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 |
| Expenses | ||
| 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 |
| Equity | ||
| 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%.
Required:
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.
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