Book Solution Company Accounting Consolidation Intragroup Transactions

Solutions Manual to accompany

Company Accounting 10e prepared by

Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan

© John Wiley & Sons Australia, Ltd 2015

Chapter 20: Consolidation: intragroup transactions

Chapter 20 – Consolidated financial statements: intragroup transactions REVIEW QUESTIONS 1. Why is it necessary to make adjustments for intragroup transactions? The consolidated financial statements are the statements of the group, an economic entity consisting of the parent and its subsidiaries. The consolidated financial statements then can only contain profits, assets and liabilities that relate to parties external to the group. Adjustments must then be made for intragroup transactions as these are internal to the economic entity, and do not reflect the effects of transactions with external parties. This is also consistent with the entity concept of consolidation, which defines the group as the net assets of the parent and the net assets of the subsidiary. Transactions between these parties must then be adjusted in full as both parties are within the economic entity.

2. In making consolidation worksheet adjustments, sometimes tax-effect entries are made. Why? Accounting for tax is governed by AASB 112 Income Tax. Deferred tax accounts are raised when a temporary difference arises because the tax base of an asset or liability differs from the carrying amount. Some consolidation adjustments result in changing the carrying amounts of assets and liabilities. Where this occurs a temporary difference arises as there is no change to the tax base. In these situations, tax-effect entries, require the raising of deferred tax assets and liabilities, are necessary. Consider an example of an item of inventory carried at cost of $10 000 being sold by a parent to a subsidiary for $12 000, the inventory still being on hand at the end of the period. The tax rate is 30%. In the consolidation worksheet there is a credit adjustment to inventory of $2 000 as the cost to the economic entity differs from that to the subsidiary. In the subsidiary’s accounts, the inventory is carried at $12 000 and has a tax base of $12 000, giving rise to no temporary differences. From the group’s point of view, the asset has a carrying amount of $10 000, giving a temporary difference of $2 000. As the expected future deduction is greater than the assessable amount, a deferred tax asset exists for the group. This has no effect on the amount of tax payable in the current period.

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Solutions manual to accompany Company Accounting 10e

3. Why is it important to identify transactions as current or prior period transactions? Current period transactions affect different accounts than prior period transactions. For example, current period sales of inventory affect sales and cost of sales accounts, whereas prior period sales of inventory affect retained earnings. If the transactions are not correctly placed into a time context, then the adjustments used for those transactions may be inappropriate.

4. Where an intragroup transaction involves a depreciable asset, why is depreciation expense adjusted? The cost of the asset to the group is different from that recorded by the acquirer of the depreciable asset within an intragroup transaction. The acquirer records depreciation on the cost to the acquirer while in the consolidated financial statements, the group wants to show depreciation calculated on cost to the group. Hence an adjustment is necessary. If a profit is made on an intragroup sale of a depreciable asset, then the cost of the asset to the group is less than the cost recorded by the acquirer of the asset. Hence an adjustment is necessary to reduce the depreciation expense and accumulated depreciation in relation to the asset.

5. How are adjustments for post-acquisition dividends different from those for pre-acquisition dividends? Explain. There is no difference in the accounting for pre-acquisition or post-acquisition dividends. They are all accounted for as post-acquisition dividends. The adjustment is to dividend revenue recorded by the parent and dividends paid recorded by the subsidiary. The treatment of all dividends as post-acquisition dividends is hard to justify conceptually and this decision was made by the standard-setters on pragmatic grounds. Refer to AASB 127 and AASB 9 (para 5.7.6). 6. What is meant by “realisation of profits”? Profit is realised when an entity or an economic entity transacts with another external entity. For a group or economic entity this is consistent with the concept that the consolidated financial statements show only the results of transactions with external entities. The consolidated statement of profit or loss and other comprehensive income will thus show only realised profits. Profits recognised by group members on sale of assets within the group are unrealised profits. With transferred inventory involvement of an external party, or realisation, occurs when the inventory is on-sold to an external entity. With transferred depreciable assets, realisation occurs as the asset is used up, as the benefits are received by the group as a result of use of the asset. The proportion of profits realised in any one period is measured by reference to the depreciation charged on the transferred asset. Profits recorded from intragroup services are considered to be immediately realised.

7. When are profits realised in relation to inventory transfers within the group? Realisation occurs on involvement of an external entity, namely when the inventory is on-sold to an entity that is not a member of the group.

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Chapter 20: Consolidation: intragroup transactions

8. When are profits realised on transfers of depreciable assets within the group? As the asset is never on-sold by a member of the group, remaining instead within the group and being consumed by use within the group, the point of realisation cannot be directly determined by reference to involvement of an external entity. Realisation is then indirectly determined by usage of the asset within the group, that is, in proportion to the consumption of the benefits from the asset within the group. Realisation of the profit/loss on sale within the group is then measured in the same proportion to the depreciation of the asset. For example, if the transferred asset is being depreciation on a straight line basis over a 10-year period, that is, at 10% per annum, then the profit on sale is realised at 10% per annum.

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Solutions manual to accompany Company Accounting 10e

CASE STUDIES Case Study 1

Consolidation adjustments

Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows: Sales Cost of Sales Inventory Deferred Tax Asset Income Tax Expense

Dr Cr Cr Dr Cr

15 000 13 000 2 000 300 300

Required A. Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entries. B. Determine the consolidation worksheet entries in the following year, assuming the inventory is on-sold, and explain the adjustments on a line-by-line basis. A. The correct entry is: Sales Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

15 000 13 500 1 500 450 450

Sales:

Recorded sales = $15 000 + $8 000 = $23 000 Group sales = $8 000 [external entity sales only] Adjustment = $15 000 Cost of sales: Recorded = $12 000 + ½ x $15 000 = $19 500 Group = ½ x $12 000 = $6 000 Adjustment = $13 500 Inventory: Recorded = ½ x $15 000 = $7 500 Group = ½ x $12 000 = $6 000 Adjustment = $1 500 DTA:

As inventory in the first adjustment is reduced by $1 500, this changes the carrying amount of the asset. A change in the carrying amount creates a temporary difference between it and the tax base giving rise to a deferred tax benefit which will be reversed on sale of the asset to an external entity.

B.

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Chapter 20: Consolidation: intragroup transactions

Assuming the inventory is on-sold, the entry in the following year is: Retained earnings (op bal) Income tax expense Cost of sales

Dr Dr Cr

1 050 450 1 500

Retained earnings (op bal): In the prior period, Jessica Ltd recorded an after tax profit of $2 100 on sale of inventory to Amelie Ltd. Half of this inventory was on-sold to an external entity, leaving half the profit, $1 050, unrealised. Hence prior period profit is reduced by $1 050. Income tax expense: In the prior period, the group raised a deferred tax asset of $450. When the inventory is on-sold this year the account is reversed effectively crediting the deferred tax asset account and debiting the income tax expense. Cost of sales: Recorded = ½ x $15 000 = $7 500 Group = ½ x $12 000 = $6 000 Adjustment = $1 500

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Solutions manual to accompany Company Accounting 10e

Case Study 2

Depreciation expense

At the beginning of the current period, Jessica Ltd sold a used depreciable asset to its wholly owned subsidiary, Amelie Ltd, for $80 000. Jessica Ltd had originally paid $200 000 for this asset, and at time of sale to Amelie Ltd had charged depreciation of $150 000. This asset is used differently in Amelie Ltd from how it was used in Jessica Ltd; thus, whereas Jessica Ltd used a 10% p.a. straight-line depreciation method, Amelie Ltd uses a 20% straight-line depreciation method. In calculating the depreciation expense for the consolidated group (as opposed to that recorded by Amelie Ltd), the group accountant, RuiFen Xue, is unsure of which amount the depreciation rate should be applied to ($200 000, $50 000 or $80 000) and which depreciation rate to use (10% or 20%). Required Provide a detailed response, explaining which depreciation rate should be used and to what amount it should be applied. For the group, depreciation is based on the cost of the asset to the group and the depreciation rate is that applied by the entity using the asset. The asset has been transferred within the group. Note that consolidation adjustments are not based on reversing intragroup transactions. The purpose of the adjustments made is to remove the effects of the transactions so that the group position in relation to external entities is reported. As the usage of the asset in the group has changed as a result of transfer within the group, then the depreciation rate used by the group must reflect the actual consumption of benefits within the group. In this example, the cost of the asset to the group is the carrying amount at time of transfer, namely $50 000. The asset is being used by Amelie Ltd which applies a 20% depreciation rate. This is then the rate used by the group.

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Chapter 20: Consolidation: intragroup transactions

Case Study 3

Income on redemption

The parent entity, Leah Ltd, has purchased on the open market, for an amount less than nominal value, some debentures previously issued by its wholly owned subsidiary, Natalie Ltd. The group accountant for Leah Ltd, James Cong, has stated that the adjustment in the consolidation worksheet includes the raising of an account Income on Redemption. He is unsure whether this is correct. Required What does this account represent? Would an adjustment to income, or subsequently to retained earnings, have to be made for the rest of the life of the group? If not, what event would cause the discontinuation of this adjustment entry?

Assume debentures have a nominal value of $100 and are acquired on the open market for $90. The consolidation adjustment entry is: Debentures Income on redemption Debentures in Subsidiary

Dr Cr Cr

100 10 90

The economic entity has made a gain on buying its own debentures. Effectively, the group has derecognised a liability at a gain. While the debentures remain unredeemed, a similar entry is made every year, with a credit to retained earnings instead of income on redemption. When the debentures are eventually redeemed [assume a subsequent period], the subsidiary will pay the nominal amount to the debenture holders. Hence the parent will receive $100 on redemption, passing the entry: Cash Debentures in Subsidiary Income on redemption

Dr Cr Cr

100 90 10

From the economic entity’s point of view the gain/income was made when the group derecognised the liability on the parent acquiring the subsidiary’s debentures. Hence, in the year of redemption, the group will not recognise a gain. The consolidation adjustment is: Income on redemption Retained earnings (op bal)

Dr Cr

10 10

No consolidation adjustments are required in future periods.

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Solutions manual to accompany Company Accounting 10e

Case Study 4

Bonus dividend

The parent entity, Olivia Ltd, has received a bonus dividend paid from its subsidiary’s postacquisition profits. The accountant for Olivia Ltd, Lu Rong, is concerned that if on consolidation the total effects of this transaction have to be eliminated, then this will show a misleading financial position for the group. Her concern is that the subsidiary, by making a bonus dividend, has reduced the ability of the group to pay cash dividends. The consolidation adjustments will result in this fact not being made known to the users of the consolidated financial statements. Required Discuss whether Lu Rong has cause for concern, and what options are available for her in accounting for the bonus dividend.

When a parent receives a bonus dividend from a subsidiary, no journal entries are passed in the parent’s records as the parent’s wealth in the subsidiary has not changed – there has simply been a movement within equity with no change in total equity. However, one result of the bonus dividend is that equity previously available for dividend has now been classed as share capital, and no longer available for dividend. If the following consolidation worksheet adjustment were made: Share capital Bonus dividend paid

Dr Cr

x x

The effect of the reduction in equity available for dividend would not be obvious to shareholders. Hence, the following consolidation worksheet adjustment is preferred: Share capital Capitalised profits reserve

Dr Cr

x x

The consolidated accounts then show that a bonus dividend has been paid and that there has been a reduction in profits available for dividend distribution. This fact would be disclosed by way of note.

© John Wiley and Sons Australia, Ltd 2015

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Chapter 20: Consolidation: intragroup transactions

PRACTICE QUESTIONS Question 20.1

Intragroup transactions

Koala Ltd owns all of the shares of Kangaroo Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2016. Assume an income tax rate of 30%. (a) In April 2016, Koala Ltd sells inventory to Kangaroo Ltd for $12 000. This inventory had previously cost Koala Ltd $8000, and it remains unsold by Kangaroo Ltd at the end of the period. (b) All the inventory in (a) is sold to Cockatoo Ltd, an external party, for $16 500 on 19 June 2016. (c) Half the inventory in (a) is sold to Galah Ltd, an external party, for $7200 on 20 June 2016. The remainder is still unsold at the end of the period. (d) Koala Ltd, in January 2016, sold inventory for $8000. This inventory had been sold to it by Kangaroo Ltd in the previous year. It had originally cost Kangaroo Ltd $4800, and was sold to Koala Ltd for $9600.

(a)

(b)

(c)

(d)

Sales revenue Cost of sales Inventory

Dr Cr Cr

12 000

Deferred tax asset Income tax expense (30% x $4 000)

Dr Cr

1 200

Sales revenue Cost of sales

Dr Cr

12 000

Sales revenue Cost of sales Inventory

Dr Cr Cr

12 000

Deferred tax asset Income tax expense (30% x $2 000)

Dr Cr

600

Retained earnings (1/7/15) Income tax expense Cost of sales

Dr Dr Cr

3 360 1 440

© John Wiley and Sons Australia, Ltd 2015

8 000 4 000

1 200

12 000

10 000 2 000

600

4 800

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Solutions manual to accompany Company Accounting 10e

Question 20.2

Intragroup transactions

Numbat Ltd owns all of the shares of Goanna Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2016. Assume an income tax rate of 30%. (a) On 1 July 2015, Numbat Ltd sold an item of plant costing $15 000 to Goanna Ltd for $18 000. Numbat Ltd had not charged any depreciation on the plant before the sale. Both entities depreciate assets at 10% p.a. on cost. (b) On 1 January 2014, Goanna Ltd sold a new tractor to Numbat Ltd for $30 000. This had cost Goanna Ltd $24 000 on that day. Both entities charged depreciation at the rate of 10% p.a. on cost. (c) On 1 July 2015, Numbat Ltd sold an item of machinery to Goanna Ltd for $9000. This item had cost Numbat Ltd $6000. Numbat Ltd regarded this item as inventory whereas Goanna Ltd intended to use it as a non-current asset. Goanna Ltd charges depreciation at the rate of 10% p.a. on cost. (d) In February 2015, Numbat Ltd sold inventory to Goanna Ltd for $9000, at a mark-up of 20% on cost. One-quarter of this inventory was unsold by Goanna Ltd at 30 June 2015. (e) Goanna Ltd sold land to Numbat Ltd in December 2015. The land had originally cost Goanna Ltd $20 000, but was sold to Numbat Ltd for only $16 000. To help Numbat Ltd pay for the land, Goanna Ltd gave Numbat Ltd an interest-free loan of $9000, and the balance was paid in cash. Numbat Ltd has as yet made no repayments on the loan. (f) On 1 July 2014, Goanna Ltd rented a spare warehouse to be used jointly by Numbat Ltd and Galah Ltd with each company paying half the agreed rent to Goanna Ltd. The rent paid to Goanna Ltd in the 2014–15 year was $300 while the rent paid in the 2015–16 year was $350.

(a)

Proceeds on sale of plant Carrying amount of asset sold Asset

Dr Cr Cr

18 000

Gain on sale of plant Asset

Dr Cr

3 000

Deferred tax asset Income tax expense

Dr Cr

900

Accumulated depreciation Depreciation expense (10% x $3000 p.a.)

Dr Cr

300

Income tax expense Deferred tax asset

Dr Cr

90

Retained earnings (1/7/15) Deferred tax asset Tractors

Dr Dr Cr

4 200 1 800

Accumulated depreciation Depreciation expense Retained earnings (1/7/15)

Dr Cr Cr

1 500

15 000 3 000

OR

(b)

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3000

900

300

90

6 000

600 900

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Chapter 20: Consolidation: intragroup transactions

(10% x $6000 p.a. for 2.5 years)

(c)

(d)

(e)

Income tax expense Retained earnings (1/7/15) Deferred tax asset

Dr Dr Cr

180 270

Sales revenue Cost of sales Machinery

Dr Cr Cr

9 000

Deferred tax asset Income tax expense

Dr Cr

900

Accumulated depreciation Depreciation expense (10% x $3000 p.a.)

Dr Cr

300

Income tax expense Deferred tax asset

Dr Cr

90

Retained earnings (1/7/12) Income tax expense Cost of sales

Dr Dr Cr

Proceeds on sale of land Land Carrying amount of land sold

Dr Dr Cr

16 000 4 000

Land

Dr Cr

4 000

Income tax expense Deferred tax liability (30% x $4 000)

Dr Cr

1 200

Loan from Goanna Ltd Loan to Numbat Ltd

Dr Cr

9 000

Rent revenue Rent expense

Dr Cr

175

450

6 000 3 000

900

300

90 262.5 112.5 375

20 000

OR Loss on sale of land

(f)

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4 000

1 200

9 000

175

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Solutions manual to accompany Company Accounting 10e

Question 20.3

Intragroup transactions

Dingo Ltd owns all of the shares of Bilby Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2016. Assume an income tax rate of 30%. (a) On 1 January 2015, Dingo Ltd sold inventory costing $6000 to Bilby Ltd at a transfer price of $8000. On 1 September 2015, Bilby Ltd sold half these items of inventory back to Dingo Ltd, receiving $3000 from Dingo Ltd. Of the remaining inventory kept by Bilby Ltd, half was sold in January 2016 to Goanna Ltd at a loss of $200. (b) On 1 January 2016, Bilby Ltd sold an item of plant to Dingo Ltd for $2000. Immediately before the sale, Bilby Ltd had the item of plant on its accounts for $3000. Bilby Ltd depreciated items at 5% p.a. on the diminishing balance and Dingo Ltd used the straightline method over 10 years. (c) On 1 July 2015, Dingo Ltd sold a motor vehicle to Bilby Ltd for $12 000. This had a carrying amount to Dingo Ltd of $9600. Both entities depreciate motor vehicles at a rate of 10% p.a. on cost. (d) During the 2014–15 period, Dingo Ltd sold inventory to Bilby Ltd for $9000, recording a before-tax profit of $1800. Half this inventory was unsold by Bilby Ltd at 30 June 2015. (e) Bilby Ltd sells second-hand machinery. Dingo Ltd sold one of its depreciable assets (original cost $80 000, accumulated depreciation $64 000) to Bilby Ltd for $10 000 on 1 January 2016. Bilby Ltd had not resold the item by 30 June 2016. (f) On 1 May 2016, Bilby Ltd sold inventory costing $300 to Dingo Ltd for $360 on credit. On 30 June 2016, only half of these goods had been sold by Dingo Ltd, but Dingo Ltd had paid $280 back to Bilby Ltd.

(a)

(b)

Retained earnings (1/7/15) Income tax expense Sales revenue Cost of sales (4000 + 500) Inventory (1/4 x 2000)

Dr Dr Dr Cr Cr

1 400 600 3 000

Deferred tax asset Income tax expense

Dr Cr

150

Plant Proceeds on sale of plant Carrying amount of plant sold

Dr Dr Cr

1 000 2 000

Plant

Dr Cr

1 000

Loss on sale of plant Income tax expense Deferred tax liability

Dr Cr

300

Depreciation expense Accumulated depreciation (10% x $1000 x ½ year)

Dr Cr

50

Deferred tax liability

Dr

15

4 500 500

150

3 000

OR

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1 000

300

50

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Chapter 20: Consolidation: intragroup transactions

Income tax expense

(c)

Cr

15

Proceeds on sale of motor vehicle Carrying amount of motor vehicle sold Motor vehicles

Dr Cr Cr

12 000

Gain on sale of vehicles Motor vehicles

Dr Cr

2 400

Deferred tax asset Income tax expense

Dr Cr

720

Accumulated depreciation Depreciation expense (10% x 2 400 p.a.)

Dr Cr

240

Income tax expense Deferred tax asset

Dr Cr

72

Retained earnings (1/7/15) Income tax expense Cost of sales

Dr Dr Cr

630 270

Inventory Proceeds on sale of machinery Carrying amount of machinery sold

Dr Dr Cr

6 000 10 000

Inventory Loss on sale of machinery

Dr Cr

6 000

Income tax expense Deferred tax liability

Dr Cr

1 800

Sales revenue Cost of sales Inventory

Dr Cr Cr

360

Deferred tax asset Income tax expense

Dr Cr

9

Accounts payable Accounts receivable

Dr Cr

80

9 600 2 400

OR

(d)

(e)

2 400

720

240

72

900

16 000

OR

(f)

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6 000

1 800

330 30

9

80

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Solutions manual to accompany Company Accounting 10e

Question 20.4

Intragroup transactions

Emu Ltd owns all of the shares of Cassowary Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2016. Assume an income tax rate of 30%. (a) Emu Ltd sold inventory to Cassowary Ltd on 1 September 2015 for $27 000. This inventory had cost Emu Ltd $18 000. One-third of the inventory was sold by Cassowary Ltd to Goanna Ltd for $13 000 and one-third to Galah Ltd for $13 200. (b) Emu Ltd manufactures certain items which it then markets through Cassowary Ltd. During the current period, Emu Ltd sold items for $18 000 to Cassowary Ltd at cost plus 20%. Cassowary Ltd has sold 75% of these transferred items at 30 June 2016. (c) During June 2016, Cassowary Ltd declared a $2000 dividend. The dividend was paid in August 2017. (d) In January 2016, Cassowary Ltd paid a $4500 interim dividend. (e) Emu Ltd sold a warehouse to Cassowary Ltd for $150 000. This had originally cost Emu Ltd $123 000. The transaction took place on 1 January 2015. Cassowary Ltd charges depreciation at 5% p.a. on a straight-line basis.

(a)

(b)

(c)

(d)

(e)

Sales revenue Cost of sales Inventory

Dr Cr Cr

27 000

Deferred tax asset Income tax expense

Dr Cr

900

Sales revenue Cost of sales Inventory

Dr Cr Cr

18 000

Deferred tax asset Income tax expense

Dr Cr

225

Dividend payable Dividend declared

Dr Cr

2 000

Dividend revenue Dividend receivable

Dr Cr

2 000

Dividend revenue Dividend paid

Dr Cr

4 500

Retained earnings (1/7/15) Deferred tax asset Warehouse

Dr Dr Cr

18 900 8 100

Accumulated depreciation Depreciation expense

Dr Cr

2025

24 000 3 000

900

17 250 750

225

2 000

2 000

4 500

© John Wiley and Sons Australia, Ltd 2015

27 000

1350

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Chapter 20: Consolidation: intragroup transactions

Retained earnings (1/7/12) (5% x $27 000 p.a. for 1.5 yrs)

Cr

Income tax expense Retained earnings (1/7/15) Deferred tax asset

Dr Dr Cr

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675

405.0 202.5 607.5

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Solutions manual to accompany Company Accounting 10e

Question 20.5

Intragroup transactions

Platypus Ltd owns all of the share capital of Wallaby Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2016. Assume an income tax rate of 30%. (a) During the year ending 30 June 2016, Wallaby Ltd sold $55 000 worth of inventory to Platypus Ltd. Wallaby Ltd recorded an $8000 profit before tax on these transactions. At 30 June 2016, Platypus Ltd has one-quarter of these goods still on hand. (b) Platypus Ltd manufactures items of machinery which are used as property, plant and equipment by other companies, including Wallaby Ltd. On 1 January 2016, Platypus Ltd sold such an item to Wallaby Ltd for $52 000, its cost to Platypus Ltd being only $45 000 to manufacture. Wallaby Ltd charges depreciation on these machines at 20% p.a. on the diminishing balance. (c) A non-current asset with a carrying amount of $1200 was sold by Wallaby Ltd to Platypus Ltd for $900 on 1 January 2016. Platypus Ltd intended to use this item as inventory, being a seller of second-hand goods. Both entities charged depreciation at the rate of 10% p.a. on the diminishing balance on non-current assets. The item was still on hand at 30 June 2016. (d) Platypus Ltd issued 1000 10% debentures of $100 at nominal value on 1 October 2015. Wallaby Ltd acquired 300 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities’ accounts. (e) On 25 June 2016, Platypus Ltd declared a dividend of $8000. On the same day, Wallaby Ltd declared a $4000 dividend.

(a)

(b)

(c)

Sales revenue Cost of sales Inventory

Dr Cr Cr

55 000

Deferred tax asset Income tax expense

Dr Cr

600

Sales revenue Cost of sales Machinery

Dr Cr Cr

52 000

Deferred tax asset Income tax expense

Dr Cr

2 100

Accumulated depreciation Depreciation expense (20% x ½ x $7000)

Dr Cr

700

Income tax expense Deferred tax asset

Dr Cr

210

Inventory Dr Proceeds on sale of non-current asset Dr Carrying amount of non-current asset sold Cr

300 900

Inventory Loss on sale of non-current asset

Dr Cr

300

Income tax expense

Dr

90

53 000 2 000

600

45 000 7 000

2 100

700

210

1 200

OR

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300

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Chapter 20: Consolidation: intragroup transactions

(d)

(e)

Deferred tax liability

Cr

90

Debentures Debentures in Platypus Ltd

Dr Cr

30 000

Interest revenue Interest expense (10% x $30 000 x ¾)

Dr Cr

2 250

Interest payable Interest receivable (10% x $30 000 x ¼)

Dr Cr

750

Dividend payable Dividend declared

Dr Cr

4 000

Dividend revenue Dividend receivable

Dr Cr

4 000

© John Wiley and Sons Australia, Ltd 2015

30 000

2 250

750

4 000

4 000

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Question 20.6

Consolidated worksheet entries, rationale for adjustments

Tasmanian Ltd owns all the issued shares of Tiger Ltd, having acquired its ownership interest on 1 August 2010. The accountant, Ms Echidna, is preparing the consolidated financial statements at 30 June 2016, and, as a part of preparing the consolidation worksheet for Tasmanian Ltd, is analysing the intragroup transactions between the parent and its subsidiary. The intragroup transactions under analysis are as follows (assume a tax rate of 30%): (a) On 1 February 2016, Tiger Ltd sold inventory to Tasmanian Ltd for $15 000, recording a before-tax profit of $3000. By 30 June 2016, Tasmanian Ltd has sold one-third of these to other entities for $6000. (b) On 1 January 2015, Tasmanian Ltd sold an item of machinery to Tiger Ltd that Tiger Ltd classified as inventory. At the date of sale, Tasmanian Ltd had recorded the asset at a carrying amount of $150 000 (net of $20 000 depreciation, calculated using a 10% p.a. straight-line method). Tiger Ltd recorded the asset at $160 000. Tiger Ltd sold it to Oz Animals Ltd on 15 August 2016 for $100 000. (c) Tasmanian Ltd supplies motor vehicles to its executives, and the managing director is supplied with a new Ferrari every 2 years. On 1 January 2014, as the managing director of Tasmanian Ltd wanted a new car, the company sold the Ferrari to Tiger Ltd to be used by the newly appointed accounting graduate. At the date of sale, the car had a carrying amount of $240 000, and was sold to Tiger Ltd for $260 000. The vehicle is depreciated at 20% p.a. straight-line by Tiger Ltd, and is still being used by the accounting graduate. (d) Tasmanian Ltd installed new computing systems at a cost of $825 000 on 1 September 2015. These are depreciated evenly over a 5-year period. To assist in the installation and training, Tiger Ltd sent one of its young computer experts to Tasmanian Ltd for a 6-month period, charging the company $100 000 for the services provided. Required A. Prepare the consolidation worksheet entries at 30 June 2016 to adjust for the effects of the above inter-entity transactions. B. Ms Echidna is concerned that the auditors may require her to explain the adjustments she has made. Provide suitable explanations for transactions (a) and (b) above.

A. (a) Sales

15 000

Cost of sales Inventory

Dr Cr Cr

Deferred tax asset Income tax expense

Dr Cr

600

Retained earnings (1/7/15) Income tax expense Cost of sales

Dr Dr Cr

7 000 3 000

Retained earnings (1/7/15) Deferred tax asset Vehicles

Dr Dr Cr

14 000 6 000

Accumulated depreciation

Dr

10 000

13 000 2 000

600

(b)

(c)

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10 000

20 000

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Chapter 20: Consolidation: intragroup transactions

(d)

Retained earnings (1/7/15) Depreciation expense (20% x $20 000 for 1.5 yrs)

Cr Cr

6 000 4 000

Income tax expense Retained earnings (1/7/15) Deferred tax asset

Dr Dr Cr

1 200 1 800

Other revenue Other expenses

Dr Cr

100 000

3 000

100 000

B. (a) Sales: Tiger recorded sales of $15 000 while Tasmanian Ltd recorded sales of $6000. Total recorded sales are $21 000. Sales to the group – those to external entities – are $6 000. Therefore adjustment of $15 000 is necessary. Cost of sales: Tiger Ltd recorded cost of sales of $12 000 while Tasmanian Ltd recorded cost of sales of $5 000 (being 1/3 x $15 000). Total recorded cost of sales is $17 000. Cost of sales to the group is $4 000 (being 1/3 x $12 000). Cost of sales therefore needs to be reduced by $13 000. Inventory: Recorded inventory held by Tasmanian Ltd is $10 000 (being 2/3 x $15,000). Cost of inventory to the group is $8000 (being 2/3 x $12 000). Inventory therefore has to be reduced by $2000 to show cost to the group in the CFS. Deferred tax asset/income tax expense: The reduction of $2000 to the carrying amount of the inventory creates a temporary difference between carrying amount of the asset and its tax base. A deferred tax asset is raised to reflect the future tax benefits when the asset is sold. (b) Retained earnings (1/7/15) Income tax expense Cost of sales

Dr Dr Cr

7 000 3 000 10 000

Retained earnings: In the prior period Tasmanian Ltd recorded an after-tax profit of $7000 on sale of the machine to Tiger Ltd. No external entities were involved in this sale. The group therefore does not want to recognise any such sale. Hence prior period’s profits - reflected in Retained Earnings – are reduced by $7000. Cost of sales: Tiger Ltd regards the asset as inventory. It recorded a cost of sales of $160 000 on sale of the asset to Oz Animals Ltd. The cost of the asset to the group is $150 000. Hence cost of sales is reduced by $10 000. Income tax expense: In the consolidated financial statements at 30 June 2015, a deferred tax asset of $3000 was raised as the carrying amount to the group of the inventory on hand ($150 000) was different from its tax base ($160 000). On sale of the asset to Oz Animals Ltd in the current period that deferred tax asset is reversed giving rise to a debit to the income tax expense of $3000 (being 30% x $10 000).

© John Wiley and Sons Australia, Ltd 2015

20.19

Solutions manual to accompany Company Accounting 10e

Question 20.7

Consolidation worksheet

On 1 July 2015, Fluffy Ltd acquired all the issued shares of Glider Ltd. Fluffy Ltd paid $30 000 in cash and 20 000 shares in Fluffy Ltd valued at $3 per share. At this date, the equity of Glider Ltd consisted of $66 000 share capital and $6000 retained earnings. At 1 July 2015, all the identifiable assets and liabilities of Glider Ltd were recorded at amounts equal to their fair values except for:

Plant (cost $150 000) Patents Inventory

Carrying amount $120 000 90 000 18 000

Fair value $123 000 105 000 22 500

The plant was considered to have a further 5-year life. The patents were sold for $120 000 to an external entity on 18 August 2015. The inventory was all sold by 30 June 2016. Additional information (a) Fluffy Ltd sells certain raw materials to Glider Ltd to be used in its manufacturing process. At 1 July 2016, Glider Ltd held inventory sold to it by Fluffy Ltd in the previous year at a profit of $600. During the 2016–17 year, Fluffy Ltd sold inventory to Glider Ltd for $21 000. None of this was on hand at 30 June 2017. (b) Glider Ltd also sells items of inventory to Fluffy Ltd. During the 2016–17 year, Glider Ltd sold goods to Fluffy Ltd for $4500. At 30 June 2017, inventory which had been sold to Fluffy Ltd at a profit of $300 was still on hand in Fluffy Ltd’s inventory. (c) On 1 July 2016, Glider Ltd sold an item of plant to Fluffy Ltd for $15 000. This plant had a carrying amount in the records of Glider Ltd of $14 000 at time of sale. This type of plant is depreciated at 10% p.a. on cost. (d) On 1 January 2015, Fluffy Ltd sold an item of inventory to Glider Ltd for $18 000. The inventory had cost Fluffy Ltd $16 000. This item was classified by Glider Ltd as plant. Plant of this type is depreciated by Glider Ltd at 20% p.a. (e) On 1 March 2017, Glider Ltd sold an item of plant to Fluffy Ltd. Whereas Glider Ltd classified this as plant, Fluffy Ltd classified it as inventory. The sales price was $9000 which included a profit to Glider Ltd of $1500. Fluffy Ltd sold this to another entity on 31 March for $9900. (f) The tax rate is 30%. At 30 June 2017, the following financial information was provided by the two companies:

© John Wiley and Sons Australia, Ltd 2015

20.20

Chapter 20: Consolidation: intragroup transactions

Fluffy Ltd Dr Sales revenue Cost of sales Trading expenses Office expenses Depreciation expenses Proceeds on sale of plant Carrying amount of plant sold Income tax expense Share capital Retained earnings (1/7/16) Current liabilities Deferred tax liability Plant Accumulated depreciation – plant Intangibles Deferred tax assets Shares in Glider Ltd Inventory Receivables

Glider Ltd Cr 64 500

30 900 4 800 7 950 1 800

Dr 46 350 9 000 4 050 3 900

9 000 7 500 11 100

15 000 14 000 7 300

96 000 48 000 21 100 11 000 57 000

66 000 31 500 10 500 15 000 107 250

18 300 12 000 8 100 90 000 28 500 8 250 267 900

Cr 78 000

267 900

33 450 11 100 9 450 0 24 600 12 450 249 450

249 450

Required Prepare a consolidation worksheet for the preparation of the consolidated financial statements of Fluffy Ltd at 30 June 2017.

At 1 July 2015: Net fair value of identifiable assets and liabilities of Glider Ltd

=

Consideration transferred Goodwill

= = =

$66 000 + $6 000 (equity) + $4 500 (1 – 30%) (inventory) + $15 000 (1 – 30%) (patents) + $3 000 (1 – 30%) (plant) $87 750 $90 000 $2 250

1. Business combination valuation entries Accumulated depreciation Plant Deferred tax liability Business combination valuation reserve

Dr Cr Cr Cr

30 000

Depreciation expense Retained earnings (1/7/16) Accumulated depreciation (1/5 x $3000 p.a. for 2 years)

Dr Dr Cr

600 600

Deferred tax liability Income tax expense Retained earnings (1/7/16)

Dr Cr Cr

360

© John Wiley and Sons Australia, Ltd 2015

27 000 900 2 100

1 200

180 180

20.21

Solutions manual to accompany Company Accounting 10e

Goodwill Business combination valuation reserve

Dr Cr

2 250

Dr Dr Dr Cr

6 000 66 000 18 000

Dr Dr Dr Cr

19 650 66 000 4 350

2 250

2. Pre-acquisition entries At 1/7/15: Retained earnings (1/7/15) Share capital Business combination valuation reserve Shares in Glider Ltd

90 000

At 30/6/17: Retained earnings (1/7/16)* Share capital Business combination valuation reserve Shares in Glider Ltd

90 000

(* = $6000 + $3 150 + $10 500)

3. Sales and profit in closing inventory Sales revenue Cost of sales

Dr Cr

21 000

Sales revenue Cost of sales Inventory

Dr Cr Cr

4 500

Deferred tax asset Income tax expense

Dr Cr

90

Dr Dr Cr

420 180

Proceeds on sale of plant Carrying amount of plant sold Plant

Dr Cr Cr

15 000

Deferred tax asset Income tax expense

Dr Cr

300

Accumulated depreciation - plant Depreciation expense (10% x $1000)

Dr Cr

100

Income tax expense

Dr

30

21 000

4 200 300

90

4. Profit in opening inventory of Glider Ltd Retained earnings (1/7/16) Income tax expense Cost of sales

600

5. Sale of Plant - current period

© John Wiley and Sons Australia, Ltd 2015

14 000 1 000

300

100

20.22

Chapter 20: Consolidation: intragroup transactions

Deferred tax asset

Cr

30

6. Sale of Inventory classified as Plant : prior period Retained earnings (1/7/16) Deferred tax asset Plant

Dr Dr Cr

1 400 600

Accumulated depreciation Depreciation expense Retained earnings (1/7/16) (20% x $2000 p.a. for 1.5 years)

Dr Cr Cr

600

Income tax expense Retained earnings (1/7/16) Deferred tax asset

Dr Dr Cr

120 60

2 000 400 200

180

7. Sale of Plant classified as Inventory: current period Proceeds on sale of plant Carrying amount of plant sold Cost of sales

Dr Cr Cr

© John Wiley and Sons Australia, Ltd 2015

9 000 7 500 1 500

20.23

Solutions manual to accompany Company Accounting 10e

QUESTION 20.7 (cont’d) Fluffy Ltd 64 500

Glider Ltd 78 000

Cost of sales

30 900

46 350

Gross profit Trading expenses Office expenses Depreciation

33 600 4 800 7 950 1 800

31 650 9 000 4 050 3 900

14 550 19 050 9 000

16 950 14 700 15 000

7 500

14 000

1 500

1 000

20 550 11 100

15 700 7 300

Profit Retained earnings (1/7/16)

9 450 48 000

8 400 31 500

Retained earnings (30/6/17) Share capital BCVR

57 450

39 900

96 000 --

66 000 --

Total equity

153 450

105 900

Current liabilities Deferred tax liability Total liabilities Total equity and liabilities

21 100 11 000 32 100 185 550

10 500 15 000 25 500 131 400

Sales revenue

Profit from trading Proceeds from sale of plant Carrying amount of plant sold Gain/loss on sale of machinery Profit before tax Tax expense

3 3

1

5 7

Adjustments Dr Cr 21 000 4 500 21 000 4 200 600 1 500

600

100 400

Group 117 000 3 3 4 7

5 6

49 950

67 050 13 800 12 000 5 800 31 600 35 450 0

15 000 9 000 14 000 7 500

5 7

0 0

4 5 6

1 2 4 6 6

180 30 120

600 19 650 420 1 400 60

180 90 300

180 200

1 3 5

1 6

35 450 18 160

17 290 57 750

75 040 2 2

66 000 4 350

2 100 2 250

1 1

96 000 0 171 040

1

360

© John Wiley and Sons Australia, Ltd 2015

900

1

31 600 26 540 58 140 229 180

20.24

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.7 (cont’d)

Fluffy Ltd 57 000

Glider Ltd 107 250

(18 300)

(33 450)

Intangibles Shares in Glider Ltd Deferred tax asset

12 000 90 000 8 100

11 100 9 450

Inventory Receivables Goodwill Total assets

28 500 8 250 0 185 550

24 600 12 450 0 131 400

Plant

Accumulated depreciation

1 5 6

3 5 6

1

Adjustments Dr Cr 27 000 1 000 2 000 30 000 1 200 100 600

1 5 6 1

90 000 30 180

2 5 6

300

3

90 300 600

2 250 177 210

177 210

© John Wiley and Sons Australia, Ltd 2015

Group 134 250

(22 250)

23 100 0 18 330

52 800 20 700 2 250 229 180

20.25

Solutions manual to accompany Company Accounting 10e

Question 20.8

Intragroup transactions rationale for transactions

Mallee Ltd owns 100% of the shares of Fowl Ltd. The following events occurred during the 2016–17 period: (a) Fowl Ltd sold inventory for $15 000 in August 2016. This inventory had been sold to it by Mallee Ltd in June 2016 for $13 500. The inventory had originally cost Mallee Ltd $9000. (b) On 1 January 2016, Fowl Ltd sold machinery to Mallee Ltd for $150 000. The carrying amount of the machinery at time of sale was $120 000. The machinery is depreciated at 10% p.a. on cost. Required A. Prepare the consolidation worksheet entries for the above two transactions for the preparation of consolidated financial statements at 30 June 2017. B. Provide an explanation for the worksheet entries made in A above.

A. (a)

(b)

Retained earnings (1/7/16) Income tax expense Cost of sales

Dr Dr Cr

3 150 1 350

Retained earnings (1/7/16) Deferred tax asset Machinery

Dr Dr Cr

21 000 9 000

Accumulated depreciation Depreciation expense Retained earnings (1/7/16)

Dr Cr Cr

4 500

Dr Dr Cr

900 450

4 500

30 000

3 000 1 500

(10% x $30 000 p.a. for 1.5 years) Income tax expense Retained earnings (1/7/16) Deferred tax asset

1 350

B. (a) Retained earnings: In the previous period, Mallee Ltd recorded a $4500 before-tax profit, or a $3150 after-tax profit on sale of inventory within the group. Because the sale did not involve external entities, the profit must be eliminated on consolidation. Cost of sales: In the current period, the transferred inventory is sold to external entities. Fowl Ltd records cost of sales of $13 500 which is $4500 greater than the cost of sales to the group, namely $9000. Hence, cost of sales is reduced by $4500. Note that this increases group profit by $4500, reflecting the realisation of the profit to the group in the current period (due to the sale to an external party), when it was recognised by the legal entity in the previous period. Income tax expense: At the end of the previous period, in the consolidated statement of financial position a deferred tax asset of $1350 (30% x $4500) was raised because of the difference in cost of the inventory recorded by the legal entity and that recognised by the group. This deferred tax asset is reversed when the asset is sold. The adjustment to income tax expense reflects the reversal of the deferred tax asset raised at the end of the previous period. (b)

© John Wiley and Sons Australia, Ltd 2015

20.26

Chapter 20: Consolidation: intragroup transactions

Retained earnings: In the prior period, Fowl Ltd sold machinery to Mallee Ltd at an after-tax profit of $21 000, being $30 000(1 – 30%). As there were no external parties to the group involved in this transaction, the profit is unrealised to the group. Hence, retained earnings (1/7/16) must be reduced by $21 000. Machinery: The machinery is still held by Mallee Ltd at 30 June 2017, and recorded at $150 000 cost. The cost to the group is $120 000. As the asset must be reported in the consolidated financial statements at cost to the group, machinery must be reduced by $30 000. Deferred tax asset: A change in the carrying amount of the asset causes a temporary difference between the carrying amount and the tax base of the asset. As the carrying amount is reduced by $30 000, a deferred tax asset of $9 000 (30% x $30 000) is raised. Depreciation expense and accumulated depreciation: The asset is depreciated by the Mallee Ltd at $15 000 p.a. (being 10% x $150 000) while the depreciation to the group is $12 000 (being 10% x $120 000). Hence depreciation p.a. must be reduced by $3 000. As the transfer occurred on 1 January 2016, this means a reduction to prior period depreciation, via retained earnings of half a year’s depreciation, $1 500, and a reduction in current depreciation expense of $3000. This means a reduction to accumulated depreciation of $4 500. Deferred tax asset and income tax expense: As changes to accumulated depreciation change the carrying amount of the asset, there is a tax-effect to be considered. The deferred tax asset raised in relation to the sale of the asset within the group is reversed as the asset is depreciated. Hence, there is an overall reversal of $1350, being 30% x $4500, being the change to accumulated depreciation with resultant effects on tax expense both in the current period of $900 (30% x $3 000) and the prior period of $450 (30% x $1 500).

© John Wiley and Sons Australia, Ltd 2015

20.27

Solutions manual to accompany Company Accounting 10e

Question 20.9

Consolidation worksheet, concept of realisation

On 1 July 2016, Gilberts Ltd acquired all the issued shares (cum div.) of Potoroo Ltd for $50 000. At this date the equity of Potoroo Ltd consisted of: Share capital Retained earnings

$ 25 000 7 500

At this date, Potoroo Ltd had recorded a dividend payable of $7500 which was paid in August 2016. All the identifiable assets and liabilities of Potoroo Ltd were recorded at amounts equal to fair values except for inventory for which the fair value was $1000 greater than carrying amount. Only 10% of the inventory on hand at 1 July 2016 remained unsold by 30 June 2017. The tax rate is 30%. During the 2016–17 period, the following transactions occurred. (a) Gilberts Ltd sold inventory to Potoroo Ltd for $30 000 at a profit before tax of $6000. At 30 June 2017, inventory which was sold to Potoroo Ltd for $12 500 at a profit before tax of $2500 was still on hand in the records of Potoroo Ltd. (b) On 1 January 2017, Gilberts Ltd sold machinery to Potoroo Ltd at a gain of $5000. The machinery was considered to have a further 5-year life. (c) During the period Potoroo Ltd rented a warehouse from Gilberts Ltd, paying $1250 in rent to Gilberts Ltd. (d) During the period Gilberts Ltd recorded gains from revaluation of land, which is measured using the fair value method. These gains increased the asset revaluation surplus by $2000 to give a balance of $14 000 at 30 June 2017. (e) In June 2017, an impairment test was conducted on Potoroo Ltd and resulted in the recognition of impairment losses on goodwill of $8000 (recognised in other expenses) The following financial information was provided by the companies at 30 June 2017:

Sales revenue Dividend revenue Other income Gains on sale of non-current assets Total income Cost of sales Other expenses Total expenses Profit before income tax Income tax expense Profit for the year Retained earnings (1/7/16) Dividend paid Retained earnings (30/6/17)

Gilberts Ltd $62 500 2 500 2 500 2 500

Potoroo Ltd $59 000 — 5 000 5 000

70 000 (52 500) (7 500) (60 000) 10 000 (3 375) 6 625 15 000 21 625 (6 250) $15 375

69 000 (45 000) (2 500) (47 500) 21 500 (4 875) 16 625 7 500 24 125 (2 500) $21 625

Required A. Prepare the consolidated statement of profit or loss and other comprehensive income and the consolidated statement of changes in equity for Gilberts Ltd at 30 June 2017. B. Discuss the concept of realisation using the intragroup transactions in this question to illustrate your answer.

© John Wiley and Sons Australia, Ltd 2015

20.28

Chapter 20: Consolidation: intragroup transactions

At 1 July 2016: Net fair value of identifiable assets and liabilities of Potoroo Ltd

Consideration transferred Goodwill

= = = = =

$25 000 + $7 500 (equity) + $1000 (1 – 30%) (inventory) $33 200 $50 000 - $7 500 dividend $42 500 $9 300

A. Worksheet entries 1. Business combination valuation entries Cost of sales Income tax expense Transfer from business combination valuation reserve

Dr Cr

900

Inventory Deferred tax liability Business combination valuation reserve

Dr Cr Cr

100

Goodwill Business combination valuation reserve

Dr Cr

9 300

Retained earnings (1/7/16) Share capital Business combination valuation reserve Shares in Potoroo Ltd

Dr Dr Dr Cr

7 500 25 000 10 000

Transfer from business combination valuation reserve Business combination valuation reserve

Dr Cr

630

Impairment loss - goodwill Accumulated impairment losses

Dr Cr

8 000

270

Cr

630

30 70

9 300

2. Pre-acquisition entries

© John Wiley and Sons Australia, Ltd 2015

42 500

630

8 000

20.29

Solutions manual to accompany Company Accounting 10e

QUESTION 20.9 (cont’d) 3. Dividend paid Dividend revenue Interim dividend paid

Dr Cr

2 500

Sales revenue Cost of sales Inventory

Dr Cr Cr

30 000

Deferred tax asset Income tax expense

Dr Cr

750

Dr Cr

1 250

Gain on sale of PPE Machinery

Dr Cr

5 000

Deferred tax asset Income tax expense

Dr Cr

1 500

Accumulated depreciation Depreciation expense (20% x $5000 x 1/2)

Dr Cr

500

Income tax expense Deferred tax asset

Dr Cr

150

2 500

4. Sales

27 500 2 500

750

5. Rental of warehouse Other income Other expenses

1 250

6. Sale of machinery

5 000

1 500

7. Depreciation

© John Wiley and Sons Australia, Ltd 2015

500

150

20.30

Chapter 20: Consolidation: intragroup transactions

Sales revenue Dividend revenue Other income Cost of sales Other expenses

Profit from trading Gain/loss on sale of PPE Profit before tax Tax expense

Profit Retained earnings (1//7/16) Transfer from BCV reserve Dividend paid Retained earnings (30/6/17)

Gilberts Potoroo Ltd Ltd 62 500 59 000 2 500 0 2 500 5 000 67 500 64 000 52 500 45 000 7 500 2 500 60 000 7 500 2 500 10 000 3 375

47 500 16 500 5 000 21 500 4 875

6 625 15 000

4 3 5 1 2

Adjustments Dr Cr 30 000 2 500 1 250 900 8 000

6

5 000

7

150

16 625 7 500

2

7 500

0

0

2

630

21 625 6 250 15 375

24 125 2 500 21 625

© John Wiley and Sons Australia, Ltd 2015

27 500 1 250 500

270 750 1 500

Group

4 5 7

1 4 6

91 500 0 6 250 97 750 70 900 16 250 87 150 10 600 2 500 13 100 5 880

7 220 15 000 630

1

0

2 500

3

22 220 6 250 15 970

20.31

Solutions manual to accompany Company Accounting 10e

QUESTION 20.9 (cont’d)

GILBERTS LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income for the financial year ended 30 June, 2017 Revenue: sales Other income

$91 500 6 250 $97 750

Expenses: Cost of sales Other

70 900 16 250

Gain on sale of non-current assets Profit before income tax Income tax expense Profit for the period Other comprehensive income: Gains on revaluation of assets Comprehensive income for the period

87 150 10 600 2 500 13 100 5 880 $7 220 2 000 $9 220

GILBERTS LTD Consolidated Statement of Changes in Equity For the financial year ended 30 June 2017 Comprehensive income for the year

$9 220

Retained earnings balance at 1 July 2016 Profit for the year Dividend paid Retained earnings balance at 30 June 2017

$15 000 7 220 (6 250) $15 970

Share capital balance at 1 July 2016 Share capital balance at 30 June 2017

$25 000 $25 000

Asset revaluation surplus balance at 1 July 2016 Gains on revaluation of assets Asset revaluation surplus at 30 June 2017

$12 000 2 000 $14 000

B. Concept of realisation   



Realisation occurs on involvement of an external entity Sale of inventory: realisation occurs when inventory is on-sold to external party – see worksheet adjustment (4) where adjustment is made for unrealised profits Sale of machinery: realisation occurs as plant is used up and benefits received – see worksheet adjustments (6) and (7). Note that the gain on sale is considered to be fully unrealised but as the asset is depreciated, profit is realised; the credit to depreciation expense in adjustment (7) means an increase in group profit. Services: Profits/losses on services are realised immediately; see adjustment (5)

© John Wiley and Sons Australia, Ltd 2015

20.32

Chapter 20: Consolidation: intragroup transactions

Question 20.10 Consolidated financial statements, rationale for adjustments Leadbeaters Ltd acquired all the issued shares (cum div.) of Possum Ltd on 1 July 2014. At this date the shareholders’ equity of Possum Ltd was: Share capital – 100 000 shares General reserve Asset revaluation surplus Retained earnings

$

450 000 45 000 45 000 15 000

At 1 July 2014, the accounting records of Possum Ltd contained a dividend payable of $30 000. This dividend was paid in August 2014. All the identifiable assets and liabilities at acquisition date were recorded at amounts equal to their fair values except for:

Plant (cost $290 000) Inventory

Carrying amount $220 000 160 000

Fair value $227 500 175 000

The plant was considered to have a further 5-year life. It was sold on 1 January 2017 for $118 000. The inventory was all sold by 30 June 2015. Possum Ltd did not record a contingent liability relating to a lawsuit by a customer for faulty goods. Possum Ltd considered this liability had a fair value of $18 000. The lawsuit was settled in May 2015 when Possum Ltd was required to pay damages of $20 000. Additional information (a) On 1 July 2015, Leadbeaters Ltd sold plant to Possum Ltd at a before-tax profit of $6000. This class of non-current asset is depreciated at 20% p.a. on cost by Leadbeaters Ltd while Possum Ltd uses a rate of 10% p.a. on cost. (b) In June 2016 Possum Ltd sold $50 000 worth of inventory to Leadbeaters Ltd at a beforetax profit of $5400. At 30 June 2017, inventory on which Possum Ltd had made a profit of $750 on sale to Leadbeaters Ltd was still on hand. (c) On 10 February 2017, Possum Ltd used the whole of the general reserve existing at 1 July 2014 to pay a bonus dividend of three shares for every ten held. (d) Both Leadbeaters Ltd and Possum Ltd use the valuation method to measure land. In June 2017, Leadbeaters Ltd recorded revaluation increases of $15 000 while Possum Ltd recorded increases of $12 000. (e) The tax rate is 30%. Financial information provided by the companies at 30 June 2017 was as follows:

© John Wiley and Sons Australia, Ltd 2015

20.33

Solutions manual to accompany Company Accounting 10e

Leadbeaters Ltd $ 558 750 (318 000) 531 300 594 000 270 000 43 500 37 500 $1 717 050

Possum Ltd

Dividend payable Other current liabilities Loans Total liabilities

15 000 52 050 150 000 $ 217 050

6 000 60 000 60 000 $ 126 000

Share capital Asset revaluation surplus Retained earnings (1/7/16) Revenues Expenses Gains/(losses) on sale of non-current assets Tax expense Dividend declared Total equity

$1 200 000 225 000 22 500 162 000 (48 000) 6 000

$495 000 120 000 18 000 210 000 (80 000) 5 000

(52 500) (15 000) $1 500 000

(60 000) (6 000) $ 702 000

Plant Accumulated depreciation – plant Land Shares in Possum Ltd Inventory Receivables Cash Total assets

$ 318 000 (165 000) 397 500 — 240 000 22 500 15 000 $ 828 000

Required A. Prepare the consolidated financial statements of Leadbeaters Ltd at 30 June 2017. B. Explain the consolidation worksheet entries made for the intragroup transactions in (a) and (b) in the additional information. At 1 July 2014: Net fair value of identifiable assets and liabilities of Possum Ltd

Consideration transferred Goodwill A. 1. Business combination valuation entries

=

= = =

Depreciation expense Gain on sale of non-current assets Income tax expense Retained earnings (1/7/16) Transfer from business combination valuation reserve (Depreciation is charged at $1500 p.a.)

$450 000 + $45 000 + $45 000 + $15 000 (equity) + $15 000 (1 – 30%) (inventory) + $7 500 (1 – 30%) (machinery) - $18 000 (1 – 30%) (liability) $558 150 $594 000 $35 850

Dr Dr Cr Dr Cr

© John Wiley and Sons Australia, Ltd 2015

750 3 750 1 350 2 100 5 250

20.34

Chapter 20: Consolidation: intragroup transactions

Goodwill Business combination valuation reserve

Dr Cr

35 850 35 850

2. Pre-acquisition entries at 30 June 2017 Retained earnings (1/7/16) * Share capital General reserve Asset revaluation surplus (1/7/16) Business combination valuation reserve Shares in Possum Ltd * = $15 000 +$10 500 - $12 600

Dr Dr Dr Dr Dr Cr

12 900 450 000 45 000 45 000 41 100

Share capital General reserve

Dr Cr

45 000

Transfer from business combination valuation reserve Business combination valuation reserve

Dr Cr

5 250

Dr Dr Cr

4 200 1 800

Accumulated depreciation Retained earnings (1/7/16) Depreciation expense (10% x $6000 p.a.)

Dr Cr Cr

1 200

Retained earnings (1/7/16) Income tax expense Deferred tax asset

Dr Dr Cr

180 180

Dr Dr Cr

525 225

Dr Cr

6 000

594 000

45 000

5 250

3. Sale of Plant Retained earnings (1/7/16) Deferred tax asset Plant

6 000

4. Depreciation of Plant

600 600

360

5. Profit in Opening/Closing Inventory Retained earnings (1/7/16) Deferred tax asset Inventory

750

6. Dividend payable Dividend payable Dividend declared

© John Wiley and Sons Australia, Ltd 2015

6 000

20.35

Solutions manual to accompany Company Accounting 10e

Dividend revenue Dividend receivable

Dr Cr

© John Wiley and Sons Australia, Ltd 2015

6 000 6 000

20.36

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.10 (cont’d) Leadbeaters Possum Ltd Ltd Revenues 162 000 210 000 Expenses 48 000 80 000 Trading profit 114 000 130 000 Gains/losses on sale of 6 000 5 000 non-current assets Profit before tax 120 000 135 000 Tax expense 52 500 60 000 Profit 67 500 75 000 Retained earnings 22 500 18 000 (1/7/16)

Transfer from BCVR Dividend declared Ret. Earnings (30/6/17) Share capital BCVR

Asset revaluation surplus (1/7/16) Gains/losses Asset revaluation surplus (30/6/17) Total equity Loans Other current liabilities Dividend payable Total liabilities Total equity and liabilities Shares in Possum Ltd Inventory Receivables Cash Plant Accum. depreciation Land Deferred tax asset Goodwill Total assets

0 90 000 15 000 75 000 1 200 000

93 000 6 000 87 000 495 000

0

6 1

Adjustments Dr Cr 6 000 750 600

Group

4

1

3 750

4

180

1 350

1

1 2 3 4 5 2

2 100 12 900 4 200 180 525 5 250

600

4

5 250

1

6 000

6

35 850 5 250

1 2

366 000 128 150 237 850 7 250 245 100 111 330 133 770 21 195

0 154 965 15 000 139 965 1 200 000

0

2 2 2

450 000 45 000 41 100

1 275 000 210 000

582 000 108 000

2

45 000

15 000 225 000

12 000 120 000

27 000 300 000

1 500 000 150 000 52 050 15 000 217 050 1 717 050

702 000 60 000 60 000 6 000 126 000 828 000

1 639 965 210 000 112 050 15 000 337 050 1 977 015

594 000 0 270 000 240 000 43 500 22 500 37 500 15 000 558 750 318 000 (318 000) (165 000) 531 300 397 500 0 0 0 1 717 050

0 828 000

6

1 339 965 273 000

6 000

4

1 200

3 5 1

1 800 225 35 850 662 010

© John Wiley and Sons Australia, Ltd 2015

0

594 000 750 6 000

2 5 6

6 000

3

360

4

662 010

0 509 250 60 000 52 500 870 750 (481 800) 928 800 1 665 35 850 1 977 015

20.37

Solutions manual to accompany Company Accounting 10e

QUESTION 20.10 (cont’d) LEADBEATERS LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income for financial year ended 30 June 2017 Revenues Expenses Trading profit Gains/(losses) on sale of non-current assets Profit before income tax Income tax expense Profit for the period Other comprehensive income: Other components of equity: gains on revaluation of assets Comprehensive income for the period

$366 000 128 150 237 850 7 250 245 100 111 330 $133 770 27 000 $160 770

LEADBEATERS LTD Consolidated Statement of Changes in Equity for financial year ended 30 June 2017 Comprehensive income for the period

$160 770

Retained earnings: Balance at 1 July 2016 Profit for the period Dividend declared Balance at 30 June 2017

$21 195 133 770 (15 000) $139 965

Share capital: Balance at 1 July 2016 Balance at 30 June 2017

$1 200 000 $1 200 000

Asset revaluation surplus: Balance at 1 July 2016 Gains Balance at 30 June 2017

$273 000 27 000 $300 000

© John Wiley and Sons Australia, Ltd 2015

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Chapter 20: Consolidation: intragroup transactions

QUESTION 20.10 (cont’d) LEADBEATERS LTD Consolidated Statement of Financial Position as at 30 June 2017 ASSETS Current Assets Inventories Receivables Cash Total Current Assets Non-current Assets Property, plant and equipment: Plant Accumulated depreciation Land Deferred tax assets Goodwill Total Non-current Assets Total Assets

$509 250 60 000 52 500 621 750

$870 750 (481 800

EQUITY AND LIABILITIES Equity Share capital Asset revaluation surplus Retained earnings Total Equity Current Liabilities Dividend payable Other Non-current Liabilities: Interest-bearing liabilities: Loans Total Liabilities Total Equity and Liabilities

© John Wiley and Sons Australia, Ltd 2015

388 950 928 800 1 665 35 850 1 355 265 $1 977 015

$1 200 000 300 000 __139 965 1 639 965

$15 000 112 050

127 050 210 000 _337 050 $1 977 015

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Solutions manual to accompany Company Accounting 10e

QUESTION 20.10 (cont’d) B. (a) Retained earnings: This is a prior period transaction. As there were no external parties to the group involved in this transaction, the prior period profit is unrealised to the group. Hence, retained earnings (1/7/16) must be reduced by $4 200 (profit after tax). Plant: The plant is still held by Possum Ltd at 30 June 2017 and recorded at $6 000 more than the cost to the group. As the asset is reported in the consolidated financial statements at cost to the group, plant must be reduced by $6 000. Deferred tax asset: A change in the carrying amount of the asset causes a temporary difference between the carrying amount and the tax base of the asset. As the carrying amount is reduced, a deferred tax asset of $1 800 (30% x $6 000) is raised. Depreciation expense and accumulated depreciation: The asset is depreciated by Possum Ltd based on the price paid to Leadbeaters Ltd which includes the unrealised profit of $6 000. Depreciation for the group should be based on cost to the group which means depreciation p.a. must be reduced by $600 (10% x $6 000). A reduction to prior period depreciation, via retained earnings of $600, and a reduction in current depreciation expense of $600. This means a reduction to accumulated depreciation of $1200. Deferred tax asset and income tax expense: As changes to accumulated depreciation change the carrying amount of the asset, there is a tax-effect to be considered. The deferred tax asset raised in relation to the sale of the asset within the group is reversed as the asset is depreciated. Hence, there is an overall reversal of $360, being 30% x $1200, being the change to accumulated depreciation with resultant effects on tax expense both in the current period and prior period of $180 (30% x $600). (b) Retained earnings: This is a prior period transaction. In the previous period, Possum Ltd recorded a $750 before-tax profit, or a $525 after-tax profit on sale of inventory still held within the group at 30/6/16. Because the sale did not involve external entities, the profit must be eliminated on consolidation. Any profit on sale of other inventory now sold to external entities does not require any adjustment on consolidation as the profits on the sale are realised by the group. Inventory: At 30 June 2017, Leadbeaters Ltd still has the inventory on hand from intragroup transactions in the prior period and records them at cost which includes an unrealised profit of $750. The cost of this inventory to the group is $750 less than the amount recorded by the legal entity; hence inventory is then reduced by $750. Deferred tax asset/income tax expense: A change in the carrying amount of the asset inventory causes a temporary difference between the carrying amount and the tax base of the asset. As the carrying amount is reduced, a deferred tax asset of $225 (30% x $750) is raised.

© John Wiley and Sons Australia, Ltd 2015

20.40

Chapter 20: Consolidation: intragroup transactions

Question 20.11 Consolidation worksheet Golden Ltd acquired all the issued shares of Bandicoot Ltd on 1 July 2016. Golden Ltd paid $40 000 cash plus 100 000 shares in Golden Ltd which had a fair value of $2 per share. At the acquisition date all the identifiable assets and liabilities of Bandicoot Ltd were recorded at amounts equal to their fair values, except inventory, which had a fair value $1500 greater than its carrying amount. All this inventory was sold by Bandicoot Ltd prior to 30 June 2017. Bandicoot Ltd conducts a strong research and development division. It has expensed all past outlays. Golden Ltd has assessed that on-process research and development has a fair value of $12 000. It assessed this asset at 30 June 2017 and decided that $3000 of this asset should be written off as amortisation expense. In the 2016 annual report Bandicoot Ltd reported in the notes the existence of a contingent liability relating to damages being sought by a supplier. Golden Ltd assessed the liability to have a fair value at 1 July 2016 of $10 500. Bandicoot Ltd made an out-of-court settlement with the supplier in August 2016, paying $10 000 to the supplier. The income tax rate is 30%. Intragroup transactions occurring in the 2016–17 period were as follows. (a) During the course of the year, Bandicoot Ltd sold inventory to Golden Ltd. Total sales were $60 000, these being sold at cost plus 25%. At 30 June 2017, Golden Ltd still held inventory that it had bought from Bandicoot Ltd for $15 000. (b) On 1 January 2017, Golden Ltd acquired $90 000 of debentures previously issued by Bandicoot Ltd. These were acquired on the open market for $85 500. Interest on debentures is paid half-yearly. Interest due on 30 June 2017 has been paid by Bandicoot Ltd. (c) On 1 April 2017, Golden Ltd sold an item of inventory to Bandicoot Ltd for $45 000. This asset had cost Bandicoot Ltd $36 000 to manufacture. The asset is to be used by Bandicoot Ltd as part of its plant and machinery. The depreciation rate used by Bandicoot Ltd for this type of asset is 20% p.a. on cost. The financial information provided by the two entities at 30 June 2017 was as follows:

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Solutions manual to accompany Company Accounting 10e

Golden Ltd $352 100 25 500 10 000 387 600 (184 500) (51 900) (236 400) 151 200 (48 000) 103 200 36 000 139 200 (27 000)

Bandicoot Ltd $272 000 5 000 23 000 300 000 (180 000) (33 000) (213 000) 87 000 (30 000) 57 000 18 000 75 000 (7 500)

(24 000)

(7 200)

(36 000)

(10 800)

Retained earnings (30/6/17) Share capital General reserve Total equity

(87 000) 52 200 480 000 102 000 $634 200

(25 500) 49 500 180 000 36 000 $265 500

Deferred tax liabilities 8% debentures Dividend payable Provisions Payables Total liabilities Total equity and liabilities

19 500 0 24 000 18 000 16 500 $78 000 $712 200

7 500 120 000 10 800 35 460 15 000 $188 760 $454 260

Plant and machinery Accumulated depreciation Land Debentures in Bandicoot Ltd Shares in Bandicoot Ltd Cash Receivables Inventory Total assets

$160 000 (60 000) 143 450 85 500 240 000 8 500 31 750 103 000 $712 200

165 000 (39 000) 225 000 — — 5 260 15 500 82 500 $454 260

Sales Dividend revenue Other income/gains Cost of sales Other expenses Profit before income tax Income tax expense Profit for the year Retained earnings (1/7/16) Dividend paid from 2015–16 profit Dividend paid from 2016–17 profit Dividend declared from 2016–17 profit

Required Prepare the consolidation worksheet for the preparation of the consolidated financial statements of Golden Ltd at 30 June 2017.

At 1 July 2016: Net fair value of identifiable assets and liabilities of Bandicoot Ltd

=

$180 000 + $18 000 + $36 000 + $1 500 (1 – 30%) (inventory) + $12 000 (1 – 30%) (R&D)

© John Wiley and Sons Australia, Ltd 2015

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Chapter 20: Consolidation: intragroup transactions

Consideration transferred Goodwill

= = =

- $10 500 (1 -30%) (liability) $236 100 $240 000 $3 900

1. Business combination valuation entries Cost of sales Income tax expense Transfer from business combination valuation reserve

Dr Cr

1 500

Research & development Deferred tax liability Business combination valuation reserve

Dr Cr Cr

12 000

Amortisation expense Accumulated amortisation

Dr Cr

3 000

Deferred tax liability Income tax expense

Dr Cr

900

Transfer from business combination valuation reserve Deferred tax asset Damages expense Gain on settlement of liability

Dr Dr Cr Cr

7 350 3 150

Goodwill Business combination valuation reserve

Dr Cr

3 900

Retained earnings (1/7/16) Share capital Business combination valuation reserve General reserve Shares in Bandicoot Ltd

Dr Dr Dr Dr Cr

18 000 180 000 6 000 36 000

Transfer from business combination valuation reserve Business combination valuation reserve (Sale of inventory)

Dr Cr

1 050

Dr

7 350

450

Cr

1 050

3 600 8 400

3 000

900

10 000 500

3 900

2. Pre-acquisition entries

Business combination valuation reserve Transfer from business combination valuation reserve

Cr

240 000

1 050

7 350

(Settlement of court case)

© John Wiley and Sons Australia, Ltd 2015

20.43

Solutions manual to accompany Company Accounting 10e

QUESTION 20.11 (cont’d) 3. Dividend declared Dividend payable Dividend declared

Dr Cr

10 800

Dividend revenue Dividend receivable

Dr Cr

10 800

Dividend revenue Interim dividend paid - 2015-16 profits

Dr Cr

7 500

Dividend revenue Interim dividend paid: 2016-17 profits

Dr Cr

7 200

Debentures Debentures in Bandicoot Ltd Income on redemption of debentures

Dr Cr Cr

90 000

Interest revenue Interest expense (8% x ½ x $90 000)

Dr Cr

3 600

Sales revenue Cost of sales Inventory

Dr Cr Cr

60 000

Deferred tax asset Income tax expense

Dr Cr

900

Sales revenue Cost of sales Plant and machinery

Dr Cr Cr

45 000

Deferred tax asset Income tax expense

Dr Cr

2 700

Accumulated depreciation Depreciation expense (1/4 x 20% x $9 000)

Dr Cr

450

Income tax expense Deferred tax asset

Dr Cr

135

10 800

10 800

4. Dividend paid

7 500

7 200

5. Debentures

85 500 4 500

3 600

6. Unrealised profit in closing inventory

57 000 3 000

900

7. Sale of inventory for use as non-current asset

36 000 9 000

2 700

8. Depreciation on plant and machinery

© John Wiley and Sons Australia, Ltd 2015

450

135

20.44

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.11 (cont’d) Sales revenue

Golden Bandicoot Ltd Ltd 352 100 272 000

6 7 5

Adjustments Dr Cr 60 000 45 000 3 600 500 4 500 10 800 7 500 7 200

Other income

10 000

5 000

Dividend revenue

25 500

23 000

387 600 184 500

300 000 180 000

1

1 500

Other expenses

51 900

33 000

1

3 000

Profit before tax Tax expense

236 400 151 200 48 000

213 000 87 000 30 000

103 200 36 000

57 000 18 000

0

0

139 200 27 000

75 000 7 500

24 000 36 000 87 000 52 200

7 200 10 800 25 500 49 500

480 000 102 000 0

180 000 36 000 0

634 200 19 500

265 500 7 500

0 24 000 18 000 16 500 78 000 712 200

120 0000 10 800 35 460 15 000 188 760 454 260

Cost of sales

Profit Retained earnings (1/7/16) Transfer from BCVR

Dividend paid: 2015/16 profits 2016/17 profits Dividend declared Retained earnings (30/6/17) Share capital General reserve BCVR

Total equity Deferred tax liabilities 8% debentures Dividend payable Provisions Payables Total liabilities Total equity and liabilities

3 4 4

1 8

3 150 135

2

18 000

1 2

7 350 1 050

2 2 2 2

180 000 36 000 6 000 7 350

57 000 36 000 10 000 3 600 450

450 900 2 700

90 000 10 800

© John Wiley and Sons Australia, Ltd 2015

519 100 1 5

16 400 23 000

6 7 1 5 8

1 6 7

558 500 273 000 73 850

346 850 211 650 77 235

134 415 36 000 1 050 7 350

1 2

7 500

4

7 200 10 800

4 3

8 400 3 900 1 050 3 600

5 3

Group

1 1 2 1

0 170 415 27 000 24 000 36 000 87 000 83 415 480 000 102 000 0

665 415 30 600 30 000 24 000 53 460 31 500 169 560 834 975

20.45

Solutions manual to accompany Company Accounting 10e

QUESTION 20.11 (cont’d) Golden Ltd

Bandicoot Ltd

Adjustments Dr Cr 9 000

Group

Plant & machinery Accumulated depreciation Land Debentures in Bandicoot Ltd Shares in Bandicoot Ltd Deferred tax assets

160 000 (60 000)

165 000 (39 000)

143 450 85 500

225 000 0

85 500

5

368 450 0

240 000

0

240 000

2

0

0

0

135

8

3 465

Cash Receivables Inventory R&D in-process Accumulated amortisation R&D Goodwill Total assets

8 500 31 750 103 000 0 0

5 260 15 500 82 500 0 0

10 800 3 000

3 6

3 000

1

712 200

454 260

8

6 7

1

1

7

450

900 2 700

12 000

3 900 518 385

© John Wiley and Sons Australia, Ltd 2015

518 385

316 000 (98 550)

13 760 36 450 182 500 12 000 (3 000) 3 900 834 975

20.46

Chapter 20: Consolidation: intragroup transactions

Question 20.12 Consolidated worksheet journal entries On 1 July 2013, Rock Ltd acquired (ex div.) all of the issued capital of Wallaby Ltd. The recorded equity of Wallaby Ltd at this date consisted of: Share capital General reserve Retained earnings

$120 000 25 000 55 000

At 1 July 2013, all the identifiable assets and liabilities of Wallaby Ltd were recorded at fair value except for the following assets:

Land Inventory Machinery (cost $86 000) Vehicles (cost $58 000)

Carrying amount $100 000 78 500 52 000 47 000

Fair value $130 000 86 100 56 000 53 000

Additionally, Wallaby Ltd’s records showed a dividend payable at 1 July 2013 of $8000. This dividend was paid on 31 October 2013. The assets of Wallaby Ltd at acquisition date included goodwill recorded at $15 000 arising from a business combination transaction in 2009. At 1 July 2013, Wallaby Ltd owned but had not recorded an internally generated brand name. This brand name was considered by Rock Ltd to have a fair value of $29 000 and an indefinite useful life. An impairment test conducted with respect to the brand name on 30 June 2016 concluded that its recoverable amount at that date was $2000 less than its carrying amount. The vehicles and machinery were expected to have a further useful life of 6 and 8 years respectively, with benefits to be received evenly over those periods. Inventory on hand at 1 July 2013 was all sold by 31 January 2014. The land owned at 1 July 2013 was sold in September 2014 for $150 000. The machinery on hand at 1 July 2013 was sold on 1 January 2016 for $38 000. Adjustments for the differences between carrying amounts and fair values of assets and liabilities on hand at acquisition date are recognised on consolidation. When assets are sold or derecognised, any related valuation reserves are transferred to retained earnings. In June 2015, Wallaby Ltd paid a share dividend worth $20 000 from the general reserve on hand at 1 July 2013. The trial balances of both companies at 30 June 2016 showed the following balances:

© John Wiley and Sons Australia, Ltd 2015

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Solutions manual to accompany Company Accounting 10e

Debit balances Cash Receivables Inventory Other current assets Deferred tax assets Vehicles Equipment Land Financial assets Goodwill Shares in Wallaby Ltd Debentures in Rock Ltd Dividend paid Dividend declared Transfer to general reserve Cost of sales Income tax expense Depreciation and other expenses Carrying amount of machinery sold Carrying amount of equipment sold

Rock Ltd $ 2 500 27 000 39 700 15 200 7 500 88 000 — 140 000 68 000 28 000 250 000 — 10 000 20 000 10 000 210 000 30 000 39 000 — 21 000 $1 005 900

Wallaby Ltd $ 1 250 13 000 24 500 8 200 3 500 158 000 42 000 180 000 14 800 15 000 — 25 000 5 000 12 000 5 000 192 550 32 000 36 000 30 500 — $798 300

Credit balances Share capital General reserve Retained earnings (1/7/15) Accounts payable Loan payable (due 30/6/20) Dividend payable Provisions Current tax liability Deferred tax liability Accumulated depreciation – vehicles Accumulated depreciation – equipment 8% Debentures (matures 30/6/19) Sales revenue Dividend revenue Other income Proceeds on sale of equipment Proceeds on sale of machinery

Rock Ltd $ 200 000 35 000 51 300 69 500 25 000 20 000 12 500 43 000 11 800 16 400 — 25 000 450 000 17 000 11 400 18 000 — $1 005 900

Wallaby Ltd $ 140 000 10 000 67 500 36 000 15 000 12 000 9 300 34 000 5 000 60 000 34 500 — 320 000 — 17 000 — 38 000 $798 300

Additional information (a) Dividends may be declared by either company without shareholder approval. (b) The tax rate is 30%. (c) On 1 January 2016, Rock Ltd sold an item of equipment to Wallaby Ltd for $18 000. The equipment had a carrying amount at the date of sale of $21 000. Both companies depreciate equipment at 20% p.a. on a straight-line basis. (d) On 1 May 2015, Wallaby Ltd sold a machine to Rock Ltd for $7800. The machine had a carrying amount of $7000 at the date of sale. Rock Ltd recorded the machine as inventory. The inventory item was sold to an external party in November 2015 for $8200.

© John Wiley and Sons Australia, Ltd 2015

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Chapter 20: Consolidation: intragroup transactions

(e) All interest on the 8% debentures has been paid and brought to account in the records of both companies. (f) During the 2015–16 financial year, Rock Ltd sold inventory to Wallaby Ltd for $75 000. The cost of this inventory to Wallaby Ltd was $70 000. Of this inventory, 25% is still on hand at 30 June 2016. (g) The transfer to general reserve recorded by Wallaby Ltd in the current year was from retained earnings recorded at 1 July 2013. Required Prepare the consolidation worksheet journal entries for the preparation of the consolidated financial statements of Rock Ltd at 30 June 2016.

Acquisition analysis

At 1 July 2013: Net fair value of identifiable assets, liabilities and contingent liabilities of Wallaby Ltd =

Net fair value acquired Consideration transferred Goodwill Recorded goodwill Adjustment required

= = = = =

$120 000 + $25 000 +$55 000 (equity) + $6 000 (1 – 30%) (BCVR - vehicles) + $4 000 (1 – 30%) (BCVR – machinery) + $30 000 (1 – 30%) (BCVR - land) + $7 600 (1 – 30%) (BCVR - inventory) + $29 000 (1 – 30%) (BCVR – brand name) - $15 000 (goodwill) $238 620 $250 000 $11 380 $11 380 - $15 000 $(3 620)

CONSOLIDATION WORKSHEET ENTRIES YEAR AT -30 JUNE 2016 1. Business combination valuation entries Accumulated depreciation - vehicles Vehicles Deferred tax liability Business combination valuation reserve

Dr Dr Cr Cr

11 000

Depreciation expense Retained earnings (1/7/15) Accumulated depreciation - Vehicles (1/6 x $6000 p.a for 3 years)

Dr Dr Cr

1 000 2 000

Deferred tax liability Income tax expense Retained earnings (1/7/15)

Dr Cr Cr

900

© John Wiley and Sons Australia, Ltd 2015

5 000 1 800 4 200

3 000

300 600

20.49

Solutions manual to accompany Company Accounting 10e

Depreciation expense Carrying amount of machinery sold * Income tax expense Retained earnings (1/7/15) Transfer from BCVR (1/8 x $4000 p.a. for 2.5 yrs prior to sale) * 5.5 yrs x $500 p.a.

Dr Dr Cr Dr Cr

250 2 750

Brand name Deferred tax liability Business combination valuation reserve

Dr Cr Cr

29 000

Impairment loss Accumulated impairment losses - brand

Dr Cr

2 000

Deferred tax liability Income tax expense

Dr Cr

600

Business combination valuation reserve Goodwill

Dr Cr

3 620

900 700 2 800

8 700 20 300

2 000

600

3 620

2. Pre-acquisition entries Retained earnings (1/7/15)* Dr 81 320 Share capital ** Dr 140 000 General reserve Dr 5 000 Business combination valuation reserve Dr 23 680 Shares in Wallaby Ltd Cr * ($55 000 + $5 320 (BCVR – inventory)+ $21 000 (BCVR - land) ** $120 000 + $20 000 Transfer from business combination valuation reserve Business combination valuation reserve (Transfer on sale of machinery)

Dr Cr

2 800

General reserve Transfer to general reserve

Dr Cr

5 000

Dr Cr

5 000

Dr

12 000

250 000

2 800

5 000

3. Dividend paid Dividend revenue Dividend paid

5 000

4. Dividend declared Dividend payable

© John Wiley and Sons Australia, Ltd 2015

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Chapter 20: Consolidation: intragroup transactions

Dividend declared Dividend revenue Dividend receivable

Cr

12 000

Dr Cr

12 000

Dr Cr

2 000

Dr Cr

25 000

Proceeds on sale of equipment Equipment Carrying amount of equipment sold

Dr Dr Cr

18 000 3 000

Income tax expense Deferred tax liability

Dr Cr

900

Depreciation expense – equipment Accumulated depreciation (1/2 x 20% x $3 000)

Dr Cr

300

Deferred tax liability Income tax expense

Dr Cr

90

12 000

5. Interest on debentures Interest revenue Interest expense (8% x $25 000)

2 000

6. Debentures 8% Debentures Debentures in Rock Ltd

25 000

7. Sale of equipment: Rock Ltd to Wallaby Ltd

21 000

900

8. Depreciation of equipment

300

90

9. Prior year sale of machine classified as inventory – Wallaby Ltd to Rock Ltd Retained earnings (1/7/15) Income tax expense Cost of sales

Dr Dr Cr

560 240 800

10. Current year sale of inventory – Rock Ltd to Wallaby Ltd Sales revenue Cost of sales

Dr Cr

© John Wiley and Sons Australia, Ltd 2015

75 000 73 750

20.51

Solutions manual to accompany Company Accounting 10e

Inventory

Cr

Deferred tax asset Income tax expense

Dr Cr

© John Wiley and Sons Australia, Ltd 2015

1 250 375 375

20.52

Chapter 20: Consolidation: intragroup transactions

Question 20.13 Consolidation worksheet, consolidated financial statements On 1 July 2015, Ghost Ltd acquired all the shares of Bat Ltd for $330 000 on an ex-div. basis. On this date, the equity and liabilities of Bat Ltd included the following balances: Share capital General reserve Retained earnings Dividend payable Provisions

$

200 000 25 000 45 000 10 000 169 500

At acquisition date, all the identifiable assets and liabilities of Bat Ltd were recorded at amounts equal to fair value except for:

Plant and equipment (cost $300 000) Trademark Inventory Land Goodwill Machinery (cost $18 000)

Carrying amount $186 000 100 000 70 000 50 000 25 000 15 000

Fair value $190 000 110 000 80 000 70 000 55 000 16 000

Goodwill was not impaired in any period. The plant and equipment had a further 5-year life at acquisition date and was expected to be used evenly over that time. The trademark was considered to have an indefinite life. The machinery, which was estimated to have a further 4year life at acquisition date, was sold on 1 January 2017. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. During the year ended 30 June 2016, all inventories on hand at acquisition date were sold, and the land was sold on 1 June 2017. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed. Additional information (a) Of the interim dividend paid by Bat Ltd in the current year, $5000 was from profits before acquisition date. All other dividends were from current year profits. Shareholder approval is not required in relation to dividends. (b) On 1 July 2016, Bat Ltd has on hand inventory worth $12 000, being transferred from Ghost Ltd in June 2016. The inventory had previously cost Ghost Ltd $8000. On 31 March 2017, Bat Ltd transferred an item of plant with a carrying amount of $10 000 to Ghost Ltd for $15 000. Ghost Ltd treated this item as inventory. The item was still on hand at the end of the year. Bat Ltd applied a 20% depreciation rate to this plant. (c) On 1 January 2017, Bat Ltd acquired $8000 inventory from Ghost Ltd. This inventory originally cost Ghost Ltd $5000. The profit in inventory on hand at 30 June 2017 was $1000. (d) During the year ending 30 June 2017, Bat Ltd sold inventory costing $12 000 to Ghost Ltd for $18 000. Two-thirds of this was sold to external parties for $9000. (e) On 1 January 2016, Ghost Ltd sold furniture to Bat Ltd for $8000. This had originally cost Ghost Ltd $12 000 and had a carrying amount at the time of sale of $7000. Both entities charge depreciation at a rate of 10% p.a. (f) Ghost Ltd sold some land to Bat Ltd in December 2016. The land had originally cost Ghost Ltd $25 000, but was sold to Bat Ltd for only $20 000. To help Bat Ltd pay for the land, Ghost Ltd gave Bat Ltd an interest-free loan of $12 000. Bat Ltd has as yet made no repayments on the loan. (g) The tax rate is 30%.

© John Wiley and Sons Australia, Ltd 2015

20.53

Solutions manual to accompany Company Accounting 10e

On 30 June 2017 the trial balances of Ghost Ltd and Bat Ltd were as follows: Debit balances Shares in Bat Ltd Cash Receivables Inventory Deferred tax assets Machinery Plant and equipment Land Furniture Trademark Goodwill Cost of sales Other expenses Income tax expense Interim dividend paid Final dividend declared Loan to Bat Ltd Credit balances Share capital General reserve Retained earnings (1/7/16) Final dividend payable Current tax liabilities Provisions Loan from Ghost Ltd Sales Other income Gains(losses) on sale of non-current assets Accumulated depreciation – plant and equipment Accumulated depreciation – machinery Accumulated depreciation – furniture

Ghost Ltd $325 000 7 800 6 000 20 000 10 200 15 000 113 000 25 000 7 000 — — 162 000 53 000 20 000 12 000 6 000 12 000 $794 000

Bat Ltd — $35 000 20 000 50 000 — 15 000 300 000 50 000 8 000 100 000 25 000 128 000 41 000 18 000 10 000 4 000 — $804 000

$312 000 20 000 30 000 6 000 8 000 78 000 — 220 000 62 000 22 000 34 000

$200 000 25 000 45 000 4 000 2 500 169 500 12 000 182 000 20 000 25 000 114 000

1 000 1 000 $794 000

3 000 2 000 $804 000

Required Prepare the consolidation worksheet for Ghost Ltd for the preparation of consolidated financial statements at 30 June 2017. At 1 July 2015: Net fair value of identifiable assets, liabilities and contingent liabilities of Bat Ltd

Net fair value acquired Cost of combination

=

= =

($200 000 + $25 000 + $45 000) (equity) + $10 000 (1 – 30%) (inventory) + $20 000 (1 –30%) (land) + $4 000 (1 – 30%) (plant & equipment) + $1 000 (1 – 30%) (machinery) + $10 000 (1 – 30%) (trademark) - $25 000 (goodwill) $276 500 $330 000

© John Wiley and Sons Australia, Ltd 2015

20.54

Chapter 20: Consolidation: intragroup transactions

Goodwill acquired Unrecorded goodwill acquired

1.

2.

= = =

$53 500 $53 500 – $25 000 $28 500

Business combination valuation entries at 30 June 2017 Gain (loss) on sale of non-current assets Income tax expense Transfer from business combination valuation reserve

Dr Cr

20 000

Trademark Deferred tax liability Business combination valuation reserve

Dr Cr Cr

10 000

Accumulated depreciation - P&E Plant and equipment Deferred tax liability Business combination valuation reserve

Dr Cr Cr Cr

114 000

Depreciation expense - P&E Retained earnings (1/7/16) Accumulated depreciation - P&E ($4 000 /5)

Dr Dr Cr

800 800

Deferred tax liability Income tax expense Retained earnings (1/7/16)

Dr Cr Cr

480

Depreciation expense – machinery Gain (loss) on sale of non-current assets Income tax expense Retained earnings (1/7/16) Transfer from business combination valuation reserve

Dr Dr Cr Dr

6 000

Cr

14 000

3 000 7 000

110 000 1 200 2 800

1 600

240 240 125 625 225 175

Cr

700

Pre-acquisition entry 30/6/15 Retained earnings Share capital General reserve Business combination valuation reserve Goodwill Shares in Bat Ltd

Dr Dr Dr Dr Dr Cr

45 000 200 000 25 000 31 500 28 500

Dr Dr Dr Dr Dr Cr

52 000 200 000 25 000 24 500 28 500

330 000

Pre-acquisition entry 30/6/17 Retained earnings* (1/7/16) Share capital General reserve Business combination valuation reserve Goodwill Shares in Bat Ltd * $45 000 + $7000 BCVR - Inventory

© John Wiley and Sons Australia, Ltd 2015

330 000

20.55

Solutions manual to accompany Company Accounting 10e

Transfer from business combination valuation reserve Business combination valuation reserve Cr

Dr

14 000 14 000

Transfer from business combination valuation reserve Business combination valuation reserve

Dr Cr

700

Shares in Bat Ltd Interim dividend paid

Dr Cr

5 000

Dr Cr

5 000

Dividend payable Final dividend declared

Dr Cr

4 000

Dividend revenue Dividend receivable

Dr Cr

4 000

700

5 000

3. Interim dividend paid Dividend revenue Interim dividend paid

5 000

4. Final dividend declared

© John Wiley and Sons Australia, Ltd 2015

4 000

4 000

20.56

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.13 (cont’d) 5. Inter-entity sales of inventory: Profit in opening inventory Retained earnings (1/7/16) Income tax expense Cost of sales

Dr Dr Cr

2 800 1 200

Gain (loss) on sale of non-current assets Inventory

Dr Cr

5 000

Deferred tax asset Income tax expense

Dr Cr

1 500

4 000

6. Transfer of plant to inventory: Ghost Ltd – Bat Ltd

5 000

1 500

7. Intragroup sales of inventory: Profit in ending inventory Sales Cost of sales Inventory

Dr Cr Cr

8 000

Deferred tax asset Income tax expense

Dr Cr

300

7 000 1 000

300

8. Intragroup sales of inventory: Profit in ending inventory Sales Cost of sales Inventory

Dr Cr Cr

18 000

Deferred tax asset Income tax expense

Dr Cr

600

Dr Dr Cr

700 300

Dr Cr Cr

150

Dr Dr Cr

30 15

16 000 2 000

600

9. Sale of Furniture Retained earnings (1/7/16) Deferred tax asset Furniture

1 000

10. Depreciation Accumulated depreciation - furniture Depreciation expense Retained earnings (1/7/16) Income tax expense Retained earnings (1/7/16) Deferred tax asset QUESTION 20.13 (cont’d)

100 50

45

11. Sale of land: Ghost Ltd to Bat Ltd

© John Wiley and Sons Australia, Ltd 2015

20.57

Solutions manual to accompany Company Accounting 10e

Land Gain (loss) on sale of non-current assets

Dr Cr

5 000

Income tax expense Deferred tax liability

Dr Cr

1 500

Dr Cr

12 000

Loan from Ghost Ltd Loan to Bat Ltd

Financial Statements Sales revenue Other income

Cost of sales

Other expenses

Trading profit Gains/losses on sale of noncurrent assets Profit before tax Tax expense

Profit Retained earnings (1/7/16)

Transfer from BCV reserve Dividend paid Dividend declared

Ghost Bat Ltd Ltd 220 000 182 000 62 000

20 000

7 8 3 4

41 000

215 000 169 000 67 000 33 000 22 000 25 000

89 000

58 000

20 000

18 000

69 000 30 000

40 000 45 000

0

0

99 000 12 000

85 000 10 000

6 000

4 000

1 1 1

1 1 6

1 500

12 000

Adjustments Dr Cr 8 000 18 000 5 000 4 000

282 000 202 000 162 000 128 000

53 000

5 000

800 125

20 000 625 5 000

4 000 7 000 16 000 100

5 000

Group 376 000 73 000

5 7 8 10

11

449 000 263 000

94 825

357 825 81 175 26 375

117 550 5 10 11

1 1 2 5 9 10 2

1 200 30 1 500

800 175 52 000 2 800 700 15 14 700

6 000 240 225 1 500 300 600

1 1 1 6 7 8

240 50

1 10

14 000 700

1 1

5 000 5 000 4 000

2 3 4

© John Wiley and Sons Australia, Ltd 2015

31 865

85 685 18 800

0104 485 12 000 6 000

20.58

Chapter 20: Consolidation: intragroup transactions

Retained earnings (30/6/17) Share capital General reserve BCVR Total Equity Deferred tax liabilities Dividend payable Current tax liability Loan from Ghost Ltd Provisions Total Liabilities Total Liabilities + Equity

18 000 81 000

14 000 71 000

18 000 86 485

312 000 200 000 20 000 25 000 -

2 2 2

200 000 25 000 9 800

413 000 296 000 -

1

480

4

4 000

6 000

4 000

8 000

2 500

-

12 000

7 000 2 800

1 1

3 000 1 200 1 500

1 1 11

312 000 20 000 418 485 5 220

6 000 10 500

11

12 000

78 000 169 500 92 000 188 000

247 500 269 220

505 000 484 000

687 705

© John Wiley and Sons Australia, Ltd 2015

20.59

Solutions manual to accompany Company Accounting 10e

QUESTION 20.13 (cont’d)

Ghost Ltd Shares in Bat Ltd Cash Inventory

Bat Ltd

Group

325 000 7 800 20 000

-35 000 50 000

6 000 25 000 113 000 (34 000)

20 000 50 000 300 000 (114 000)

15 000 (1 000)

15 000 (3 000)

7 000 (1 000)

8 000 (2 000)

10 200

100 000 25 000 -

Loan to Bat Ltd

12 000

-

Total assets

505 000

484 000

Receivables Land Plant & equipment Accumulated depreciation – P & E Machinery Accumulated depreciation – Mach. Furniture Accumulated depreciation – Furn. Trademark Goodwill Deferred tax assets

Adjustments Dr Cr 325 000

2

5 000 1 000 2 000 4 000

6 7 8 4

110 000 1 600

1 1

11

5 000

1

114 000

-42 800 62 000

22 000 80 000 303 000 (35 600) 30 000 (4 000)

1 000 10

150

1 2 6 7 8 9

10 000 28 500 1 500 300 600 300

© John Wiley and Sons Australia, Ltd 2015

9

45

10

12 000

11

14 000 (2 850) 110 000 53 500 12 855

687 705

20.60

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.13 (cont’d) GHOST LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income for financial year ended 30 June 2017 Income: Sales revenue Other income

$376 000 73 000 449 000

Expenses: Cost of sales Other Trading profit Gains/(losses) on sale of non-current assets Profit before income tax Income tax expense Profit for the period Other items of comprehensive income Comprehensive income

263 000 94 825 333 800 81 175 26 375 117 550 31 865 $85 685 0 $85 685

GHOST LTD Consolidated Statement of Changes in Equity for the financial year ended 30 June 2017 Comprehensive income for the period

$85 685

Retained earnings: Balance at 1 July 2016 Profit for the period Dividend paid Dividend declared Balance at 30 June 2017

$18 800 85 685 (12 000) (6 000) $86 485

General reserve: Balance at 1 July 2016 Balance at 30 June 2017

$20 000 $20 000

Share capital: Balance at 1 July 2016 Balance at 30 June 2017

$312 000 $312 000

© John Wiley and Sons Australia, Ltd 2015

20.61

Solutions manual to accompany Company Accounting 10e

QUESTION 20.13 (cont’d) GHOST LTD Consolidated Statement of Financial Position as at 30 June 2017 ASSETS Current Assets Cash Inventories Receivables Total Current Assets Non-current Assets Property, plant and equipment Land Plant & Equipment Accumulated depreciation Machinery Accumulated depreciation Furniture Accumulated depreciation Trademark Goodwill Tax assets: Deferred tax asset Total Non-current Assets Total Assets EQUITY AND LIABILITIES Equity Share capital General reserve Retained earnings Total Equity Current Liabilities Dividend payable Current tax liabilities Provisions Total Current Liabilities Non-current Liabilities: Deferred tax liabilities Total Non-current Liabilities Total Liabilities Total Equity and Liabilities

© John Wiley and Sons Australia, Ltd 2015

$42 800 62 000 22 000 126 800

$80 000 $303 000 (35 600) $30 000 (4 000) $14 000 (2 850)

267 400 26 000 11 150 110 000

53 500 12 855 560 905 $687 705

$312 000 20 000 86 485 $418 485 6 000 10 500 247 500 264 000 5 220 5 220 $269 220 $687 705

20.62

Chapter 20: Consolidation: intragroup transactions

Question 20.14 Consolidation worksheet, consolidated financial statements On 1 July 2016, King Ltd acquired all the shares of Parrot Ltd on a cum-div. basis. At this date, the equity and liability sections of Parrot Ltd’s statement of financial position showed the following balances: Share capital – 60 000 shares General reserve Retained earnings Other reserves Dividend payable

$ 60 000 30 000 21 000 6 000 5 000

The dividend payable at acquisition date was subsequently paid in September 2016. At acquisition date, all the identifiable assets and liabilities of Parrot Ltd were recorded at amounts equal to fair value except for:

Inventory Equipment (cost $30 000) Machinery (cost $17 000) Land

Carrying amount $50 000 24 000 15 000 18 480

Fair value $56 000 32 000 16 000 24 480

A bonus dividend, on the basis of 6 ordinary shares for every 60 ordinary shares held, was paid in January 2018 out of Other Reserves existing at acquisition date. The inventory on hand in Parrot Ltd at 1 July 2016 was sold during the following 12 months. The machinery which had a further 5-year life on acquisition date was sold on 1 January 2018. The land on hand at acquisition date was sold by 1 March 2017. The equipment was estimated to have a further 8-year life. At 1 July 2016, Parrot Ltd had not recorded any goodwill. Valuation adjustments are made on consolidation and, on realisation of a business combination valuation reserve, a transfer is made to retained earnings on consolidation. Additional information (a) On 1 July 2017, Parrot Ltd has on hand inventory worth $12 000 transferred from King Ltd in June 2017. The inventory had previously cost King Ltd $11 800. Profit in inventory on hand at 30 June 2017 is $200. By 30 June 2018, Parrot Ltd had sold all $12 000 of the inventory to external parties. (b) On 1 January 2018, King Ltd acquired $15 000 worth of inventory for cash from Parrot Ltd. The inventory had previously cost Parrot Ltd $11 000. By 30 June 2018, King Ltd had sold $11 250 of the transferred inventory for $16 000 to external entities. (c) On 1 January 2017, Parrot Ltd sold equipment to King Ltd for $8000. This had originally cost Parrot Ltd $12 000 and had a carrying amount at the time of sale of $7000. Both entities charge depreciation at a rate of 10% p.a. straight-line. (d) King Ltd sold an item of inventory to Parrot Ltd on 1 January 2018 for use as machinery. This item cost King Ltd $4000 and was sold to Parrot Ltd for $6000. Parrot Ltd depreciated the item at 10% p.a. straight-line. (e) On 30 June 2018, half of the goodwill was written off as a result of an impairment test. (f) The tax rate is 30%. (g) All dividends declared by Parrot Ltd have been from post-acquisition profits. Shareholder approval is not required in relation to dividends. On 30 June 2018, the trial balances of King Ltd and Parrot Ltd were as follows:

© John Wiley and Sons Australia, Ltd 2015

20.63

Solutions manual to accompany Company Accounting 10e

Debit balances Shares in Parrot Ltd Inventory Other current assets Deferred tax assets Machinery Land Equipment Cost of sales Other expenses Income tax expense Interim dividend paid Final dividend declared Advance to Parrot Ltd

King Ltd $137 200 171 580 8 620 16 200 28 000 — 34 000 65 000 22 000 7 200 4 000 10 000 10 000 $513 800

Credit balances Share capital General reserve Retained earnings (1/7/17) Debentures Final dividend payable Current tax liabilities Other payables Advance from King Ltd Sales Other revenue Gains/(losses) on sale of non-current assets Accumulated depreciation – machinery Accumulated depreciation – equipment

$170 000 41 000 16 000 120 000 10 000 8 000 34 800 — 85 000 19 000 4 000 4 000 2 000 $513 800

Parrot Ltd — $70 320 3 100 7 400 22 000 24 480 37 300 53 500 27 000 2 000 2 000 3 000 — $252 100 $66 000 30 000 35 500 — 3 000 2 500 10 100 10 000 65 000 21 000 1 000 2 000 6 000 $252 100

Required Prepare the consolidated financial statements for King Ltd at 30 June 2018.

At 1 July 2016: Net fair value of identifiable assets and liabilities of Parrot Ltd

Consideration transferred Goodwill

1.

= $60 000 + $30 000 + $21 000 + $6 000 (equity) + $1 000 (1 – 30%) (machinery) + $8 000 (1 – 30%) (equipment) + $6 000 (1 – 30%) (land) + $6 000 (1 – 30%) (inventory) = $131 700 = $137 200 = $5 500

Business combination valuation entries Depreciation expense – machinery Gains/(losses on non-current assets sold

Dr Dr

© John Wiley and Sons Australia, Ltd 2015

100 700

20.64

Chapter 20: Consolidation: intragroup transactions

Income tax expense Retained earnings (1/7/17) Transfer from business combination valuation reserve

Cr Dr

240

Accumulated depreciation – equipment Equipment Deferred tax liability Business combination valuation reserve

Dr Dr Cr Cr

6 000 2 000

Depreciation expense Retained earnings (1/7/17) Accumulated depreciation

Dr Dr Cr

1 000 1 000

Deferred tax liability Income tax expense Retained earnings (1/7/17)

Dr Cr Cr

600

140

Cr

Goodwill Dr Business combination valuation reserve Cr

© John Wiley and Sons Australia, Ltd 2015

700

2 400 5 600

2 000

300 300 5 500 5 500

20.65

Solutions manual to accompany Company Accounting 10e

QUESTION 20.14 (cont’d) 2. Pre-acquisition entries At 1 July 2016: Retained earnings (1/7/16) Share capital General reserve Other reserves Business combination valuation reserve Shares in Parrot Ltd

Dr Dr Dr Dr Dr Cr

21 000 60 000 30 000 6 000 20 200 137 200

At 30 June 2018: Retained earnings (1/7/17)* Dr 29 400 Share capital Dr 60 000 General reserve Dr 30 000 Other reserves Dr 6 000 Business combination valuation reserve Dr 11 800 Shares in Parrot Ltd Cr 137 200 * $21 000 + ($6 000 - $1 800) (inventory) + ($6 000 - $1 800) (land) Share capital Other reserves

Dr Cr

Transfer from business combination valuation reserve Dr Business combination valuation reserve Cr Impairment loss - goodwill Accumulated impairment losses

6 000 6 000

700 700

Dr Cr

2 750

Dr Cr

2 000

Dividend payable Final dividend declared

Dr Cr

3 000

Dividend revenue Dividend receivable

Dr Cr

3 000

Dr Dr Cr

140 60

2 750

3. Current dividend paid Dividend revenue Interim dividend paid

2 000

4. Dividend declared

3 000

3 000

5. Profit in opening inventory Retained earnings (1/7/17) Income tax expense Cost of sales

© John Wiley and Sons Australia, Ltd 2015

200

20.66

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.14 (cont’d) 6. Profit in ending inventory Sales revenue Cost of sales Inventory

Dr Cr Cr

15 000

Deferred tax asset Income tax expense

Dr Cr

300

Dr Dr Cr

700 300

Accumulated depreciation Depreciation expense Retained earnings (1/7/17)

Dr Cr Cr

150

Income tax expense Retained earnings (1/7/17) Deferred tax asset

Dr Dr Cr

30 15

Sales revenue Cost of sales Machinery

Dr Cr Cr

6 000

Deferred tax asset Income tax expense

Dr Cr

600

Accumulated depreciation Depreciation expense (10% x 1/2 x $2 000)

Dr Cr

100

Income tax expense Deferred tax asset

Dr Cr

30

Dr Cr

10 000

14 000 1 000

300

7. Sale of Equipment Retained earnings (1/7/17) Deferred tax asset Equipment

1 000

8. Depreciation

100 50

45

9. Inventory sale and depreciation of machinery

4 000 2 000

600

100

30

10. Advances Advance from King Ltd Advance to Parrot Ltd

© John Wiley and Sons Australia, Ltd 2015

10 000

20.67

Solutions manual to accompany Company Accounting 10e

QUESTION 20.14 (cont’d) King Ltd Sales revenue 85 000

Parrot Ltd 65 000

Other revenue

19 000

21 000

Cost of sales

104 000 65 000

86 000 53 500

Other expenses

22 000

27 000

87 000 17 000 4 000

80 500 5 500 1 000

21 000 7 200

6 500 2 000

13 800 16 000

4 500 35 500

--

--

29 800 4 000 10 000 14 000 15 800

40 000 2 000 3 000 5 000 35 000

170 000

66 000

41 000

30 000

Trading profit Gains/(losses on sale of non-current assets Profit before tax Tax expense

Profit Retained earnings (1/7/17)

Transfer from BCV reserve Dividend paid Dividend declared Retained earnings (30/6/18) Share capital General reserve Other Reserves Business combination valuation reserve Total equity

--

--

226 800

131 000

6 9 3 4

1 1 2

1

5 8 9

1 1 2 5 7 8 2

Adjustments Dr Cr 15 000 6 000 2 000 3 000

100 1 000 2 750

200 14 000 4 000 100 100

129 000 35 000

5 6 9 8 9

700

60 30 30

140 1 000 29 400 140 700 15 700

60 000 6 000 30 000 6 000 11 800

© John Wiley and Sons Australia, Ltd 2015

164 000 100 300

52 650

152 950 11 050 4 300

240 300 300 600

1 1 6 9

300 50

1 8

700

1

2 000 3 000

2 2 2 2 2

Group

3 4

15 350 7 880

7 470 20 455

-27 925 4 000 10 000 14 000 13 925 170 000

6 000 5 600 5 500 700

1 1 2

41 000 ---

224 925

20.68

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.14 (cont’d) Debentures Deferred tax liability Dividend payable Current tax liability Other payables Advance from King Ltd Total liabilities Total equity and liabilities

Shares in Parrot Land Machinery Accumulated depreciation Equipment Accumulated depreciation Inventory Deferred tax asset

Advance to Parrot Ltd Other assets Goodwill Accumulated impairment loss Total assets

120 000

--

10 000 8 000 34 800 --

3 000 2 500 10 100 10 000

172 800 399 600

25 600 156 600

King Ltd 137 200 -28 000 (4 000)

1

600

4

3 000

10

10 000

1

10 000 10 500 44 900 -187 200 412 125

Parrot Ltd -24 480 22 000 (2 000)

2 400

120 000 1 800

Adjustments Dr Cr 137 200

2

2 000

9

1 000 2 000

7 1

72 300 (3 850)

1 000 45 30

6 8 9

240 900 24 725

9

100

1 1 8

2 000 6 000 150

Group -24 480 48 000 (5 900)

34 000 (2 000)

37 300 (6 000)

171 580 16 200

70 320 7 400

10 000

--

10 000

10

--

8 620 --

3 100 --

3 000

4

2 750

2

8 720 5 500 (2 750)

399 600

156 600

6 7 9

2

300 300 600

5 500

183 820

© John Wiley and Sons Australia, Ltd 2015

184 120

412 125

20.69

Solutions manual to accompany Company Accounting 10e

QUESTION 20.14 (cont’d) KING LTD Consolidated Statement of profit or Loss and Other Comprehensive Income for the financial year ended 30 June 2018 Revenues: Sales revenue Other Expenses: Cost of sales Other Trading profit Gains/(losses on sale of non-current assets Profit before income tax Income tax expense Profit for the period Other comprehensive Comprehensive income for the period

$129 000 35 000 100 300 52 650

$164 000

152 950 11 050 4 300 15 350 7 880 $7 470 0 $7 470

KING LTD Consolidated Statement of Changes in Equity for the financial year ended 30 June 2018 Comprehensive income for the period

$7 470

Retained earnings: Balance at 1 July 2017 Profit for the period Dividend paid Dividend declared Balance at 30 June 2018

$20 455 7 470 (4 000) (10 000) $13 925

Share capital: Balance at 1 July 2017 Balance at 30 June 2018

$170 000 $170 000

General reserve: Balance at 1 July 2017 Balance at 30 June 2018

$41 000 $41 000

© John Wiley and Sons Australia, Ltd 2015

20.70

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.14 (cont’d) KING LTD Consolidated Statement of Financial Position as at 30 June 2018 ASSETS Current Assets Inventories Non-current Assets Property, plant and equipment Land Equipment Accumulated depreciation Machinery Accumulated depreciation Other assets Goodwill Accumulated Impairment Loss Tax assets: Deferred tax asset Total Non-current Assets Total Assets

$240 900

$24 480 $72 300 (3 850) 48 000 (5 900)

EQUITY AND LIABILITIES Equity Share capital General reserve Retained earnings Total Equity Current Liabilities Dividend payable Current tax liabilities Other payables Total Current Liabilities Non-current Liabilities: Deferred tax liabilities Interest-bearing liabilities: Debentures Total Non-current Liabilities Total Liabilities Total Equity and Liabilities

© John Wiley and Sons Australia, Ltd 2015

68 450 42 100

135 030 8 720 5 500 (2 750) 24 725 171 225 $412 125

$170 000 41 000 13 925 $224 925 10 000 10 500 44 900 65 400 1 800 120 000 121 800 $187 200 $412 125

20.71

Solutions manual to accompany Company Accounting 10e

Question 20.15

Consolidation worksheet, consolidated financial statements

On 1 July 2015, Wolf Ltd acquired all the shares of Spider Ltd on an ex-div. basis. Acquisition related expenses were $5000. On this date, the equity and liabilities of Spider Ltd included the following balances: Share capital General reserve Retained earnings Dividend payable Provisions

$

200 000 25 000 45 000 10 000 206 500

At acquisition date, all the identifiable assets and liabilities of Spider Ltd were recorded at amounts equal to fair value except for:

Plant (cost $300 000) Trademark Inventory Equipment (cost $80 000) Land Machinery (cost $18 000) Fittings (cost $15 000) Goodwill

Carrying amount $186 000 100 000 70 000 50 000 50 000 15 000 10 000 25 000

Fair value $190 000 110 000 80 000 53 000 70 000 16 000 10 000

Goodwill was written down by $5000 at 30 June 2016 by Wolf Ltd as a result of an annual impairment test. The plant had a further 5-year life at acquisition date and was expected to be used on a straight-line basis over that time. The trademark was considered to have an indefinite life. The machinery, which was estimated to have a further 4-year life at acquisition date, was sold on 1 January 2017. At 1 July 2015, Spider Ltd had not recorded a liability relating to a guarantee that was considered to have a fair value of $10 000. An amount of $6000 was paid by Spider Ltd in June 2017 in part payment of this liability. The balance of this liability was still considered to be $4000 at 30 June 2017. Immediately after acquisition of its shares by Wolf Ltd, Spider Ltd revalued the equipment to fair value. The equipment was expected to have a further 5-year useful life. Spider Ltd registered a patent on 28 June 2015 but has not yet recognised it as an asset. Wolf Ltd believes the fair value of the patent was $30 000. The patent is legally enforceable for a period of 10 years. On 30 June 2016, Spider Ltd determined that the patent was impaired by $9000. On 1 January 2017, Spider Ltd sold the patent for $17 000. During the year ended 30 June 2016, all inventory on hand at acquisition date was sold, and the land was sold on 1 June 2017. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed. Additional information (a) The interim dividend of $5000 was paid by Spider Ltd in the current year. Shareholder approval is not required in relation to payment of dividends. (b) On 1 July 2016, Spider Ltd has on hand inventory worth $12 000, being transferred from Wolf Ltd in June 2008. The inventory had previously cost Wolf Ltd $8000. All the inventory is sold to external parties in the year ending 30 June 2017.

© John Wiley and Sons Australia, Ltd 2015

20.72

Chapter 20: Consolidation: intragroup transactions

(c)

On 31 March 2017, Spider Ltd transferred an item of plant with a carrying amount of $10 000 to Wolf Ltd for $15 000. Wolf Ltd treated this item as inventory. The item was still on hand at the end of the year. Spider Ltd applied a 20% depreciation rate to this plant. (d) During the 2017 year, Wolf Ltd sold inventory to Spider Ltd for $9000, this being at cost plus 20% mark-up. Of this inventory, $1800 remained on hand at 30 June 2017. (e) During the 2017 year, Spider Ltd sold inventory costing $12 000 to Wolf Ltd for $18 000. One-third of this was sold to external parties for $9000. (f) On 1 January 2016, Wolf Ltd sold furniture to Spider Ltd for $8000. This had originally cost Wolf Ltd $12 000 and had a carrying amount at the time of sale of $7000. Both entities charge depreciation at a rate of 10% p.a. (g) Wolf Ltd purchased a new block of land for $25 000 in August 2016. This block of land was sold to Spider Ltd in December 2016 for $50 000. To help Spider Ltd pay for the land, Wolf Ltd gave Spider Ltd an interest-free loan of $12 000. Spider Ltd has not as yet made any repayments on the loan. (h) On 1 January 2017, Spider Ltd sold an item of inventory to Wolf Ltd who regarded the item as plant and equipment. The inventory cost Spider Ltd $9000 to manufacture and was sold for $12 000. Wolf Ltd assesses the plant and equipment’s useful life to be 5 years. (i) On 1 January 2016, Spider Ltd sold a motor vehicle to Wolf Ltd. On this date, the motor vehicle had a carrying amount of $240 000 and was sold to Wolf Ltd for $260 000. The motor vehicle is depreciated at 20% p.a. on a straight-line basis by Wolf Ltd. (j) The tax rate is 30%. On 30 June 2017, the trial balances of Wolf Ltd and Spider Ltd were as follows: Debit balances Shares in Spider Ltd Cash Receivables Inventory Deferred tax assets Motor vehicle Fittings Machinery Plant Equipment Land Furniture Trademark Goodwill Cost of sales Other expenses Income tax expense Interim dividend paid Final dividend declared Loan to Spider Ltd

Wolf Ltd $330 000 2 800 6 000 20 000 10 200 10 000 — 15 000 203 000 53 000 25 000 7 000 — — 162 000 53 000 20 000 12 000 6 000 12 000 $947 000

Spider Ltd — $40 000 5 000 50 000 20 000 20 000 15 000 15 000 324 000 53 000 50 000 8 000 80 000 25 000 128 000 31 000 18 000 5 000 4 000 — $891 000

Credit balances

© John Wiley and Sons Australia, Ltd 2015

20.73

Solutions manual to accompany Company Accounting 10e

Share capital General reserve Asset revaluation surplus Retained earnings (1/7/16) Final dividend payable Current tax liabilities Provisions Deferred tax liabilities Loan from Wolf Ltd Sales Other income Gains/(losses) on sale of non-current assets Accumulated depreciation – plant Accumulated depreciation – Machinery Accumulated depreciation – furniture Accumulated depreciation – fittings Accumulated depreciation – equipment Accumulated depreciation – vehicles

$312 000 20 000 — 30 000 6 000 8 000 50 000 20 000 — 220 000 84 000 50 000 114 000 1 000 1 000 — 30 000 1 000 $947 000

$200 000 25 000 5 000 45 000 4 000 2 500 110 500 11 000 12 000 182 000 30 000 80 000 138 000 3 000 2 000 5 000 30 000 6 000 $891 000

Required Prepare the consolidated financial statements for Wolf Ltd at 30 June 2017.

At 1 July 2015: Net fair value of identifiable assets and liabilities of Spider Ltd =

Net fair value acquired Consideration transferred Goodwill acquired Unrecorded goodwill acquired

1.

= = = = =

($200 000 + $25 000 + $45 000) (equity) + $10 000 (1 – 30%) (inventory) + $20 000 (1 –30%) (land) + $4 000 (1 – 30%) (plant) + $1 000 (1 – 30%) (machinery) + $10 000 (1 – 30%) (trademark) + $30 000 (1 – 30%) (patent) + $3 000 (1 – 30%) (equipment) - $10 000 (1 – 30%) (loan guarantee) - $25 000 (goodwill) $292 600 $330 000 $37 400 $37 400 – $25 000 $12 400

Business combination valuation entries at 30 June 2017 Gain/(loss) on sale of non-current assets Income tax expense Transfer from business combination valuation reserve (Sale of land)

Dr Cr

Trademark

Dr

20 000 6 000

Cr

© John Wiley and Sons Australia, Ltd 2015

14 000

10 000

20.74

Chapter 20: Consolidation: intragroup transactions

Deferred tax liability Cr Business combination valuation reserve Cr

3 000 7 000

Accumulated depreciation - plant Plant and equipment Deferred tax liability Business combination valuation reserve

Dr Cr Cr Cr

114 000

Depreciation expense - plant Retained earnings (1/7/16) Accumulated depreciation - plant ($4 000 /5)

Dr Dr Cr

800 800

Deferred tax liability Income tax expense Retained earnings (1/7/16)

Dr Cr Cr

480

© John Wiley and Sons Australia, Ltd 2015

110 000 1 200 2 800

1 600

240 240

20.75

Solutions manual to accompany Company Accounting 10e

QUESTION 20.15 (cont’d) Depreciation expense – machinery Gain/(loss) on sale of non-current assets Income tax expense Retained earnings (1/7/16) Transfer from business combination valuation reserve (Sale of machinery)

Dr Dr Cr Dr

Business combination valuation reserve Deferred tax asset Loan guarantee

Dr Dr Cr

2 800 1 200

Dr Dr Cr

4 200 1 800

Dr Dr Cr Dr

1 000 17 000

Transfer from business combination valuation reserve Income tax expense Guarantee expense (Payment of guarantee) Amortisation expense Gain/(loss) on sale of non-current assets Income tax expense Retained earnings (1/7/16) Transfer from business combination valuation reserve (Sale of patent) Accumulated depreciation - fittings Fittings

125 625 225 175

Cr

700

4 000

6 000

5 400 8 400

Cr

21 000

Dr Cr

5 000

Goodwill Dr Business combination valuation reserve Cr

12 400

Retained earnings (1/7/16) Accumulated impairment losses

Dr Cr

© John Wiley and Sons Australia, Ltd 2015

5 000

12 400 5 000 5 000

20.76

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.15 (cont’d) 2.

Pre-acquisition entry 01/07/15 Retained earnings Share capital General reserve Asset revaluation surplus Business combination valuation reserve Shares in Spider Ltd

Dr Dr Dr Dr Dr Cr

45 000 200 000 25 000 2 100 57 900

Dr Dr Dr Dr Dr Cr

52 000 200 000 25 000 50 900 2 100

330 000

Pre-acquisition entry 30/6/17 Retained earnings* (1/7/17) Share capital General reserve Business combination valuation reserve** Asset revaluation surplus Shares in Spider Ltd * 45 000 + 10 000 (1 – 0.3) inventory ** 57 900 – 7000 BCVR - inventory

Transfer from business combination valuation reserve Dr Business combination valuation reserve Cr (Sale of land) Transfer from business combination valuation reserve Dr Business combination valuation reserve Cr (Sale of machinery) Transfer from business combination valuation reserve Dr Business combination valuation reserve Cr (Sale of patent) Business combination valuation reserve Transfer from business combination valuation reserve (Payment of guarantee)

Dr Cr

© John Wiley and Sons Australia, Ltd 2015

330 000

14 000 14 000

700 700

21 000 21 000

4 200 4 200

20.77

Solutions manual to accompany Company Accounting 10e

QUESTION 20.15 (cont’d) 3. Interim dividend paid Dividend revenue Interim dividend paid

Dr Cr

5 000

Dividend payable Final dividend declared

Dr Cr

4 000

Dividend revenue Dividend receivable

Dr Cr

4 000

5 000

4. Final dividend declared

4 000

4 000

5. Inter-entity sales of inventory: Profit in opening inventory Retained earnings (1/7/16) Income tax expense Cost of sales

Dr Dr Cr

2 800 1 200 4 000

6. Transfer of plant to inventory: Wolf Ltd – Spider Ltd Gain/(loss) on sale of non-current assets Inventory

Dr Cr

5 000

Deferred tax asset Income tax expense

Dr Cr

1 500

5 000

1 500

7. Intragroup sales of inventory: Profit in ending inventory Sales Cost of sales Inventory

Dr Cr Cr

9 000

Deferred tax asset Income tax expense

Dr Cr

90

8 700 300

90

8. Intragroup sales of inventory: Profit in ending inventory Sales Cost of sales Inventory

Dr Cr Cr

18 000

Deferred Tax Asset Income Tax Expense

Dr Cr

1 200

© John Wiley and Sons Australia, Ltd 2015

14 000 4 000

1 200

20.78

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.15 (cont’d) 9. Sale of Furniture Retained earnings (1/7/17) Deferred tax asset Furniture

Dr Dr Cr

700 300

Accumulated depreciation - furniture Depreciation expense Retained earnings (1/7/16)

Dr Cr Cr

150

Income tax expense Retained earnings (1/7/16) Deferred tax asset

Dr Dr Cr

30 15

Gain/(loss) on sale of non-current assets Land

Dr Cr

25 000

Deferred tax asset Income tax expense

Dr Cr

7 500

Loan from Wolf Ltd Loan to Spider Ltd

Dr Cr

12 000

1 000

10. Depreciation

100 50

45

11. Sale of Land

25 000

7 500

12 000

12. Transfer of inventory to plant: Wolf Ltd – Spider Ltd Sales Cost of sales Inventory

Dr Cr Cr

12 000

Deferred tax asset Income tax expense

Dr Cr

900

Accumulated depreciation – P & E Depreciation expense

Dr Cr

300

Income Tax expense Deferred tax asset

Dr Cr

90

© John Wiley and Sons Australia, Ltd 2015

9 000 3 000

900

300

90

20.79

Solutions manual to accompany Company Accounting 10e

QUESTION 20.15 (cont’d) 13. Transfer of MV in prior period Retained earnings (1/7/16) Deferred tax asset Motor vehicle

Dr Dr Cr

14 000 6 000

Accumulated depreciation-MV Retained earnings (1/7/16) Depreciation expense

Dr Cr Cr

6 000

Income tax expense Retained earnings (1/716) Deferred tax asset

Dr Dr Cr

1 200 600

© John Wiley and Sons Australia, Ltd 2015

20 000

2 000 4 000

1 800

20.80

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.15 (cont’d) Financial Wolf Spider Statements Ltd Ltd Sales revenue 220 000 182 000

Other income

84 000

30 000

Cost of sales

304 000 162 000

212 000 128 000

53 000

31 000

215 000 89 000 50 000

159 000 53 000 80 000

139 000

123 000

20 000

18 000

119 000 30 000

115 000 45 000

Other expenses

Trading profit Gains/(losses)

Profit before tax Tax expense

Profit Retained earnings (1/7/16)

7 8 12 3 4

1 1 1

1 1 1 6 11

Adjustments Dr Cr 9 000 18 000 12 000 5 000 4 000

800 125 1 000

4 000 8 700 14 000 9 000 6 000 100 300 4 000

Group 363 000

105 000

5 7 8 12 1 10 12 13

468 000 254 300

75 525

329 825 138 175 62 375

20 000 625 17 000 5 000 25 000

200 550 1 5 10 12 13

1 1 1 1 2 5 9 10 13 13

1 800 1 200 30 90 1 200

800 175 8 400 5 000 52 000 2 800 700 15 14 000 600

6 000 225 240 5 400 1 500 90 1 200 7 500 900 240 50 2 000

© John Wiley and Sons Australia, Ltd 2015

1 1 1 1 6 7 8 11 12 1 10 13

19 265

181 285 (7 200)

20.81

Solutions manual to accompany Company Accounting 10e

Transfer from BCV reserve

Dividend paid Dividend declared Retained earnings (30/6/17) Share capital General Reserve BCVR

Asset reval’n surplus Total Equity Deferred tax liabilities Dividend payable Current tax liability Loan from Wolf Ltd Provisions Loan guarantee Total Liabilities Total Liabilities + Equity

0

0

1 2 2 2

4 200 14 000 700 21 000

14 000 700 21 000 4 200

1 1 1 2

5 000 4 000

3 4

-

149 000 12 000 6 000

160 000 5 000 4 000

18 000 131 000

9 000 151 000

312 000 20 000

200 000 25 000

2 2

200 000 25 000

0

0

1 2 2

2 800 50 900 4 200

0

5 000

2

2 100

2 900

463 000 20 000

381 000 11 000

1

480

490 985 34 720

6 000

4 000

4

4 000

8 000

2 500

0

12 000

50 000 0

110 500 0

84 000

140 000

215 720

547 000

521 000

706 705

174 085 12 000 6 000 18 000 156 085

312 000 20 000 7 000 2 800 12 400 14 000 700 21 000

3 000 1 200

1 1 1 2 2 2

1 1

0

6 000 10 500

11

12 000

0

4 000

© John Wiley and Sons Australia, Ltd 2015

1

160 500 4 000

20.82

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.15 (cont’d) Wolf Ltd

Spider Ltd

Group

Shares in Spider Ltd Cash Inventory

330 000 2 800 20 000

0 40 000 50 000

Receivables Land Vehicle Accumulated depreciation – Veh. Equipment Accumulated depreciation –Equip. Plant

6 000 25 000 10 000 (1 000)

5 000 50 000 20 000 (6 000)

53 000 (30 000)

53 000 (30 000)

203 000

324 000

Accumulated (114 000) depreciation – Plant Machinery 15 000 Accumulated (1 000) depreciation – Mach. Furniture 7 000 Accumulated (1 000) depreciation – Furn. Fittings 0 Accumulated 0 depreciation – Fit. Trademark Goodwill 0 Accumulated 0 impairment losses Deferred tax assets 10 200

(138 000)

13

Adjustments Dr Cr 330 000

2

5 000 300 4 000 4 000 25 000 20 000

6 7 8 4 11 13

6 000

15 000 (5 000)

1 12

114 000 300

110 000 3 000 1 600

1 12 1

10

80 000 25 000 -

1 1

10 000 12 400

20 000

1 6 7 8 9 11 12 13

-

Total assets

547 000

521 000

(139 300)

1 000

9

14 000 (2 850)

5 000

1

10 000 0

150

5 000

12 000

414 000

30 000 (4 000)

1

Loan to Spider Ltd

7 000 50 000 10 000 (1000) 106 000 (60 000)

15 000 (3 000) 8 000 (2 000)

0 42 800 60 700

1 200 1 500 90 1 200 300 7 500 900 6 000

714 280

© John Wiley and Sons Australia, Ltd 2015

90 000 37 400 (5 000)

5 000

1

45 90 1 800

10 12 13

46 955

12 000

11

0

714 280

706 705

20.83

Solutions manual to accompany Company Accounting 10e

QUESTION 20.15 (cont’d) WOLF LTD Consolidated Statement of profit or Loss and Other Comprehensive Income for financial year ended 30 June 2017 Income: Sales revenue Other income Expenses: Cost of sales Other Trading profit Gains/(losses) on sale of non-current assets Profit before income tax Income tax expense Profit for the period Other comprehensive income Comprehensive income for the period

$363 000 105 000 468 000 254 300 75 525 329 825 62 375 200 550 19 265 $181 285 $0 $181 285

WOLF LTD Consolidated Statement of Changes in Equity for the financial year ended 30 June 2017 Total comprehensive income for the period

$181 285

Retained earnings: Balance at 1 July 2016 Profit for the period Dividend paid Dividend declared Balance at 30 June 2017

$(7 200) 181 285 (12 000) (6 000) $156 085

General reserve: Balance at 1 July 2016 Balance at 30 June 2017

$20 000 $20 000

Share capital: Balance at 1 July 2016 Balance at 30 June 2017

$312 000 $312 000

Asset revaluation surplus: Balance at 1 July 2016 Balance at 30 June 2017

$2 900 $2 900

© John Wiley and Sons Australia, Ltd 2015

20.84

Chapter 20: Consolidation: intragroup transactions

QUESTION 20.15 (cont’d) WOLF LTD Consolidated Statement of Financial Position as at 30 June 2017 ASSETS Current Assets Cash Inventories Receivables Total Current Assets Non-current Assets Property, plant and equipment Land Plant Accumulated depreciation Machinery Accumulated depreciation Furniture Accumulated depreciation Fittings Accumulated depreciation Vehicles Accumulated depreciation Equipment Accumulated depreciation Trademark Goodwill Accumulated impair. Tax assets: Deferred tax asset Total Non-current Assets Total Assets EQUITY AND LIABILITIES Equity Share capital General reserve Asset revaluation surplus Retained earnings Total Equity Current Liabilities Dividend payable Current tax liabilities Provisions Total Current Liabilities Non-current Liabilities: Deferred tax liabilities Loan Guarantee Total Non-current Liabilities Total Liabilities Total Equity and Liabilities

© John Wiley and Sons Australia, Ltd 2015

$42 800 60 700 7 000 110 500

$50 000 $414 000 (139 300) $30 000 (4 000) $14 000 (2 850) $10 000 (0) 10 000 (1 000) 106 000 (60 000) $37 400 (5 000)

274 700 26 000 11 150 10 000 9 000 46 000 90 000 32 400 46 255 596 205 $706 705

$312 000 20 000 2 900 156 085 $490 985 6 000 10 500 160 500 177 000 34 720 4 000 38 720 $215 720 $706 705

20.85