A hypothetical case provided below is in relation to the consolidation process. Steps involved: 1. Read the case 2. Answer the questions listed at the end of the case using Microsoft Excel. An Excel template is provided to you on the unit LMS page under Assessments – Team Assignment. Ensure that the solution is prepared using the Excel template only. 3. Submit the solution (Excel) via LMS. A submission point is also made available on the unit LMS page.
ACCT5511 Semester 1, 2021 1 ACCT5511: Assignment (25%) Refer instructions for full details of this assessment on the unit LMS page. A hypothetical case provided below is in relation to the consolidation process. Steps involved: 1. Read the case 2. Answer the questions listed at the end of the case using Microsoft Excel. An Excel template is provided to you on the unit LMS page under Assessments – Team Assignment. Ensure that the solution is prepared using the Excel template only. 3. Submit the solution (Excel) via LMS. A submission point is also made available on the unit LMS page. THE CASE On 1 July 2018 B Limited acquired 75% of the share capital cum div. of R Limited for the following consideration: Cash $105,000 Ordinary Shares in B Ltd 35,000 shares of $7 each Artwork Carrying Amount in the records of B Ltd as at 1 July 2018 (net of accumulated amortization of $15,000) = $100,000 Fair Value as at 1 July 2018 = $110,000 To this effect, B Ltd incurred legal and accounting costs of $5,000 and share issue costs of $3,500. B Ltd had previously acquired 25% of the shares of R Ltd for $90,000. B Ltd recorded its original investment in R Ltd at fair value, with changes in fair value being recognised in profit or loss. At 1 July 2018, the investment was recorded at $95,000. The fair value of this investment on 1 July 2018 was estimated at $92,000. The recorded equity of R Ltd at the date of acquisition consisted of: • Share capital: $400,000 • General Reserve: $40,000 • Retained Earnings: $55,000 The following information in relation to the acquisition is made available: • Included in the assets and liabilities recorded by R Ltd at 1 July 2018 were: - Goodwill of $4000 and - Dividend of $25,000 payable on 7 August 2018 • All the identifiable assets and liabilities of R Ltd were recorded at fair value with the exception of the following: ACCT5511 Semester 1, 2021 2 Carrying Amount Fair Value Plant and Equipment (Cost $40,000) 23,000 33,000 Land 75,000 83,000 Inventory 28,000 33,000 Patent - 30,000 • In the notes to the financial statements, R Ltd had reported the existence of a contingent liability. B Ltd determined that this contingent liability had a fair value of $9,000 at the date of acquisition. Of the above, • 70% of the inventories was sold by 30 June 2019 and the remaining 30% by 30 June 2020 • The plant and equipment is expected to have a further life of 5 years and R Ltd continues to use straight line method to depreciate the asset. This plant and equipment was later sold to an external party on 1 Feb 2022 at a gain of $8000. • Land on hand at 1 July 2018 was sold to external parties on 30 March 2021 at a gain of $40,000 by R Ltd. • The contingent liability was settled by R Ltd for $10,000 by June 2019. • Patents are estimated to have a useful life of 4 years. R Ltd amortises the cost evenly. In addition, • R Ltd transferred $2200 and $7500 from General Reserve on hand at 1 July 2018 to Retained Earnings in June 2020 and June 2021 respectively. • On 30 June 2021, R Ltd paid a bonus dividend of $10,000, the dividend being paid from retained earnings on hand at 1 July 2018. • Impairment tests for goodwill resulted in the write down of goodwill by $2000 in June 2021. Besides the above, the following intragroup transactions took place between the acquisition date and 30 June 2021: 1. On 1 Jan 2020 R Ltd sold inventory to B Ltd costing $40,000 for $50,000. 60% of this inventory was sold to outside parties for $35,000 by B Ltd by 30 June 2020. The remaining 40% was sold by 30 June 2021. B Ltd paid 70% of the amount owed to R Ltd on 10 March 2020 and the balance on 10 July 2021. 2. On 1 Nov 2019 R Ltd sold a piece of plant and equipment to B Ltd at a profit of $5,000. B Ltd classifies this as inventory in its accounting records. This item was sold by B Ltd to external parties on 10 July 2020. 3. On 1 Jan 2019, B Ltd sold a piece of equipment to R Ltd for $20,000. It had a carrying amount of $17,500 at the time of sale. B Ltd applied a rate of 10% p.a. as depreciation on cost, while R Ltd applies a rate of 7.5% p.a. on cost. 4. On 1 October 2020, R Ltd sold an item of inventory to B Ltd for $10,000. This item had cost R Ltd $8,000. B Ltd accounted this item as Plant and Equipment and charges depreciation at the rate of 10% p.a. on cost. 5. B Ltd rented a spare warehouse to R Ltd starting from 1 July 2019 for 1 year. The total charge for the rental was $20,000. Half of this amount was paid by R Ltd in advance on 1 July 2019 and the remaining on 1 August 2020. ACCT5511 Semester 1, 2021 3 6. R Ltd borrowed $30,000 from B Ltd on 1 September 2018 for one year @5% interest p.a. The entire amount of the loan and the interest was paid by R Ltd on 2 September 2019. Using the answer template (excel template available on the LMS unit page) provided, 1. Prepare the journal entries in the books of B Ltd for the following events: • Change in the value of existing investment in R Ltd (i.e. 25% share capital) on 1 July 2018 • The investment made in R Ltd on 1 July 2018 • The receipt of dividend from R Ltd in August 2018 2. Prepare the acquisition analysis at 1 July 2018 3. Prepare the Business combination valuation entries and the pre-acquisition entries as at: • 01 July 2018 • 30 June 2019 • 30 June 2020 • 30 June 2021 • 30 June 2022 4. Prepare the consolidation worksheet journal entries to eliminate the effects of intragroup transactions at: • 30 June 2019 • 30 June 2020 • 30 June 2021 • 30 June 2022 5. Prepare the consolidation worksheet for the preparation of the consolidated financial statements for the period ended 30 June 2022 The summarised financial statements of B Ltd and R Ltd as at 30 June 2022 are presented overleaf (refer Annexure 1). ACCT5511 Semester 1, 2021 4 Annexure 1 Summarised Financial Statements as at 30 June 2022 Statement of profit and loss and other comprehensive income B Ltd R Ltd Sales Revenue 1,650,000 882,024 Cost of Sales (1,248,060) (519,420) Gross Profit 401940 362604 Wages and Salaries (80,520) (64,020) Depreciation Expense (6,864) (8,580) Service Expense 0 (3,168) Interest Expense 0 (1,102) Other Expenses (5,280) (7,920) Total Expenses (92,664) (84,790) Gain on sale of non-current assets 24,750 0 Service Revenue 3,168 0 Interest Revenue 1,102 0 Dividend Revenue 57,090 0 Profit before tax 395,386 277,814 Income tax expense (118,616) (83,344) Profit after tax 276,770 194,470 ACCT5511 Semester 1, 2021 5 Statement of financial position B Ltd B Ltd R Ltd R Ltd Share Capital 715,000 410,000 Retained Earnings 1/7/21 144,173 102,645 Profit for the year 276,770 194,470 Dividend Paid (42,020) (20,295) Dividend Declared (53,350) (36,795) Retained Earnings 30/6/22 325,573 240,025 General Reserve 200,200 163,020 Loan Payable to B Ltd 0 12,870 Deferred Tax Liability 95,810 42,900 Dividend Payable 53,350 36,795 Other current liabilities 11,880 9,515 Total equity and liabilities 1,401,813 915,125 DTA 36,675 20,845 Shares in R Ltd 533,250 0 Cash 162,993 44,904 Inventories 290,240 99,356 Other Current Assets 38,480 429,000 Dividend Receivable 36,795 0 Loan receivable from R Ltd 12,870 0 Brand 86,350 121,000 Plant and Equipment 118,360 64,350 Acc. Depreciation Plant -41,800 -44,330 Land 127,600 176,000 Goodwill 0 4,000 Total assets 1,401,813 915,125 ACCT5511 Semester 1, 2021 6 SPARKPLUS • Please rate yourself and your group members on SPARKPLUS by 5pm Wednesday 19 May. • Access to SPARKPLUS will be made available on LMS from 8am Friday 14 May to 5pm Wednesday 19 May. • Non-completion of SPARKPLUS will result in a penalty. Students who do not complete the SPARKPLUS tasks or fully engage in the tasks will automatically receive a RPF factor of 0.5 which means they only receive 50% of their team’s mark for the assignment. Additional details on the use of SPARKPLUS are available on the unit LMS page. END OF ASSIGNMENT Annexure 1 Summarised Financial Statements as at 30 June 2022 Statement of profit and loss and other comprehensive income Statement of financial position SPARKPLUS END OF ASSIGNMENT