QA Before Week 6 Tute

Tutorial Week 6 Moodle Questions and Solutions

Chapter 15 – Consolidation: Consolidation: controlled entities REVIEW QUESTIONS 1. What is a subsidiary? A subsidiary is an entity that is controlled by another entity, a parent. 2. What is meant by the term “control”? An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. 3. For what purposes are the consolidated financial statements prepared? Possible objectives are: - Supply of relevant information - Supply of comparable information - Accountability of management - Reporting of risks and benefits 4. What are the key elements of control? There are 3 key elements: - Power over the investee - Exposure or rights to variable returns from the parent’s involvement with the subsidiary - The ability to use the power over the subsidiary to affect the amount of the  parent’s returns. returns .

Chapter 16 – Controlled entities: the consolidation method REVIEW QUESTIONS 1. Explain the purpose of the pre-acquisition entries in the the preparation of consolidated financial statements.

The purpose of the pre-acquisition entry is to:

-

 prevent double counting of the assets of the economic entity  prevent double counting of the equity equity of the economic entity recognise any gain on bargain purchase

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Tutorial Week 6 Moodle Questions and Solutions

A simple example such as that below could be used to illustrate these points: A Ltd has acquired all the issued shares of B Ltd. The balance sheets of both companies immediately after acquisition are as follows: Share capital Reserves

Shares in B Ltd Cash

$200 100 300 150 150 300

Share capital Reserves

Cash

$100 50 150 -150 150

The balance of the “Shares in B Ltd” account can be changed to introduce goodwill/ gain on bargain purchase amounts.

6. At the date the parent acquires a controlling interest in a subsidiary, if the carrying amounts of the subsidiary’s assets are not equal to fair value, explain why adjustments to these assets are required in the preparation of the consolidated financial statements. AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary be shown at fair value. The standard-setters believe that the fair value of the assets and liabilities provides the most relevant information to users. Even though the standard refers to an allocation of the cost of a business combination, the standard does not require the identifiable assets and liabilities acquired to be recorded at cost. The only asset acquired that is not measured at fair value is goodwill. The fair value approach is emphasised by the required accounting for any bargain  purchase on combination. It is not accounted for as a reduction in the fair values of the identifiable assets and liabilities acquired such that these items are recorded at cost. Instead, the fair values are unchanged and the excess is recognised as a gain.

8. What is the purpose of the business combination valuation entries? The purpose of these entries is to make consolidation adjustments so that in the consolidate  balance sheet the identifiable assets, liabilities and contingent liabilities of the subsidiary are reported at fair value. This is to fulfil step 3 of the acquisition method required to account for  business combinations by AASB 3.

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Tutorial Week 6 Moodle Questions and Solutions

PRACTICE QUESTIONS QUESTION 16.1 PISCES LTD – URSA LTD Acquisition analysis at 1 July 2013: Fair value of identifiable assets and liabilities of Ursa Ltd

=

Consideration transferred Goodwill

= = =

$200 000 + $50 000 + $20 000 + $5 000 (1 – 30%) (BCVR – inventory) + $10 000 (1 – 30%) BCVR – plant) $280 500 $283 000 $2 500

Business combination valuation entries at 30 June 2014 Accumulated depreciation Plant Deferred tax liability Business combination valuation reserve

Dr Cr Cr Cr

80 000

Depreciation expense Accumulated depreciation (1/5 x $10 000 p.a.)

Dr Cr

2 000

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

Dr Cr

600

Cost of sales Income tax expense Transfer from business combination valuation reserve

Dr Cr

5 000

Cr

Goodwill Business combination valuation entry

Dr Cr

2 500

Retained earnings (1/7/13) Share capital General reserve Business combination valuation reserve Shares in Ursa Ltd

Dr Dr Dr Dr Cr

20 000 200 000 50 000 13 000

Transfer from business combination valuation reserve Business combination valuation reserve

Dr Cr

3 500

70 000 3 000 7 000

2 000

600

1 500 3 500

2 500

Pre-acquisition entries at 30 June 2014

283 000

3 500

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Tutorial Week 6 Moodle Questions and Solutions

QUESTION 16.14 EQUULEUS LTD – FORNAX LTD

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

=

Consideration transferred Gain on bargain purchase

= = =

($10 000 + $2 000 + $1 500) (equity) + $2 000 (1 – 30%) (land) + $ 1 000 (1 – 30%) (plant) + $ 1 000 (1 – 30%) (inventory) $16 300 $15 000 $1 300

Worksheet entries at 1 July 2015 1. Business combination valuation entries Gain on sale of land/Carrying amount of land sold Dr Income tax expense Cr Transfer from business combination valuation reserve Cr

2 000 600 1 400

Accumulated depreciation – plant Plant Deferred tax liability Business combination valuation reserve

Dr Dr Cr Cr

500 500

Depreciation expense – plant Retained earnings (1/7/14) Accumulated depreciation (1/5 x $1 000 p.a.)

Dr Dr Cr

200 200

Deferred tax liability Income tax expense Retained earnings (1/7/14)

Dr Cr Cr

120

300 700

400

60 60

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Tutorial Week 6 Moodle Questions and Solutions 2. Pre-acquisition entries  At 1 July 2013: Gain on bargain purchase Retained earnings (1/7/13) Share capital General reserve Business combination valuation reserve Shares in Fornax Ltd

Cr Dr Dr Dr Dr Cr

1 300 1 500 10 000 2 000 2 800 15 000

 At 30 June 2015: Retained earnings (1/7/14) * Share capital General reserve Business combination valuation reserve Shares in Fornax Ltd

Dr Dr Dr Dr Cr

1 400 10 000 1 500 2 100 15 000

* = $1 500 - $1 300 + $500 (general reserve transfer) + $700 (BCVR) Transfer from business combination valuation reserve Business combination valuation reserve

Dr Cr

1 400 1 400

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Tutorial Week 6 Moodle Questions and Solutions

Equuleus Ltd 3 200

Fornax Ltd 1 800

Income tax expense

1 300

240

Profit Retained earnings (1/7/14)

1 900 1 500

1 560 2 100

3 400 500 2 900

3 600 0 3 660

25 000 8 000 -

10 000 3 000 -

35 900 1 500 (500) 1 000 36 900 5 000 41 900

16 660 300 200 500 17 160 1 300 18 460

3 000 300 3 000 15 000 8 600 17 000 (5 000) 41 900

4 000 360 2 000 5 100 8 000 (1 000) 18 460

Profit before tax

Transfer from BCVR Dividend paid Retained earnings (30/6/15) Share capital General reserve Business combination valuation reserve Other components Increases/Decreases

Liabilities

Inventory Cash Financial assets Shares in Fornax Ltd Land Plant Accum depreciation

1 1

1 2

Adjustments Dr Cr 2 000 200 600 60 200 1 400

2

1 400

2 2 2

10 000 1 500 2 100

1

1 1

120

500 500 19 920

60

1 400

700 1 400

300

Group 2 800

1 1

880 1 920 2 060

1

3 980 -500 3 480

1

1 2

1

15 000

2

400 19 920

1

25 000 9 500 -37 980 1 800 (300) 1 500 39 480 6 480 45 960 7 000 660 5 000 -13 700 25 500 (5 900) 45 960

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Tutorial Week 6 Moodle Questions and Solutions

FORNAX LTD Consolidated Statement of profit or Loss and Other Comprehensive Income for financial year ended 30 June 2015 Profit before income tax Income tax expense Profit for the period Other comprehensive income: Other components of equity: decrements Comprehensive income for the period

$2 800 880 $1 920 (300) $1 620

FORNAX LTD Consolidated Statement of Changes in Equity for financial year ended 30 June 2015 Comprehensive income for the period

$1 620

Retained earnings balance at 1 July 2014 Profit for the period Dividend paid Retained earnings balance at 30 June 2015

$2 060 1 920 (500) $3 480

Share capital balance at 1 July 2014 Share capital balance at 30 June 2015

$25 000 $25 000

General reserve balance at 1 July 2014 General reserve balance at 30 June 2015

$9 500 $9 500

Other components of equity at 1 July 2014 Decreases Other components of equity at 30 June 2015

$1 800 (300) $1 500

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Tutorial Week 6 Moodle Questions and Solutions

FORNAX LTD Consolidated Statement of Financial Position as at 30 June 2015 Current Assets Inventory Financial assets Cash Total Current Assets Non-current Assets Property, plant and equipment: Land Plant Accumulated depreciation – Plant Total Non-current Assets Total Assets

13 700 25 500 (5 900) 33 300 $45 960

Equity Share capital Reserves: General reserve Other components of equity Retained earnings Total Equity Liabilities Total Equity and Liabilities

$25 000 9 500 1 500 3 480 39 480 6 480 $45 960

$7 000 5 000 660 12 660

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Tutorial Week 6 Moodle Questions and Solutions

QUESTION 16.15 AURIGA LTD – PERSEUS LTD At 1 July 2013:  Net fair value of identifiable assets and liabilities of Perseus Ltd

=

Consideration transferred Goodwill

= = =

$100 000 + $35 000 + $4 000 (1 – 30%) (inventory) + $10 000 (1 – 30%) (land) + $3 000 (1 – 30%) (plant) - $5 000 (1 – 30%) (guarantee liability) + $6 000 (1 – 30%) (patent) $147 600 $160 000 $12 400

1. Business combination valuation entries at 30 June 2016 Depreciation expense Gain on sale of plant/Carrying amount of plant sold Income tax expense Retained earnings (1/7/15) Transfer from business combination valuation reserve (1/5 x $3 000 p.a.)

Dr Dr Cr Dr

300 1 500

Patent Deferred tax liability Business combination valuation reserve

Dr Cr Cr

6 000

Amortisation expense - patent Retained earnings (1/7/15) Accumulated amortisation

Dr Dr Cr

1 000 2 000

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

Dr Cr Cr

900

Transfer from business combination valuation reserve Income tax expense Gain on guarantee

Dr Dr Cr

3 500 1 500

Goodwill Business combination valuation reserve

Dr Cr

12 400

540 840

Cr

2 100

1 800 4 200

3 000

300 600

5 000

12 400

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Tutorial Week 6 Moodle Questions and Solutions 2. Pre-acquisition entries  At 1/7/2013: Retained earnings (1/7/13) Share capital Business combination valuation reserve Shares in Perseus Ltd

Dr Dr Dr Cr

35 000 100 000 25 000 160 000

 At 30 June 2016: This entries are affected by: - sale of land in March 2014 – prior period - sale of inventory by 30 June 2014 – prior period - sale of plant in January in current period - settlement of guaranteed loan in current period - transfer to general reserve of $20 000 in current period. Retained earnings (1/7/15) * Share capital Business combination valuation reserve Shares in Perseus Ltd

Dr Dr Dr Cr

44 800 100 000 15 200

Dr

3 500

160 000

* $35 000 + 70% ($4 000 + $10 000) Business combination valuation reserve Transfer from business combination valuation reserve (Settlement of loan)

Cr

3 500

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

Dr Cr

2 100

General reserve Transfer to general reserve

Dr Cr

20 000

2 100

20 000

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Tutorial Week 6 Moodle Questions and Solutions

Auriga Ltd 50 000

Perseus Ltd 15 000

Tax expense

20 000

6 000

Profit Retained earnings (1/7/15)

30 000 37 000

9 000 45 000

-

-

67 000 20 000 20 000 47 000 150 000 12 000 -

54 000 20 000 20 000 34 000 100 000 20 000 -

209 000 14 000

154 000 0

217 500 14 000

6 000 20 000

0 0

6 000 20 000

14 000

14 000

28 000

(4 000) 10 000 239 000 19 000 25 000 283 000

(10 000 4 000 158 000 8 000 0 166 000

(14 000) 14 000 251 500 27 000 25 000 900 304 400

160 000 5 000 10 000 30 000 140 000 (62 000) 283 000

0 14 000 5 000 21 000 163 000 (37 000) 166 000

Profit before tax

Transfer from BCVR

Dividend paid T’fer to gen reserve Ret earn. (30/6/16) Share capital General reserve Business comb. valuation reserve

Asset reval surplus (1/7/15) Increment Asset reval surplus (30/6/16) Other components (1/7/15) Losses Other com (30/6/16) Payables Loan Defer. tax liability Shares in Perseus Cash Financial assets Inventory Plant & equipment Accum depreciation Goodwill Patent Accum amortisation

1 1 1 1

1 1 2 1 2

2 2 2 2

1

1 1

Adjustments Dr Cr 300 5 000 1 500 1 000 1 500 300 540 840 2 000 44 800 3 500 2 100

100 000 20 000 15 200 3 500

900

Group 1

67 200

1 1

26 660

600

1

2 100 3 500

1 2

20 000

2

4 200 12 400 2 100

1 1 2

1 800

1

160 000

2

3 000 215 540

1

12 400 6 000 215 540

40 540 34 960

-75 500 20 000 -20 000 55 500 150 000 12 000 --

0 19 000 15 000 51 000 303 000 (99 000) 12 400 6 000 (3 000) 304 400

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Tutorial Week 6 Moodle Questions and Solutions

AURIGA LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income for year ended 30 June 2016 Profit before income tax Income tax expense Profit for the period Other comprehensive income: Other components of equity: losses on financial assets Gains on revaluation of assets Comprehensive income for the period

$67 200 26 660 $40 540 (14 000) 6 000 $32 540

AURIGA LTD Consolidated Statement of Changes in Equity for year ended 30 June 2016

Comprehensive income for the period

$32 540

Retained earnings balance at 1 July 2015 Profit for the period Dividend paid Retained earnings balance at 30 June 2016

$34 960 40 540 (20 000) $55 500

Share capital balance at 1 July 2015 Share capital balance at 30 June 2016

$150 000 $150 000

General reserve balance at 1 July 2015 General reserve balance at 30 June 2016

$42 000 $42 000

Asset revaluation surplus at 1 July 2015 Gains Asset revaluation surplus at 30 June 2016

$14 000 6 000 $20 000

Other components of equity at 1 July 2015 Losses on financial assets Other components of equity at 30 June 2016

$28 000 (14 000) $14 000

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Tutorial Week 6 Moodle Questions and Solutions

AURIGA LTD Consolidated Statement of Financial Position as at 30 June 2016 Current Assets Cash Financial assets Inventory Total Current Assets Non-current Assets Property, plant, and equipment Accumulated depreciation Goodwill Intangibles: Patent Accumulated amortisation Total Non-current Assets Total Assets Equity Share capital Reserves: General reserve Asset revaluation surplus Other components of equity Retained earnings Total Equity Current Liabilities Payables Non-current Liabilities Loan Deferred tax liability Total Liabilities Total Equity and Liabilities

$19 000 15 000 51 000 85 000

$303 000 (99 000) 6 000 (3 000)

204 000 12 400 __3 000 219 400 $304 400

$150 000 12 000 20 000 14 000 55 500 251 500 27 000 25 000 __900 52 900 $304 400

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