Group Accounting – Consolidation (100 Marks in total)
On 1 July 2014, PEACE Ltd purchased 448,500 shares of MIEL Ltd at a price of 1.95 per share. On that day, the retained earnings of MIEL Ltd was 280,000. At the time of acquisition, MIEL Ltd recorded all its assets at their fair values except for an item of plant and some land. PEACE Ltd considered that an item of plant shown in the accounts of MIEL Ltd was less than the fair value. The fair value should be 50,000 not 44,000 as shown in MIEL Ltd’s accounts. The plant was assessed to have a remaining useful life of 6 years and was to be depreciated on a straight-line basis. The land was recorded in the accounts of MIEL Ltd of $21,000 and PEACE Ltd considered its fair value to be $30,000. On 11 May 2018, the land was sold to an unrelated party of PEACE Ltd and MIEL Ltd. On 30 June 2018, the financial statements of PEACE Ltd and MIEL Ltd are as follows:
The following information is available at 30 June 2018:
- During the financial year ending 30 June 2018, MIEL Ltd sold inventory to PEACE Ltd for $60,000. The inventory cost MIEL Ltd $32,000 to produce. 75% of this inventory was sold to other entities outside the group at the end of the financial year. Both PEACE Ltd and MIEL Ltd use the perpetual inventory system.
- During the financial year ending 30 June 2017, MIEL Ltd had sold inventory to PEACE Ltd at a price of $5,600. MIEL Ltd had mark-up this batch of inventory by 40%. Only 45% of this inventory had been sold by PEACE Ltd to its customers for the financial year ended 30 June 2017. During the financial year ending 30 June 2018, a further 92% of the opening balance of this inventory was sold by PEACE Ltd to its customers.
- MIEL Ltd sold an item of plant to PEACE Ltd for $88,000 on 1 July 2015. The original cost of this plant was $100,000, purchased on 1 July 2013 and MIEL Ltd decided to depreciate the asset over 5 years with no residual value. As at 1 July 2015, management of PEACE Ltd found that the asset was still in very good condition, so they estimated this item of plant had a remaining useful life of four years (no residual value).
- PEACE Ltd sold an item of equipment to MIEL Ltd for $25,000 on 1 February 2018. The carrying amount was $18,000 as at 1 February 2018, recorded in PEACE Ltd’s account. The equipment has an estimated remaining useful life of five years with no residual values.
- The recoverable amount of goodwill as at 30 June 2018 was determined at $290,500. The goodwill has been impaired as at 30 June 2017 for $7,000. No goodwill impairment loss was recorded in periods prior to 30 June 2017 because carrying amount of goodwill in those periods was lower than its recoverable amount.
- Dividend was declared and approved by both companies on 30 June 2018, MIEL Ltd had a dividend payout ratio of 30% while PEACE Ltd paid out 12% of its profit. No other dividend had been paid by MIEL Ltd during the financial year. PEACE Ltd has a policy of recording the dividend as revenue only when received.
- Income tax rate is 40%
- Answers are to be rounded to the nearest dollar.
- Prepare acquisition analysis as at the acquisition date, and journal entries to record the acquisition of the equity interest in MIEL Ltd in PEACE Ltd’s records. (10 marks)
- Prepare the consolidated adjustments for PEACE Ltd and its controlled entity on 30 June 2018, and offset deferred tax liabilities as at 30 June 2018 (if any) with deferred tax assets arose from the consolidation adjustments. (40 marks)
- Calculate non-controlling interest (NCI) in the profit for the financial year ended 30 June 2018, the opening retained earnings as at 1 July 2017, and the reserves and share capital as at 30 June 2018. Prepare the consolidated entries for NCI for the financial year ended 30 June 2018. (15 marks)
- Using the format of the template provided, complete a consolidation worksheet and post all consolidation journal entries into the worksheet. (35 marks)
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