated milling and other machinery, which are required in the manufacture of its paper and packaging products. There are substantial trading activities carried on between SWL and Ezy. All transactions are on normal commercial terms and conditions, which are calculated on the basis of cost plus 30%.
Ezy acquired 100% of the ordinary issued capital of SWL on 1 July 2017 for $3,600,000. The additional incidental costs of acquisition amounted to $100,000. The identifiable net assets at the date of acquisition were represented by:
All identifiable net assets were considered to be stated at fair value.
A director of Ezy acted as representative of Ezy on the board of SWL. He suggested that in order to improve its efficiency, SWL should modernize its facilities. It should replace its old plant and equipment with new automated machinery. He also put forward Ezy’s proposal to finance the automation. The proposal was accepted by the other two directors of SWL. SWL borrowed $1 000 000 from Ezy on 31 December 2017, at an interest of 10% p.a., paid annually on 31 December. The loan is to be repaid as a lump sum at the end of five years.
- Ezy values all classes of assets on cost basis.
- The inventory turnover period in all group companies is less than one year.
- Ezy Group impairs goodwill at 10% every year.
- Ezy Ltd. supplies paper and packaging product to other group companies for their internal use at cost plus 20%.
- During the year, group companies traded extensively with each other. As at 30 June 2019 the following stocks were, being held by group companies from purchases made from other group companies.
|Purchased from||Stock on Hand
|Annual intra-group purchases*
All other profits arising on intra-group trading have been realised outside this group.
- The taxation rate applicable in Australia is 30%.
- The stocks held by group companies as at 30, June 2018 included the following:
|Purchased from||Stock on hand
- ‘Plant and Equipment’ in the books of Ezy include the following machinery purchased from SWL:
In the books of SWL on the date of sale
|Date of sale||Useful life to Ezy|
|Cost||Accumulated Depreciation||Selling Price|
|Machinery 1||1,000,000||250,000||975,000||1 July, 2017||10 years|
|Machinery 2||1,000,000||200,000||1,040,000||1 July, 2018||8 years|
- Information on dividends paid and declared is as follows:
- In June 2019, the directors of Range proposed a dividend out of current year’s profits for $100,000. This dividend was duly authorised in August 2019.
- SWL paid an interim dividend of $25,000 and declared a further dividend of $75,000 out of Retained Earnings as at 1 July, 2018.
Financial information: Ezy, Range and SWL for the year ended 30 June 2019 is shown below:
|Ezy Ltd||Range Ltd||Swift Works Ltd|
|Profit before tax||15,000,000||520,000||900,000|
|Income tax expense||9,000,000||160,000||300,000|
|Retained Earnings (1/7/18)||7,200,000||1,500,000||1,200,000|
|Interim Dividend paid||400,000||25,000|
|Final Dividend declared||600,000||75,000|
|Retained Earnings (30/06/19)||12,200,000||1,860,000||1,700,000|
|Investment in other entities||24,000,000||750,000|
|Loan to SWL||1,000,000|
|Deferred tax asset||280,000||480,000||160,000|
|Patents and Trademarks (net)||680,000|
|Other Non-current Liabilities||1,500,000||1,000,000|
|Current tax liability||116,000||740,000||230,000|
|Share capital -ordinary shares||21,000,000||2,000,000||2,500,000|
|Share capital -preference shares||3,000,000||1,000,000|
(1) Prepare the general journal entries in the accounting records of Ezy Manufacturing Ltd to record the
(a) acquisition of investments in,
(i) Range Pty Ltd on 1 July, 2015;
(ii) Swift Works Ltd on 1 July, 2017;
(b) dividend received or receivable during the year ended 30th June, 2019.
(2) Prepare acquisition analyses for Ezy Manufacturing Ltd’s investments in subsidiaries on the respective dates of acquisition.
(3) Prepare the consolidation journal entries* required to prepare the consolidated worksheet of the Ezy Group as at 30 June 2019. Show all workings providing explanations and justifications with reference to appropriate accounting standards, where necessary.
*The consolidation journal entries must address
(a) differences between fair value and book value of identifiable net assets acquired by Ezy on the dates of acquisition;
(b) elimination of investments in subsidiaries;
(c) recognition of ‘Goodwill’ or ‘Gain on Bargain Purchase’;
(d) elimination of intercompany transactions and balances, such as,
(i) dividends paid or payable by subsidiaries;
(ii) intercompany sales of inventory;
(iii) unrealised profit in closing inventory;
(iv) unrealised profit in opening inventory;
(v) intercompany sale of non-current asset;
(vi) intercompany receivables and payables
(vii) intercompany revenues and expenses
(e) tax effect adjustments, where necessary.
(4) Complete the consolidated worksheet of the Ezy Group for the year ended 30 June 2019.
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