Company Accounting 9th Edition Solutions.pdf

Tutorial Week 2 Homework

Chapter 3: Company Operations CASE STUDIES Case Study 4: CLEARSAILING LTD A.

Currently, there is no Australian accounting standard to provide accounting policies or guidance to deal with accounting for advertising expenditure of this kind. Two potential accounting policies are: (a) expense all advertising expenditure as incurred, or (b) capitalise all advertising expenditure (i.e. treat the costs as an asset).

B.

AASB 108, paragraph 10 states that, in the absence of an Australian accounting standard, management shall use its judgement in developing and applying an accounting policy that results in information that is both relevant to the economic decision making needs of users and is reliable, i.e. provides a faithful representation of the entity’s financial position and performance, as well as being free from bias and complete. Paragraph 11 requires management to refer to the accounting standards of other bodies dealing with similar and related issues and the definitions, recognition criteria and measurement concepts contained in the conceptual framework when choosing between competing accounting policies.

D.

Students could select either policy – the key issue is whether or not such expenditure results in the creation of an asset as per the Conceptual Framework’s definition. If so, the expenditure should be capitalised. If not, the expenditure should be expensed. Students should provide valid arguments to support their choice of accounting policy. In this case, we would argue against capitalisation as the main purpose of the board is to show a higher profit in the current year, i.e. this is not a faithful representation of the entity’s financial position or performance.

Jeffrey’s View (sometimes accountants disagree with each other) Advertising that is prepaid e.g. 3 months of television commercials, might be recognised as an asset.But advertising costs should otherwise not be recognised as an asset. Subsequent expenditure on brands (i.e., advertising) should always be recognised in profit or loss as incurred. This is because such expenditure cannot be distinguished from expenditure to develop the business as a whole. (reference AASB 138 para 20)

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PRACTICE QUESTIONS RACTICE QUEST IONS QUESTION 3.11 PANSY LTD

A. Statement of Profit or Loss and Other Comprehensive Income For year ended 30 June 2014 Income: Sales Less sales returns Interest revenue Total revenues Expenses: Selling expenses Cost of sales Other selling expenses Salaries and wages Total selling expenses Administrative expenses Financial expenses Interest expense Total expenses Profit before income tax Income tax expense Profit for the year Other comprehensive income Total comprehensive income for the year

$1 600 000 65 000

$1 535 000 20 000 1 555 000

850 000 125 000 150 000 1 125 000 262 000 56 500 1443 500 111 500 65 000 $46 500 0 $46 500

2

Tutorial Week 2 Homework B.

-/-/14 30/6/14 30/6/14 30/6/14

Interim div paid Final div declared Transfer to general reserve Balance c/d

Retained Earnings 100 000 1/7/13 Balance 150 000 30/6/14 P or L Summary 25 000 30/6/14 Transfer from revaluation surplus 85 000 360 000 1/7/14 Balance b/d

263 500 46 500 50 000

360 000 85 000

Opening balance of retained earnings = $38 500 add back dividends paid and declared during the year i.e. $100 000 + 150 000 (which have been deducted from the retained earnings) less $50 000 transfer from revaluation surplus (which is included in the $38 500) and plus $25 000 transfer to general reserve (which is included in the $38 500) = $263 500

PANSY LTD Statement of Changes in Equity for the year ended 30 June 2014 Total comprehensive income for the year

$46 500

Retained earnings: Balance at 1 July 2013 Profit for the period Transfer from revaluation surplus Interim dividend paid Final dividend declared Transfer to general reserve Balance at 30 June 2014

$263 500 46 500 50 000 (100 000) (150 000) (25 000) $85 000

Share capital: Balance at 1 July 2013 Balance at 30 June 2014

$200 000 $200 000

Other reserves: Revaluation surplus Balance at 1 July 2013 Transfer to retained earnings Balance at 30 June 2014 General reserve Balance at 1 July 2013 Transfer from retained earnings Balance at 30 June 2014

70 000 (50 000) 20 000 $0 25 000 $25 000

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Tutorial Week 2 Homework C. PANSY LTD Statement of Financial Position as at 30 June 2014 Current assets Cash Inventory Accounts receivable Total current assets Non-current assets Land Plant and equipment Accumulated depreciation Total non-current assets Total assets Current liabilities Accounts payable Dividend payable Mortgage loan Current tax liability Total current liabilities Non-current Liabilities Mortgage loan Total non-current liabilities Total liabilities Net assets

$117 000 85 000 180 000 382 000 200 000 250 000 (37 000)

213 000 413 000 795 000 50 000 150 000 50 000 65 000 315 000 150 000 150 000 465 000 $330 000

Equity Share capital Revaluation surplus General reserve Retained earnings Total equity

$200 000 20 000 25 000 85 000 $330 000

4


Chapter 12: Disclosure: Legal requirements and accounting policies REVIEW QUESTIONS 15. What is the difference between the two types of events occurring after the end of the reporting period? Is their accounting treatment identical? Events occurring after the end of the reporting period are defined in AASB 110 as those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. There are two types of events described in AASB 110: 



adjusting events after the end of the reporting period which provide evidence of conditions that existed at end of the reporting period (e.g. the settlement of a court case after the end of the reporting period that confirms the company had a present obligation at the end of the reporting period) non-adjusting events after the end of the reporting period are events that are indicative of conditions that arose after the end of the reporting period (e.g. a flood or fire after the end of the reporting period that destroys a company’s building and plant).

The treatment in the financial statements is different in both cases. Paragraph 8 of AASB 110 requires the financial effect of the adjusting events to be reflected in the financial statements prepared at the end of the reporting period, i.e. an adjustment must be made to the financial statements before publication. AASB 110, paragraph 21 requires material non-adjusting events to be disclosed by way of note to the financial statements.

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Chapter 13 – Disclosure: presentation of financial statements PRACTICE QUESTIONS QUESTION 13.14 BLACK HOLE LTD [Comparative information must be disclosed in respect of the previous period for all amounts reported in the financial statements in accordance with ED 213 paragraph 38. However this information is not provided in the question]. A. BLACK HOLE LTD Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2015 Sales revenue Cost of sales Gross profit Other income* Administrative expenses** Other expenses Finance costs Profit before income tax Income tax expense Profit for the year Other comprehensive income Items that will not be reclassified to profit or loss Gain on revaluation of land Gain on revaluation of buildings Income tax relating to items not reclassified Other comprehensive income for the year, net of tax Total comprehensive income for the year

$ 825 000 (450 000) 375 000 6 000 (236 300) (10 000) (28 700) 106 000 (50 400) 55 600

25 000 30 000 (16 500) 38 500 $ 94 100

Workings: *Other income: Interest Dividends

** Administrative expenses: Administrative expenses Less Interest expense

$ 2 500 3 500 6 000

$ 265 000 (28 700) 236 300 2

Tutorial Week 3 Homework B. BLACK HOLE LTD Statement of Financial Position as at 30 June 2015 ASSETS Current asets Cash and cash equivalents Trade and other receivables* Inventories Total current assets Non-current assets Deferred tax asset Property, plant and equipment** Goodwill*** Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables**** Short-term borrowings***** Current portion of long-term borrowings Current tax payable Short-term provisions Total current liabilities

$ 500 52 200 87 700 140 400 9 800 780 000 95 000 884 800 $ 1 025 200

$ 82 300 149 200 50 000 52 100 18 000 351 600

Non-current liabilities Long-term borrowings****** Deferred tax liability Long-term provisions Total non-current liabilities Total liabilities

200 000 18 400 16 200 234 600 $ 586 200

Net assets

$ 439 000

EQUITY Share capital Reserves Retained earnings Total equity

$ 200 000 110 000 129 000 $ 439 000

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Workings: *Trade and other receivables: Accounts receivable Allowance for doubtful debts Prepaid insurance **Property, plant and equipment: Land Buildings Plant and equipment Accumulated depreciation

***Goodwill: Goodwill Accumulated impairment

****Trade and other payables: Interest payable Accounts payable Dividend payable

***** Short-term borrowings: Bank overdraft (at call) 7% Debentures

******Long-term borrowings: Mortgage loan Less instalment payable 1 March 2016

$ 58 000 (12 800) 7 000 52 200 $ 220 000 380 000 $ 222 500 (42 500)

180 000 780 000

$ 105 000 (10 000) 95 000

$ 2 800 69 500 10 000 82 300

$ 69 200 80 000 149 200

$ 250 000 (50 000) 200 000

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C. BLACK HOLE LTD Statement of Changes in Equity for the year ended 30 June 2015

Balance at 1 July 2014 Total comprehensive income for the year Issue of share capital Dividend paid – ordinary Dividend declared – ordinary Transfer to general reserve Balance at 30 June 2015

Share capital $ 100 000

General Reval. Retained Total reserve surplus earnings - $ 46 500 $ 128 400 $ 274 900

100 000 $ 200 000

- 38 500 55 600 94 100 - 100 000 - (20 000) (20 000) - (10 000) (10 000) 25 000 - (25 000) $ 25 000 $ 85 000 $ 129 000 $ 439 000

Dividends: 30 cents per share (assuming shares issued during the year entitled to dividends paid and declared).

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Chapter 6: Accounting for income tax REVIEW QUESTIONS 1.

Outline the different treatments for accounting and tax purposes of the following items: (a) depreciation of non-current assets (b) goodwill (c) long-service leave payable (d) allowance for doubtful debts (e) entertainment costs (f) prepaid insurance (g) warranties liability (h) rent received in advance.

(a) The accounting treatment for depreciation as per AASB 116 is to allocate the depreciable amount of the asset on a systematic basis over the asset’s useful life. The tax treatment is based on a set of rates provided by the tax office which is usually different to the accounting depreciation rates. (b) Purchased goodwill is for accounting purposes recognised and then tested for impairment. For tax purposes, write-downs of goodwill are not allowed as a deduction. Note AASB 112 provides an exclusion in this regard to temporary differences. (See 6.4.3 of text). (c) Long service leave is an accounting expense that is recognised as it is incurred, however, for tax purposes it is only recognised as an allowable deduction when the leave is actually taken by an employee and paid in cash. (d) Doubtful/bad debts are recognised as an accounting expense when the likelihood of recovering a debt is doubtful, whereas for tax purposes the deduction will only be allowed when the debt is written out of the accounting records as bad. (e) Entertainment expenses are an accounting expense, but for tax purposes are not an allowable deduction. (f) Prepaid insurance is recognised as an asset for accounting purposes and then charged to expense over time. The tax treatment is to record the amount prepaid as an allowable deduction immediately. (g) Warranty expenses are recognised on the sale of the inventory for accounting purposes, whereas for tax purposes the deduction is not allowed until the inventory has been returned to be fixed and a warranty cost has been incurred. (h) Rent received in advance is regarded as a liability for accounting purposes and then recorded as income (revenue) over time. The common tax treatment is to record the amount received in advance as taxable income immediately. 1


PRACTICE QUESTIONS

QUESTION 6.14 BARTLE FRERE LTD A. Taxable Income for year ended 30 June 2014 Accounting profit before tax Add Bad debts expense Depreciation expense – plant Long service leave Annual leave Office supplies used Entertainment Depreciation – buildings Rent received in advance

$600 000 60 000 50 000 45 000 30 000 15 000 18 000 8 000 35 000 861 000

Deduct Rent revenue Government grant received Depreciation expense of plant for tax Bad debts written off Long service leave paid Annual leave paid Office supplies paid for

30 000 10 000 75 000 45 000 30 000 20 000 18 000 228 000 633 000 $189 900

Taxable income Current tax liability = 30% x $633 000

The appropriate journal entry is: Income Tax Expense Current Tax Liability

Dr Cr

189 900 189 900

2

Tutorial Week 4 Homework Workings: Allowance for Doubtful Debts 45 000 Beginning balance 55 000 Expense 100 000

40 000 60 000 100 000

Revenue Ending balance

Rent Received in Advance 30 000 Beginning balance 25 000 Cash 55 000

20 000 35 000 55 000

Cash Ending balance

Long Service Leave Payable 30 000 Beginning balance 60 000 Expense 90 000

45 000 45 000 90 000

Cash Ending balance

Annual Leave Payable 20 000 Beginning balance 40 000 Expense 60 000

30 000 30 000 60 000

Accs Receivable Ending balance

Plant for taxation purposes: Carrying amount at 1 July 2013 Depreciation Tax base at 30 June 2014

($500 000 – 315 000)

$185 000 (75 000) 110 000

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Tutorial Week 4 Homework B.

Carrying Amount $ Assets Cash Inventory Receivables Supplies Plant Buildings Goodwill Liabilities A/cs payable LSL payable Annual leave payable Rent in adv Total temporary differences Excluded differences Net temporary differences Deferred tax liability Deferred tax asset Beginning balances Movement during year Adjustment

BARTLE FRERE LTD Calculation of deferred tax as at 30 June 2014 Taxable Deduct’ble Tax Base Amount Amount $

$

Taxable Temp Diffs

$

$

Deductible Temp Diffs $

80 000 170 000 445 000 25 000 240 000 152 000 70 000

(170 000) (0) (25 000) (240 000) (152 000) (70 000)

170 000 55 000 0 110 000 0 0

80 000 170 000 500 000 0 110 000 0 0

-

55 000

290 000 60 000 40 000

0 0

(60 000) (40 000)

290 000 0 0

60 000 40 000

25 000

-

(25 000)

0

25 000

25 000 130 000 152 000 70 000

377 000

180 000

222 000 155 000

180 000

46 500 54 000 (38 100)

(40 500) -

8 400Cr

13 500 Dr

The journal entry required for the year ended 30 June 2014 would be: Deferred Tax Asset Deferred Tax Liability Income Tax Exp/Income

Dr Cr Cr

13 500 8 400 5 100

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Tutorial Week 4 Homework C. As a result of a change in the tax rate, the company would need to restate the beginning balances of the deferred tax asset and liability as follows: Deferred Tax Asset Deferred Tax Liability Income Tax Exp/Income *$40 500 x 5/30 **$38 100 x 5/30

Dr Cr Cr

*6 750 **6 350 400

The current tax liability would now be recorded by the following entry (assuming that the entry had not been made previously) Income Tax Expense Current Tax Liability $633 000 x 35%

Dr Cr

221 550 221 550

The entry from the second worksheet would now appear as follows, as the change in tax rate appears as a movement at the bottom of the worksheet: 155 000

Net temporary differences Deferred tax liability (35%) Deferred tax asset (35%) Beginning balances Movement during year Adjustment

Deferred Tax Asset Deferred Tax Liability Income Tax Exp/Income

180 000

54 250

63 000

Dr Cr Cr

(38 100)

(40 500)

(6 350)

(6 750)

9 800Cr

15 750 Dr

15 750 9 800 5 950

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Chapter 5 – Fair value measurement CASE STUDIES Case Study 1 1. Determine the asset or liability that is the subject of measurement: In this case, there are 2 assets that could be measured at fair value, namely land and factory. An alternative would be to consider the land and the factory as a single asset. 2. Determine the valuation premise consistent with the highest and best use The land could be sold for residential purposes for an estimated $1m. Given the cost to demolish the existing factory of $100 000, the land could be sold for residential purposes for $900 000. Measuring fair value in this fashion assumes a specific use and is based on an in-exchange valuation premise as the land is considered on a stand-alone basis. The land and factory could also be sold as a package for use by market participants in conjunction with other assets. The factory has been depreciated by the reporting entity to half its original cost. Given the cost to build a new factory is $780 000, a depreciated replacement cost of the existing factory could be said to be $390 000. However as the factory could presumably be viably built on a cheaper block of land ie one not usable for residential purposes, it is unlikely that there is a market for the land and the factory on an in-use basis. A market participant would be forced to pay the $900 000 for the factory and the land given the alternative use of the land for residential purposes. 3. Determine the most advantageous market for the assets The most advantageous market would appear to be the selling of the property for residential purposes. 4. Determine the valuation technique The market approach would be the appropriate valuation technique given that there are observable market inputs in relation to the selling prices of similar properties. The land has a fair value based on market prices for similar properties of $900 000. The factory has a zero fair value as a separate asset. Example 2 of the Illustrative Examples considers a similar situation to this case. The highest and best use of the land is determined by comparing: (i) the value of the land as a vacant block for residential purposes which would include the factory at a zero fair value, and (ii) the value of the land as currently developed for industrial use which would include the factory as an ongoing asset.

1

Tutorial Week 5 Homework The highest and best use is the higher of these two values. If (i) is chosen, then the factory has a zero fair value and no subsequent depreciation would be determined. If (ii) is chosen, then it would be necessary to determine the fair value of the land separate from the fair value of the factory in order to depreciate the factory. It could be argued that that the fair value of the factory equals the difference between the fair value of the land for residential purposes and the fair value of the combined assets.

Chapter 7: Property, plant and equipment PRACTICE QUESTIONS QUESTION 7.1 SYDNEY LTD 31 December 2012 Depreciation expense – Machine A Accumulated depreciation (1/2 x 10% x $300 000)

Dr Cr

15 000

Depreciation expense – Machine B Accumulated depreciation (1/2 x 10% x $200 000)

Dr Cr

10 000

Machine A

Machine B

Cost Accum depn Fair value Increment

300 000 135 000 165 000 180 000 15 000

Accumulated depreciation – Machine A Machine A (Writing the asset down to carrying amount)

15 000

10 000

Cost Accum depn

200 000 40 000 160 000 155 000 5 000

Fair value Decrement Dr Cr

135 000

Machine A Dr Gain on revaluation of machinery (OCI) Cr (Revaluation of asset)

15 000

135 000

15 000

Income tax expense – gain on revaluation of asset (OCI) Deferred tax liability (Tax-effect of revaluation)

Dr Cr

4 500

Gain on revaluation of machinery (OCI) Income tax expense (OCI)

Dr Cr

15 000

4 500

4 500

2

Tutorial Week 5 Homework Asset revaluation surplus – Machine A Cr (Accumulation of net revaluation gain in equity)

10 500

Accumulated depreciation – Machine B Machine B (Writing the asset down to carrying amount)

Dr Cr

40 000

Loss – revaluation decrement (P/L) Machine B (Revaluation of machine from $200 000 to $155 000)

Dr Cr

5 000

Depreciation expense – Machine A Accumulated depreciation (1/6 x ½ x $180 000)

Dr Cr

15 000

Depreciation expense – Machine B Accumulated depreciation (1/5 x ½ x $155 000)

Dr Cr

15 500

Machine A Carrying amount Fair value Decrement

Machine B Carrying amount Fair value Decrement

40 000

5 000

30 June 2013

$ 165 000 163 000 2 000

15 000

15 500

$ 139 500 136 500 3 000

Accumulated depreciation – Machine A Machine A (Writing down to carrying amount)

Dr Cr

15 000

Loss on revaluation of machinery (OCI) Machine A (Revaluation downwards)

Dr Cr

2 000

Deferred tax liability Dr Income tax expense (OCI) Cr (Tax-effect of revaluation decrement on asset previously revalued upwards)

600

Asset revaluation surplus – Machine A Dr Income tax expense (OCI) Dr Loss on revaluation of machinery (OCI) Cr (Reduction in accumulated equity due to revaluation decrement)

1 400 600

15 000

2 000

600

2 000

Accumulated depreciation – Machine B Machine B (Writing down to carrying amount)

Dr Cr

15 500

Loss – revaluation decrement Machine B (Writing down to fair value)

Dr Cr

3 000

15 500

3 000

3


B: Basis for change in accounting policy Refer to AASB 8 paragraph 9. Discuss the cost basis method and the fair value method in relation to the relevance and reliability of information. Current information is generally more relevant than past information. Determination of cost is generally more reliable than determination of fair value. Discuss the trade-off between relevance and reliability, that is, as information becomes less reliable it also loses its relevance. A fair value measure may, because of its timeliness, be more relevant but if the measure becomes more unreliable, the relevance of the information decreases.

4


Chapter 10 – Business Combinations PRACTICE QUESTIONS QUESTION 10.13 SWEETLIP LTD – WAREHOU LTD Acquisition Analysis Net fair value of identifiable assets and liabilities acquired: Accounts receivable Land Buildings Farm equipment Irrigation equipment Vehicles ($172 000 - $48 000)

$125 000 840 000 550 000 364 000 225 000 124 000 2 228 000 80 000 $2 148 000

Accounts payable Consideration transferred: Shares: Cash: Land:

Goodwill

100 000 x $14 per share $480 000 +$5 500 +$150 000 - $20 000

$1 400 000 615 500 220 000 $2 235 500

$2 235 500 - $2 148 000 =

$87 500

The journal entries in Sweetlip Ltd are:

Land Gain (Re-measurement as part of consideration transferred in a business combination) Accounts receivable Land Buildings Farm equipment Irrigation equipment Vehicles Goodwill Accounts payable Share capital Payable to Warehou Ltd Land (Acquisition of net assets of Warehou Ltd)

Dr Cr

140 000 140 000

Dr Dr Dr Dr Dr Dr Dr Cr Cr Cr Cr

125 000 840 000 550 000 364 000 225 000 124 000 87 500 80 000 1 400 000 615 500 220 000

1


Payable to Warehou Ltd Cash (Payment of purchase consideration)

Dr Cr

615 500

Acquisition-related expenses Cash (Payment of acquisition-related costs)

Dr Cr

25 000

Share capital Cash (Share issue costs)

Dr Cr

18 000

615 500

25 000

18 000

Chapter 11 – Impairment of assets PRACTICE QUESTIONS QUESTION 11.2 NARRABRI LTD The carrying amount of the assets of the Toy Train Division is $500 000. If the recoverable amount is $423 000, then there is an impairment loss of $77 000. The impairment loss is firstly used to write off the goodwill - $50 000. The balance of the loss - $27 000 – is allocated across the other assets, except for inventory assuming it is recorded at the lower of cost and net realisable value:

Factory Brand

Carrying Amount

Proportion

Allocation of Loss

Net Carrying Amount

250 000 50 000 300 000

5/6 1/6

22 500 4 500 27 000

227 500 45 500

The journal entry to record the impairment loss is: Impairment loss Goodwill Accumulated depreciation and impairment losses –factory Accumulated amortisation and impairment losses –brand (Allocation of impairment loss)

Dr Cr

77 000 50 000

Cr

22 500

Cr

4 500

2


Chapter 16 – Controlled entities: the consolidation method REVIEW QUESTIONS

10. Why are some adjustment entries in the previous period’s consolidation worksheet also made in the current period’s worksheet? The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not affect the underlying financial statements or the accounts of the parent or the subsidiary. Hence, if last year’s profits were required to be adjusted on consolidation, then potentially retained earnings needs to be adjusted in the current period. Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in the consolidation worksheet for each year that the land remains in the subsidiary. The entry does not change from year to year. Again the reason is that the adjustment to the carrying amount of the land is only made in a worksheet and not in the actual records of the subsidiary itself.

1


PRACTICE QUESTIONS QUESTION 16.3 PYXIS LTD – GEMINI LTD

At 1 July 2013: Net fair value of identifiable assets and liabilities of Gemini Ltd

=

Consideration transferred Goodwill

= = =

($100 000 + $50 000 + $36 000) (equity) +$8 000 (1 – 30%) (inventory) + $15 000 (1 – 30%) (land) + $10 000 (1 – 30%) (equipment) $209 100 $218 500 $9 400

1. Worksheet entries at 1 July 2013 Business combination valuation entries Inventory Deferred tax liability Business combination valuation reserve

Dr Cr Cr

8 000

Land Deferred tax liability Business combination valuation reserve

Dr Cr Cr

15 000

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

Dr Cr Cr Cr

50 000

Goodwill Business combination valuation reserve

Dr Cr

9 400

Dr Dr Dr Dr Cr

36 000 100 000 50 000 32 500

2 400 5 600

4 500 10 500

40 000 3 000 7 000

19 400

Pre-acquisition entries Retained earnings (1/7/13) Share capital General reserve Business combination valuation reserve Shares in Gemini Ltd

218 500

2


2. Worksheet entries at 30 June 2014 Business combination valuation entries The entries at 1 July 2013 are affected by: - the sale of the inventory - the depreciation of the equipment Cost of sales Income tax expense Transfer from business combination valuation reserve

Dr Cr

8 000

Cr

Land Deferred tax liability Business combination valuation reserve

Dr Cr Cr

15 000

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

Dr Cr Cr Cr

50 000

Depreciation expense Accumulated depreciation (10% x $10 000)

Dr Cr

1 000

Deferred tax liability Income tax expense (30% x $1 000)

Dr Cr

300

Goodwill Business combination valuation reserve

Dr Cr

9 400

2 400 5 600

4 500 10 500

40 000 3 000 7 000

1 000

300

9 400

Pre-acquisition entries The pre-acquisition entries are affected by: - transfer from general reserve $25 000 - transfer from business combination valuation reserve Retained earnings (1/7/13) Share capital General reserve Business combination valuation reserve Shares in Gemini Ltd

Dr Dr Dr Dr Cr

36 000 100 000 50 000 32 500

Transfer from general reserve General reserve

Dr Cr

25 000

Transfer from business comb. valuation reserve Business combination valuation reserve

Dr Cr

5 600

218 500

25 000

5 600

3


Chapter 17 – 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.

PRACTICE QUESTIONS QUESTION 17.2 ADDISON LTD – ERIN LTD (a)

(b)

(c)

(d)

Sales revenue Cost of sales Inventory

Dr Cr Cr

15 000

Deferred tax asset Income tax expense (30% x $5 000)

Dr Cr

1 500

Sales revenue Cost of sales

Dr Cr

15 000

Sales revenue Cost of sales Inventory

Dr Cr Cr

15 000

Deferred tax asset Income tax expense (30% x $2 500)

Dr Cr

750

Retained earnings (1/7/13) Income tax expense Cost of sales

Dr Dr Cr

4 200 1 800

10 000 5 000

1 500

15 000

12 500 2 500

750

6 000

1


(e)

Proceeds on sale of land Land Carrying amount of land sold

Dr Dr Cr

20 000 5 000

Land

Dr Cr

5 000

Income tax expense Deferred tax liability (30% x $5 000)

Dr Cr

1 500

Loan from Erin Ltd Loan to Addison Ltd

Dr Cr

12 000

Proceeds on sale of plant Carrying amount of asset sold Plant

Dr Cr Cr

12 000

Gain on sale of plant Asset

Dr Cr

2 000

Deferred tax asset Income tax expense

Dr Cr

600

Accumulated depreciation Depreciation expense

Dr Cr

200

Income tax expense Deferred tax asset

Dr Cr

60

Sales revenue Cost of sales Machinery

Dr Cr Cr

6 000


Dr Cr

600

Accumulated depreciation Depreciation expense

Dr Cr

200


Dr Cr

60

25 000

OR Loss on sale of land

(f)

5000

1 500

12 000

10 000 2 000

OR

(g)

2000

600

200

60

4 000 2 000

600

200

60

2

1

TUTORIAL 11 Homework Solutions Chapter 19: Consolidation: other issues REVIEW QUESTIONS 3. Why does the indirect NCI receive a share of only post-acquisition equity? Assume: 80% A Ltd

60% B Ltd

C Ltd

A Ltd 80% DNCI 20%

A Ltd 48% DNCI 40% INCI 12%

The DNCI in B Ltd receives a share of the whole of the equity of B Ltd which includes equity relating to the asset “Shares in C Ltd”. This asset reflects the assets of C Ltd that were on hand in C Ltd at the date B Ltd acquired its shares in C Ltd. The pre-acquisition equity of C Ltd also relates to these assets. As the DNCI receives a share of the equity of B Ltd relating to these assets, and as the DNCI in B Ltd is the same party as the INCI in C Ltd, to give the DNCI a share of all the equity of B Ltd as well as the INCI in C Ltd getting a share of the pre-acquisition equity of C Ltd would double-count the share of equity to the NCI. As the investment account “Shares in C Ltd” only relates to the pre-acquisition equity of C Ltd, the INCI is then entitled to a share of the post-acquisition equity of C Ltd.

2

PRACTICE QUESTION Exercise 19.3 Consolidation worksheet entries, multiple subsidiaries LAOS LTD – MALDIVES LTD – MALAYSIA LTD 70% Laos Ltd

60% Maldives Ltd DNCI 30%

Malaysia Ltd DNCI 40% INCI 18%

Acquisition analysis: Laos Ltd – Maldives Ltd At 1 July 2009: Net fair value of identifiable assets and liabilities of Maldives Ltd Net fair value acquired Consideration transferred Goodwill

= $100 000 share capital+ $40 000 ret. profits = $140 000 = 70% x $140 000 = $98 000 = $100 000 = $2 000

Acquisition analysis: Maldives Ltd – Malaysia Ltd At 1 July 2009: Net fair value of identifiable assets and liabilities of Malaysia Ltd Net fair value acquired Consideration transferred Goodwill

= $80 000 share capital + $30 000 ret. profits = $110 000 = 60% x $110 000 = $66 000 = $70 000 = $4 000

STAGE 1 THE ACQUISITION RELATED JOURNALS 1. Pre-acquisition entry – 30 June 2012 Retained earnings (1/7/11) Share capital Goodwill Shares in Maldives Ltd

Dr Dr Dr Cr

28 000 70 000 2 000 100 000

2. Pre-acquisition entry – 30 June 2012 Retained earnings (1/7/11) Dr 18 000 Share capital Dr 48 000 Goodwill Dr 4 000 Shares in Malaysia Ltd Cr (Note that there are no fair value entries required in this example)

70 000

3 STAGE 2 THE INTRAGROUP TRANSACTIONS AND BALANCES

3. Dividends paid Maldives Ltd: 70% x $10 000 = $7 000 Dividend revenue Dividend paid

Dr Cr

7 000

Dr Cr

3 000

7 000

Malaysia Ltd: 60% x $5 000 = $3 000 Dividend revenue Dividend paid

3 000

4. Sale of inventory: Maldives Ltd – Laos Ltd Sales

Dr Cr Cr

20 000

Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr

750

17 500 2 500

750

5. Sale of motor vehicle: Malaysia Ltd – Maldives Ltd Proceeds on sale of motor vehicle Carrying amount of vehicle Motor vehicle

Dr Cr Cr

25 000


Dr Cr

600

Accumulated depreciation Depreciation expense (30% x $2 000)

Dr Cr

600


Dr Cr

180

23 000 2 000

600

6. Depreciation

600

180

4 STAGE 3 THE NCI

Step 1 – date of acquisition 1/7/09

7. NCI 30% share of equity in Maldives Ltd at 1/7/09 Retained earnings (1/7/11) Share capital NCI

Dr Dr Cr

12 000 30 000 42 000

8. NCI 40% share of equity in Malaysia Ltd at 1/7/09 Retained earnings (1/7/11) Share capital NCI

Dr Dr Cr

12 000 32 000 44 000

Step 2 – from date of acquisition 1/7/09 to beginning of current year 30/6//11

9. NCI share of equity in Maldives Ltd: 1/7/09 – 30/6/11 Retained earnings (1/7/11) NCI (30% ($46 000 - $40 000))

Dr Cr

1 800 1 800

10. NCI share of equity in Malaysia Ltd: 1/7/09 – 30/6/11 NCI Retained earnings (1/7/11) (DNCI 40% ($25 000 - $30 000)) NCI Retained earnings (1/7/11) (INCI 18% ($25 000 - $18 000/0.6))

Dr Cr

2 000

Dr Cr

900

2 000

900

Note retained earnings decreases over the period in this example instead of increasing. Note there are no eliminations of adjustment entries in the acquisition stage or intra-group stage in this example where we have adjusted or eliminated post-acquisition profits of the subsidiaries up until 30/06/11.

5 Step 3 – the current year 1/07/11 to 30/06/12

11. NCI share of equity in Maldives Ltd: 1/7/11 – 30/6/12 NCI share of profit NCI (30% x $12,250)

Dr Cr

Maldives’ Book profit Less: Intragroup dividend revenue Less: Unrealised profit sale of inventory after tax Maldives’ adjusted profit

NCI Dividend paid (30% x $10 000)

Dr Cr

3 675 3 675

17 000 (3 000) (1 750) 12,250

See journal 3 See journal 4

3 000 3 000

12. NCI share of equity in Malaysia Ltd: 1/7/11 – 30/6/12 NCI share of profit NCI (40% x $16 020)

Dr Cr

6 408

NCI share of profit NCI (18% x $16 020)

Dr Cr

2 884

Malaysia’s Book profit Less:Unrealised profit sale of motor vehicle after tax Add: Depreciation adjustment after tax Malaysia’s adjusted profit

NCI Dividend paid (40% x $5 000)

Dr Cr

6 408

2 884

17 000 (1,400) 420 16 020

See journal 5 See journal 6

2 000 2 000


Chapter 20: Accounting for investments in associates

REVIEW QUESTIONS 10. Explain why equity accounting is sometimes referred to as “one-line consolidation”. Equity accounting is similar to consolidation in that: - both recognise the investor’s share of post-acquisition equity in the income statement. The consolidation method recognises the MI share as well, but divides equity into parent and MI share. - both adjust for the effects of inter-entity transactions - in the income statement, the share of profits/losses of an associate is similar to the parent’s share of the post-acquisition equity of a subsidiary – however, under the equity method this is not taken against individual accounts but there is a one-line total. - in the balance sheet, the investment in the associate is adjusted for the increase in the investor’s share of the net assets of the associate – similar to the parent’s share of the net assets of a subsidiary. However, under equity accounting, there is no recognition of the individual assets and liabilities of the associate, rather, there is a one-line recognition.

1


PRACTICE QUESTIONS Question 20.1 ACOUSTIC LTD – BASS LTD 30% Acoustic Ltd At 1 July 2011: Net fair value of identifiable assets and liabilities of Bass Ltd Net fair value acquired Cost of investment Goodwill

Bass Ltd

= = = = =

$150 000 30% x $150 000 $45 000 $50 000 $5 000

A. Journal Entries in the Accounts of Acoustic Ltd 1 July 2011

2011 – 2012

Investment in Bass Ltd Cash/Payable (Acquisition of shares in Bass Ltd)

Dr Cr

50 000

Cash

Dr Cr

24 000

Investment in Bass Ltd Share of profit or loss of associates (Recognition of profit in Bass Ltd: 30% x $50 000)

Dr Cr

15 000

Cash

Dr Cr

4 500

Investment in Bass Ltd (Dividend received from Bass Ltd: 30% x $80 000) 30 June 2012

2012 – 2013

Investment in Bass Ltd (Dividend received: 30% x $15 000) 30 June 2013

2013– 2014

50 000

24 000

15 000

4 500


Dr Cr

13 500

Cash

Dr Cr

3 000

Dr Cr

12 000

Investment in Bass Ltd (Dividend from associate: 30% x $10 000) Investment in Bass Ltd * Share of profit or loss of associates (Recognition of profit in Bass Ltd: 30% x $40 000)

13 500

3 000

12 000

2


Question 20.1 (cont’d) B. Consolidation Worksheet Entries 30 June 2012: Investment in Bass Ltd Share of profit or loss of associates (30% x $50 000

Dr Cr

15 000

Dividend revenue Investment in Bass Ltd (30% x $80 000

Dr Cr

24 000

Retained earnings (1/7/12) Investment in Bass Ltd (30% x $(30 000))

Dr Cr

9 000

Investment in Bass Ltd Share of profits or losses of associates (30% x $45 000)

Dr Cr

13 500

Dividend revenue Investment in Bass Ltd (30% x $15 000)

Dr Cr

4 500

Investment in Bass Ltd Retained earnings (1/7/13) (30% [$30 000 + $(30 000)])

Dr Cr

0

Investment in Bass Ltd Share of profit or loss of associates (30% x $40 000)

Dr Cr

12 000


Dr Cr

3 000

15 000

24 000

30 June 2013:

9 000

13 500

4 500

30 June 2014:

0

12 000

3 000

3


Chapter 4 - Fundamental concepts of corporate governance

REVIEW QUESTIONS 6.

How can accountants contribute to effective governance?

Accountants must produce timely, accurate and reliable reports of the true position of the company. The accounting function will need to provide directors (as well as senior managers) with insights into the strategic factors at play in their organisations. Auditors play a key role in the external flow of information that they provide and the expectation that they will be independent and report breaches.

12.

What are the ASX Corporate Governance Council’s Corporate governance principles and recommendations and how do they operate?

On 31 March, 2003 the ASX Corporate Governance Council released a 75 page document titled Principles of good corporate governance and best practice recommendations. In August 2007, the ASX Corporate Governance Council issued a revised document titled Corporate governance principles and recommendations (the Principles), effective the first financial year beginning on or after 1 January 2008. The ASX noted that there were no drastic or wholesale changes to the corporate governance principles issued in 2003. Details of the revised Principles are available from: According to the http://www.asx.com.au/about/corporate_governance/index.htm ASX, ‘ “Best practice” has been removed from the title and the text of the document . . . to eliminate any perception that the Principles are prescriptive and so not to discourage companies from adopting alternative practices and “if not, why not” reporting where appropriate’ (ASX Media Release, ‘Revised corporate governance principles released’, 2 August 2007). On 30 June 2010, a revised version of the 2007 document entitled Corporate governance principles and recommendations with 2010 amendments was issued, effective the first financial year beginning on or after 1 January 2011. Major amendments include: (1) reporting on the processes and transparency surrounding board selection processes and aspects of director induction set out in Principle 2; (2) an explicit focus on diversity, particularly gender diversity and reporting on steps the company is taking to achieve gender diversity in Principles 2 and 3; (3) guidance on investor briefings in Principle 6; and (4) recommendations on the structure of the remuneration committee in Principle 8. The role of the principles is to provide guidance to companies and investors on best practice corporate governance and to increase the transparency of a listed company’s corporate governance practices. As such, the guidance provided in the Principles is 1

Tutorial Week 12 Homework not mandatory; rather, the approach of the ASX is an ‘if not, why not’ approach where companies are asked to (1) detail whether they comply with each best practice recommendation and (2) explain why they do not comply if this is the case. The principles are examples of “hybrid regulation” which are not strictly binding but generally entail some form of sanction if they are not followed.

2


PRACTICE QUESTIONS Question 20.1 ACOUSTIC LTD – BASS LTD 30% Acoustic Ltd At 1 July 2011: Net fair value of identifiable assets and liabilities of Bass Ltd Net fair value acquired Cost of investment Goodwill

Bass Ltd

= = = = =

$150 000 30% x $150 000 $45 000 $50 000 $5 000

A. Journal Entries in the Accounts of Acoustic Ltd 1 July 2011

2011 – 2012

Investment in Bass Ltd Cash/Payable (Acquisition of shares in Bass Ltd)

Dr Cr

50 000

Cash

Dr Cr

24 000


Dr Cr

15 000

Cash

Dr Cr

4 500

Investment in Bass Ltd (Dividend received from Bass Ltd: 30% x $80 000) 30 June 2012

2012 – 2013

Investment in Bass Ltd (Dividend received: 30% x $15 000) 30 June 2013

2013– 2014

50 000

24 000

15 000

4 500


Dr Cr

13 500

Cash

Dr Cr

3 000

Dr Cr

12 000

Investment in Bass Ltd (Dividend from associate: 30% x $10 000) Investment in Bass Ltd * Share of profit or loss of associates (Recognition of profit in Bass Ltd: 30% x $40 000)

13 500

3 000

12 000

3


Question 20.1 (cont’d) B. Consolidation Worksheet Entries 30 June 2012: Investment in Bass Ltd Share of profit or loss of associates (30% x $50 000

Dr Cr

15 000

Dividend revenue Investment in Bass Ltd (30% x $80 000

Dr Cr

24 000

Retained earnings (1/7/12) Investment in Bass Ltd (30% x $(30 000))

Dr Cr

9 000

Investment in Bass Ltd Share of profits or losses of associates (30% x $45 000)

Dr Cr

13 500


Dr Cr

4 500

Investment in Bass Ltd Retained earnings (1/7/13) (30% [$30 000 + $(30 000)])

Dr Cr

0

Investment in Bass Ltd Share of profit or loss of associates (30% x $40 000)

Dr Cr

12 000


Dr Cr

3 000

15 000

24 000

30 June 2013:

9 000

13 500

4 500

30 June 2014:

0

12 000

3 000

4

Company Accounting 9th Edition Solutions.pdf

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