Question 1 [40 marks]
Topics 1 to 3 – Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests
Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.
Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.
All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:
| Carrying amount | Fair value | |
| $ | $ | |
| Plant (cost $150,000) | 100,000 | 110,000 |
| Land | 60,000 | 76,000 |
The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.
Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:
| Parent Ltd | Subsidiary Ltd | |
| $ | $ | |
| Sales | 632,000 | 440,000 |
| Other revenue: | ||
| Debenture interest | 10,000 | – |
| Management and consulting fees | 10,000 | – |
| Dividends from Subsidiary Ltd | 24,000 | – |
| Total revenue | 676,000 | 440,000 |
| Cost of sales | 260,000 | 170,000 |
| Manufacturing expenses | 180,000 | 120,000 |
| Depreciation on plant | 30,000 | 30,000 |
| Administrative expenses | 30,000 | 16,000 |
| Financial expenses | 22,000 | 10,000 |
| Other expenses | 28,000 | 24,000 |
| Total expenses | 550,000 | 370,000 |
| Profit before tax | 126,000 | 70,000 |
| Income tax expense | (50,000) | (34,000) |
| Operating profit after tax | 76,000 | 36,000 |
| Retained earnings 1 July 2016 | 100,000 | 90,000 |
| 176,000 | 126,000 | |
| Transfer to general reserve | 6,000 | – |
| Interim dividend paid | 20,000 | 20,000 |
| Final dividends declared | 20,000 | 10,000 |
| 46,000 | 30,000 | |
| Retained earnings 30 June 2017 | 130,000 | 96,000 |
| General reserve | 100,000 | 20,000 |
| Other components of equity | 26,000 | 20,000 |
| Share capital | 600,000 | 200,000 |
| Debentures | 400,000 | 200,000 |
| Current tax liability | 50,000 | 34,000 |
| Dividend payable | 20,000 | 10,000 |
| Deferred tax liability | – | 14,000 |
| Other liabilities | 180,000 | 24,000 |
| 1,506,000 | 618,000 | |
| Assets | ||
| Financial assets | 100,000 | 120,000 |
| Debentures in Subsidiary Ltd | 200,000 | – |
| Shares in Subsidiary Ltd | 263,200 | – |
| Plant (cost) | 240,000 | 204,000 |
| Accumulated depreciation – plant | (130,000) | (110,000) |
| Other depreciable assets | 152,000 | 110,000 |
| Accumulated depreciation | (80,000) | (50,000) |
| Inventory | 180,000 | 170,000 |
| Deferred tax asset | 170,800 | 60,000 |
| Land | 402,000 | 114,000 |
| Dividend receivable | 8,000 | – |
| 1,506,000 | 618,000 |
Additional information:
(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.
(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.
(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.
(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.
(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.
(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.
(g) The tax rate is 30%.
Required:
Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.
Note: show all necessary workings and narrations.
| Question 1 | Max. marks allocated |
| Acquisition analysis | 5 |
| Consolidation entries – accuracy | 35 |
| Total | 40 |
Question 2 [10 marks]
Topic 4: Investment in associates
On 1 July 2015, Rules Ltd acquired 25% of the shares of Commercial Ltd for $200 000. The acquisition of these shares gave Rules Ltd significant influence over Commercial Ltd. At this date, the equity of Commercial Ltd consisted of:
| $ | |
| Share capital
General reserve Retained earnings |
330 000
50 000 220 000 |
At 1 July 2015, all the identifiable assets and liabilities of Commercial Ltd were recorded at amounts equal to their fair values except for:
| Carrying amount | Fair value | |
| $ | $ | |
| Land | 600 000 | 800 000 |
| Plant (cost $600 000) | 500 000 | 550 000 |
The plant was considered to have a further useful life of 5 years. The land was revalued in the records of Commercial Ltd and the revaluation model applied in the measurement of the land. The tax rate is 30%.
At 30 June 2017, Commercial Ltd reported the following information:
| $ | |
| Profit before tax | 360 000 |
| Income tax expense | (150 000) |
| Profit after tax | 210 000 |
| Retained earnings at 1 July 2016 | 410 000
620 000 |
| Dividends paid | (20 000) |
| Dividends declared | (25 000) |
| Transfer to general reserve | (15 000) |
| (60 000) | |
| Retained earnings at 30 June 2017 | 560 000 |
| Share capital | 330 000 |
| General reserve | 75 000 |
| Asset revaluation surplus | 155 000 |
| Total equity | 1 120 000 |
Commercial Ltd also reported other comprehensive income relating to gains on revaluation of land of $5 000.
Required:
Prepare the journal entries for inclusion in the consolidation worksheet of Rules Ltd at 30 June 2017 for the equity accounting of Commercial Ltd.
or
Prepare the journal entries in the books of Rules Ltd to account for the investment in Commercial Ltd under the equity method for the year ended 30 June 2017.
| Question 2 | Max. marks allocated |
| Acquisition analysis | 2 |
| Workings | 2 |
| Consolidation entries | 6 |
| Total | 10 |
Question 3 [10 marks]
Topic 5: Accounting for foreign currency transactions
Tassie Ltd is an Australian company with a reporting periods ending on 30 June. During the year ended 30 June 2017, Tassie Ltd purchased goods from Britania Ltd, a company based in London.
On 15 March 2017, Tassie Ltd ordered goods of £300 000 from Luca Ltd under FOB London contract. On 11 May, the goods were shipped FOB London and arrived at Tassie Ltd’s warehouse on the 2 July 2017. Tassie Ltd paid the £300 000 due to Luca on the 14 August 2017.
Applicable exchange rates are as follows.
| 15 March 2017 | A$1.00 = 37p |
| 11 May 2017 | A$1.00 = 41p |
| 30 June 2017 | A$1.00 = 43p |
| 2 July 2017 | A$1.00 = 42p |
| 14 August 2017 | A$1.00 = 39p |
Required:
(1) In accordance with AASB 121, prepare the relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018.
(2) Assuming that, instead of goods, Tassie Ltd was purchasing plant and equipment, which is installed ready for use on 15 July 2017 when the rate is still A$1.00=42p. Prepare relevant journal entries of Tassie Ltd for the years ending 30 June 2017 and 30 June 2018.
| Question 3 | Max. marks allocated |
| Journal entries, supported by workings | 9 |
| Overall presentation | 1 |
| Total | 10 |
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