company accounting 9th edition solutions.pdf

Tutorial Week 2 Homework

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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 entitys 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 Frameworks 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 entitys financial position or performance.

Jeffreys 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 $1 600 000 Less sales returns 65 000 $1 535 000 Interest revenue 20 000 Total revenues 1 555 000 Expenses: Selling expenses Cost of sales 850 000 Other selling expenses 125 000 Salaries and wages 150 000 Total selling expenses 1 125 000 Administrative expenses 262 000 Financial expenses Interest expense 56 500 Total expenses 1443 500 Profit before income tax 111 500 Income tax expense 65 000 Profit for the year $46 500 Other comprehensive income 0 Total comprehensive income for the year $46 500


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B.

Retained Earnings -/-/14 Interim div paid 100 000 1/7/13 Balance 263 50030/6/14 Final div declared 150 000 30/6/14 P or L Summary 46 50030/6/14 Transfer to general

reserve 25 000 30/6/14 Transfer from

revaluation surplus 50 000

30/6/14 Balance c/d 85 000 360 000 360 000 1/7/14 Balance b/d 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 $263 500 Profit for the period 46 500 Transfer from revaluation surplus 50 000 Interim dividend paid (100 000) Final dividend declared (150 000) Transfer to general reserve (25 000) Balance at 30 June 2014 $85 000 Share capital: Balance at 1 July 2013 $200 000 Balance at 30 June 2014 $200 000 Other reserves: Revaluation surplus Balance at 1 July 2013 70 000 Transfer to retained earnings (50 000) Balance at 30 June 2014 20 000 General reserve Balance at 1 July 2013 $0 Transfer from retained earnings 25 000 Balance at 30 June 2014 $25 000


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C. PANSY LTD

Statement of Financial Position as at 30 June 2014

Current assets Cash $117 000 Inventory 85 000 Accounts receivable 180 000 Total current assets 382 000 Non-current assets Land 200 000 Plant and equipment 250 000 Accumulated depreciation (37 000) 213 000 Total non-current assets 413 000 Total assets 795 000 Current liabilities Accounts payable 50 000 Dividend payable 150 000 Mortgage loan 50 000 Current tax liability 65 000 Total current liabilities 315 000 Non-current Liabilities Mortgage loan 150 000 Total non-current liabilities 150 000 Total liabilities 465 000 Net assets $330 000 Equity Share capital $200 000 Revaluation surplus 20 000 General reserve 25 000 Retained earnings 85 000 Total equity $330 000


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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 companys 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 $ 825 000 Cost of sales (450 000) Gross profit 375 000 Other income* 6 000 Administrative expenses** (236 300) Other expenses (10 000) Finance costs (28 700) Profit before income tax 106 000 Income tax expense (50 400) Profit for the year 55 600 Other comprehensive income Items that will not be reclassified to profit or loss Gain on revaluation of land 25 000 Gain on revaluation of buildings 30 000 Income tax relating to items not reclassified (16 500) Other comprehensive income for the year, net of tax 38 500 Total comprehensive income for the year $ 94 100 Workings: *Other income:

Interest $ 2 500 Dividends 3 500

6 000 ** Administrative expenses: Administrative expenses $ 265 000 Less Interest expense (28 700) 236 300


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B. BLACK HOLE LTD

Statement of Financial Position as at 30 June 2015

ASSETS Current asets Cash and cash equivalents $ 500 Trade and other receivables* 52 200 Inventories 87 700 Total current assets 140 400 Non-current assets Deferred tax asset 9 800 Property, plant and equipment** 780 000 Goodwill*** 95 000

Total non-current assets 884 800 Total assets $ 1 025 200 LIABILITIES Current liabilities Trade and other payables**** $ 82 300 Short-term borrowings***** 149 200 Current portion of long-term borrowings 50 000 Current tax payable 52 100 Short-term provisions 18 000 Total current liabilities 351 600 Non-current liabilities Long-term borrowings****** 200 000 Deferred tax liability 18 400 Long-term provisions 16 200 Total non-current liabilities 234 600 Total liabilities $ 586 200 Net assets $ 439 000 EQUITY Share capital $ 200 000 Reserves 110 000 Retained earnings 129 000 Total equity $ 439 000


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Workings: *Trade and other receivables: Accounts receivable $ 58 000 Allowance for doubtful debts (12 800) Prepaid insurance 7 000 52 200 **Property, plant and equipment: Land $ 220 000 Buildings 380 000 Plant and equipment $ 222 500 Accumulated depreciation (42 500) 180 000 780 000 ***Goodwill:

Goodwill $ 105 000 Accumulated impairment (10 000) 95 000

****Trade and other payables: Interest payable $ 2 800 Accounts payable 69 500 Dividend payable 10 000 82 300 ***** Short-term borrowings: Bank overdraft (at call) $ 69 200 7% Debentures 80 000 149 200 ******Long-term borrowings: Mortgage loan $ 250 000 Less instalment payable 1 March 2016 (50 000) 200 000


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C.

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

Share General Reval. Retained Total capital reserve surplus earnings Balance at 1 July 2014 $ 100 000 - $ 46 500 $ 128 400 $ 274 900 Total comprehensive income for the year - - 38 500 55 600 94 100 Issue of share capital 100 000 - - - 100 000 Dividend paid ordinary - - - (20 000) (20 000) Dividend declared ordinary - - - (10 000) (10 000) Transfer to general reserve - 25 000 - (25 000) - Balance at 30 June 2015 $ 200 000 $ 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 assets 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.


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PRACTICE QUESTIONS QUESTION 6.14

BARTLE FRERE LTD

A. Taxable Income

for year ended 30 June 2014 Accounting profit before tax $600 000 Add Bad debts expense 60 000 Depreciation expense plant 50 000 Long service leave 45 000 Annual leave 30 000 Office supplies used 15 000 Entertainment 18 000 Depreciation buildings 8 000 Rent received in advance 35 000 861 000 Deduct Rent revenue 30 000 Government grant received 10 000 Depreciation expense of plant for tax 75 000 Bad debts written off 45 000 Long service leave paid 30 000 Annual leave paid 20 000 Office supplies paid for 18 000 228 000 Taxable income 633 000 Current tax liability = 30% x $633 000 $189 900 The appropriate journal entry is: Income Tax Expense Dr 189 900 Current Tax Liability Cr 189 900


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Workings: Allowance for Doubtful Debts

Accs Receivable 45 000 Beginning balance 40 000 Ending balance 55 000 Expense 60 000 100 000 100 000

Rent Received in Advance Revenue 30 000 Beginning balance 20 000 Ending balance 25 000 Cash 35 000 55 000 55 000

Long Service Leave Payable Cash 30 000 Beginning balance 45 000 Ending balance 60 000 Expense 45 000 90 000 90 000

Annual Leave Payable Cash 20 000 Beginning balance 30 000 Ending balance 40 000 Expense 30 000 60 000 60 000 Plant for taxation purposes: Carrying amount at 1 July 2013 ($500 000 315 000) $185 000 Depreciation (75 000) Tax base at 30 June 2014 110 000


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B.

BARTLE FRERE LTD Calculation of deferred tax

as at 30 June 2014 Carrying

Amount Taxable Amount

Deductble Amount

Tax Base Taxable Temp Diffs

Deductible Temp Diffs

$ $ $ $ $ $ Assets Cash 80 000 - - 80 000 - -Inventory 170 000 (170 000) 170 000 170 000 - -Receivables 445 000 (0) 55 000 500 000 55 000Supplies 25 000 (25 000) 0 0 25 000 Plant 240 000 (240 000) 110 000 110 000 130 000 Buildings 152 000 (152 000) 0 0 152 000 Goodwill 70 000 (70 000) 0 0 70 000 Liabilities A/cs payable 290 000 - - 290 000 LSL payable 60 000 0 (60 000) 0 60 000Annual leave payable

40 000 0 (40 000) 0 40 000

Rent in adv 25 000 - (25 000) 0 25 000Total temporary differences

377 000 180 000

Excluded differences

222 000

Net temporary differences

155 000 180 000

Deferred tax liability

46 500

Deferred tax asset

54 000

Beginning balances

(38 100) (40 500)

Movement during year

-

Adjustment 8 400Cr 13 500 Dr

The journal entry required for the year ended 30 June 2014 would be:

Deferred Tax Asset Dr 13 500 Deferred Tax Liability Cr 8 400

Income Tax Exp/Income Cr 5 100


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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 Dr *6 750 Deferred Tax Liability Cr **6 350

Income Tax Exp/Income Cr 400 *$40 500 x 5/30 **$38 100 x 5/30 The current tax liability would now be recorded by the following entry (assuming that the entry had not been made previously) Income Tax Expense Dr 221 550 Current Tax Liability Cr 221 550 $633 000 x 35% 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:

Net temporary differences

155 000 180 000

Deferred tax liability (35%)

54 250

Deferred tax asset (35%)

63 000

Beginning balances

(38 100) (40 500)

Movement during year

(6 350) (6 750)

Adjustment 9 800Cr 15 750 Dr

Deferred Tax Asset Dr 15 750 Deferred Tax Liability Cr 9 800

Income Tax Exp/Income Cr 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.


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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


SYDNEY LTD

31 December 2012 Depreciation expense Machine A Dr 15 000 Accumulated depreciation Cr 15 000 (1/2 x 10% x $300 000) Depreciation expense Machine B Dr 10 000 Accumulated depreciation Cr 10 000 (1/2 x 10% x $200 000) Machine A Machine B Cost 300 000 Cost 200 000 Accum depn 135 000 Accum depn 40 000 165 000 160 000 Fair value 180 000 Fair value 155 000 Increment 15 000 Decrement 5 000 Accumulated depreciation Machine A Dr 135 000 Machine A Cr 135 000 (Writing the asset down to carrying amount) Machine A Dr 15 000 Gain on revaluation of machinery (OCI) Cr 15 000 (Revaluation of asset) Income tax expense gain on revaluation of asset (OCI) Dr 4 500 Deferred tax liability Cr 4 500 (Tax-effect of revaluation) Gain on revaluation of machinery (OCI) Dr 15 000 Income tax expense (OCI) Cr 4 500


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Asset revaluation surplus Machine A Cr 10 500 (Accumulation of net revaluation gain in equity) Accumulated depreciation Machine B Dr 40 000 Machine B Cr 40 000 (Writing the asset down to carrying amount) Loss revaluation decrement (P/L) Dr 5 000 Machine B Cr 5 000 (Revaluation of machine from $200 000 to $155 000) 30 June 2013 Depreciation expense Machine A Dr 15 000 Accumulated depreciation Cr 15 000 (1/6 x x $180 000) Depreciation expense Machine B Dr 15 500 Accumulated depreciation Cr 15 500 (1/5 x x $155 000) Machine A $ Machine B $ Carrying amount 165 000 Carrying amount 139 500 Fair value 163 000 Fair value 136 500 Decrement 2 000 Decrement 3 000 Accumulated depreciation Machine A Dr 15 000 Machine A Cr 15 000 (Writing down to carrying amount) Loss on revaluation of machinery (OCI) Dr 2 000 Machine A Cr 2 000 (Revaluation downwards) Deferred tax liability Dr 600 Income tax expense (OCI) Cr 600 (Tax-effect of revaluation decrement on asset previously revalued upwards) Asset revaluation surplus Machine A Dr 1 400 Income tax expense (OCI) Dr 600 Loss on revaluation of machinery (OCI) Cr 2 000 (Reduction in accumulated equity due to revaluation decrement) Accumulated depreciation Machine B Dr 15 500 Machine B Cr 15 500 (Writing down to carrying amount) Loss revaluation decrement Dr 3 000 Machine B Cr 3 000 (Writing down to fair value)


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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.


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Chapter 10 Business Combinations


SWEETLIP LTD WAREHOU LTD

Acquisition Analysis Net fair value of identifiable assets and liabilities acquired: Accounts receivable $125 000 Land 840 000 Buildings 550 000 Farm equipment 364 000 Irrigation equipment 225 000 Vehicles ($172 000 - $48 000) 124 000 2 228 000 Accounts payable 80 000 $2 148 000 Consideration transferred: Shares: 100 000 x $14 per share $1 400 000 Cash: $480 000 +$5 500 +$150 000 - $20 000 615 500 Land: 220 000 $2 235 500 Goodwill $2 235 500 - $2 148 000 = $87 500 The journal entries in Sweetlip Ltd are: Land Dr 140 000 Gain Cr 140 000 (Re-measurement as part of consideration transferred in a business combination) Accounts receivable Dr 125 000 Land Dr 840 000 Buildings Dr 550 000 Farm equipment Dr 364 000 Irrigation equipment Dr 225 000 Vehicles Dr 124 000 Goodwill Dr 87 500 Accounts payable Cr 80 000 Share capital Cr 1 400 000 Payable to Warehou Ltd Cr 615 500 Land Cr 220 000 (Acquisition of net assets of Warehou Ltd)


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Payable to Warehou Ltd Dr 615 500 Cash Cr 615 500 (Payment of purchase consideration) Acquisition-related expenses Dr 25 000 Cash Cr 25 000 (Payment of acquisition-related costs) Share capital Dr 18 000 Cash Cr 18 000 (Share issue costs) Chapter 11 Impairment of assets


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: Carrying Proportion Allocation Net Carrying Amount of Loss Amount Factory 250 000 5/6 22 500 227 500 Brand 50 000 1/6 4 500 45 500 300 000 27 000 The journal entry to record the impairment loss is: Impairment loss Dr 77 000 Goodwill Cr 50 000 Accumulated depreciation and impairment losses factory Cr 22 500 Accumulated amortisation and impairment losses brand Cr 4 500 (Allocation of impairment loss)


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Chapter 16 Controlled entities: the consolidation method

REVIEW QUESTIONS 10. Why are some adjustment entries in the previous periods consolidation worksheet

also made in the current periods 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 years 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.


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PYXIS LTD GEMINI LTD

At 1 July 2013: Net fair value of identifiable assets and liabilities of Gemini Ltd = ($100 000 + $50 000 + $36 000) (equity) +$8 000 (1 30%) (inventory) + $15 000 (1 30%) (land) + $10 000 (1 30%) (equipment) = $209 100 Consideration transferred = $218 500 Goodwill = $9 400 1. Worksheet entries at 1 July 2013 Business combination valuation entries Inventory Dr 8 000 Deferred tax liability Cr 2 400 Business combination valuation reserve Cr 5 600 Land Dr 15 000 Deferred tax liability Cr 4 500 Business combination valuation reserve Cr 10 500 Accumulated depreciation - equipment Dr 50 000 Equipment Cr 40 000 Deferred tax liability Cr 3 000 Business combination valuation reserve Cr 7 000 Goodwill Dr 9 400 Business combination valuation reserve Cr 19 400 Pre-acquisition entries Retained earnings (1/7/13) Dr 36 000 Share capital Dr 100 000 General reserve Dr 50 000 Business combination valuation reserve Dr 32 500 Shares in Gemini Ltd Cr 218 500


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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 Dr 8 000 Income tax expense Cr 2 400 Transfer from business combination valuation reserve Cr 5 600 Land Dr 15 000 Deferred tax liability Cr 4 500 Business combination valuation reserve Cr 10 500 Accumulated depreciation - equipment Dr 50 000 Equipment Cr 40 000 Deferred tax liability Cr 3 000 Business combination valuation reserve Cr 7 000 Depreciation expense Dr 1 000 Accumulated depreciation Cr 1 000 (10% x $10 000) Deferred tax liability Dr 300 Income tax expense Cr 300 (30% x $1 000) Goodwill Dr 9 400 Business combination valuation reserve Cr 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) Dr 36 000 Share capital Dr 100 000 General reserve Dr 50 000 Business combination valuation reserve Dr 32 500 Shares in Gemini Ltd Cr 218 500 Transfer from general reserve Dr 25 000 General reserve Cr 25 000 Transfer from business comb. valuation reserve Dr 5 600 Business combination valuation reserve Cr 5 600


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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.


ADDISON LTD ERIN LTD

(a) Sales revenue Dr 15 000 Cost of sales Cr 10 000 Inventory Cr 5 000 Deferred tax asset Dr 1 500 Income tax expense Cr 1 500 (30% x $5 000) (b) Sales revenue Dr 15 000 Cost of sales Cr 15 000 (c) Sales revenue Dr 15 000 Cost of sales Cr 12 500 Inventory Cr 2 500 Deferred tax asset Dr 750 Income tax expense Cr 750 (30% x $2 500) (d) Retained earnings (1/7/13) Dr 4 200 Income tax expense Dr 1 800 Cost of sales Cr 6 000


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(e) Proceeds on sale of land Dr 20 000 Land Dr 5 000 Carrying amount of land sold Cr 25 000 OR Land Dr 5 000 Loss on sale of land Cr 5000 Income tax expense Dr 1 500 Deferred tax liability Cr 1 500 (30% x $5 000) Loan from Erin Ltd Dr 12 000 Loan to Addison Ltd Cr 12 000 (f) Proceeds on sale of plant Dr 12 000 Carrying amount of asset sold Cr 10 000 Plant Cr 2 000 OR Gain on sale of plant Dr 2 000 Asset Cr 2000 Deferred tax asset Dr 600 Income tax expense Cr 600 Accumulated depreciation Dr 200 Depreciation expense Cr 200 Income tax expense Dr 60 Deferred tax asset Cr 60 (g) Sales revenue Dr 6 000 Cost of sales Cr 4 000 Machinery Cr 2 000 Deferred tax asset Dr 600 Income tax expense Cr 600 Accumulated depreciation Dr 200 Depreciation expense Cr 200 Income tax expense Dr 60 Deferred tax asset Cr 60

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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% 60% A Ltd B Ltd C Ltd A Ltd 80% A Ltd 48% DNCI 20% 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.

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PRACTICE QUESTION Exercise 19.3 Consolidation worksheet entries, multiple subsidiaries

LAOS LTD MALDIVES LTD MALAYSIA LTD

70% 60% Laos Ltd Maldives Ltd Malaysia Ltd DNCI 30% 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 = $100 000 share capital+ $40 000 ret. profits = $140 000 Net fair value acquired = 70% x $140 000 = $98 000 Consideration transferred = $100 000 Goodwill = $2 000 Acquisition analysis: Maldives Ltd Malaysia Ltd At 1 July 2009:

Net fair value of identifiable assets and liabilities of Malaysia Ltd = $80 000 share capital + $30 000 ret. profits = $110 000 Net fair value acquired = 60% x $110 000 = $66 000 Consideration transferred = $70 000 Goodwill = $4 000 STAGE 1 THE ACQUISITION RELATED JOURNALS 1. Pre-acquisition entry 30 June 2012 Retained earnings (1/7/11) Dr 28 000 Share capital Dr 70 000 Goodwill Dr 2 000 Shares in Maldives Ltd Cr 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 70 000 (Note that there are no fair value entries required in this example)

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STAGE 2 THE INTRAGROUP TRANSACTIONS AND BALANCES 3. Dividends paid Maldives Ltd: 70% x $10 000 = $7 000 Dividend revenue Dr 7 000 Dividend paid Cr 7 000 Malaysia Ltd: 60% x $5 000 = $3 000 Dividend revenue Dr 3 000 Dividend paid Cr 3 000 4. Sale of inventory: Maldives Ltd Laos Ltd Sales Dr 20 000 Cost of sales Cr 17 500 Inventory Cr 2 500 Deferred tax asset Dr 750 Income tax expense Cr 750 5. Sale of motor vehicle: Malaysia Ltd Maldives Ltd Proceeds on sale of motor vehicle Dr 25 000 Carrying amount of vehicle Cr 23 000 Motor vehicle Cr 2 000 Deferred tax asset Dr 600 Income tax expense Cr 600 6. Depreciation Accumulated depreciation Dr 600 Depreciation expense Cr 600 (30% x $2 000) Income tax expense Dr 180 Deferred tax asset Cr 180

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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) Dr 12 000 Share capital Dr 30 000 NCI Cr 42 000 8. NCI 40% share of equity in Malaysia Ltd at 1/7/09 Retained earnings (1/7/11) Dr 12 000 Share capital Dr 32 000 NCI Cr 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) Dr 1 800 NCI Cr 1 800 (30% ($46 000 - $40 000)) 10. NCI share of equity in Malaysia Ltd: 1/7/09 30/6/11 NCI Dr 2 000 Retained earnings (1/7/11) Cr 2 000 (DNCI 40% ($25 000 - $30 000)) NCI Dr 900 Retained earnings (1/7/11) Cr 900 (INCI 18% ($25 000 - $18 000/0.6)) 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.

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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 Dr 3 675 NCI Cr 3 675 (30% x $12,250) Maldives Book profit 17 000 Less: Intragroup dividend revenue (3 000) See journal 3 Less: Unrealised profit sale of inventory after tax (1 750) See journal 4 Maldives adjusted profit 12,250 NCI Dr 3 000 Dividend paid Cr 3 000 (30% x $10 000) 12. NCI share of equity in Malaysia Ltd: 1/7/11 30/6/12 NCI share of profit Dr 6 408 NCI Cr 6 408 (40% x $16 020) NCI share of profit Dr 2 884 NCI Cr 2 884 (18% x $16 020) Malaysias Book profit 17 000 Less:Unrealised profit sale of motor vehicle after tax (1,400) See journal 5 Add: Depreciation adjustment after tax 420 See journal 6 Malaysias adjusted profit 16 020 NCI Dr 2 000 Dividend paid Cr 2 000 (40% x $5 000)


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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 investors 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

parents 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 investors share of the net assets of the associate similar to the parents 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.


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PRACTICE QUESTIONS Question 20.1

ACOUSTIC LTD BASS LTD

30% Acoustic Ltd Bass Ltd

At 1 July 2011: Net fair value of identifiable assets and liabilities of Bass Ltd = $150 000 Net fair value acquired = 30% x $150 000 = $45 000 Cost of investment = $50 000 Goodwill = $5 000 A. Journal Entries in the Accounts of Acoustic Ltd 1 July 2011 Investment in Bass Ltd Dr 50 000 Cash/Payable Cr 50 000 (Acquisition of shares in Bass Ltd) 2011 2012 Cash Dr 24 000 Investment in Bass Ltd Cr 24 000 (Dividend received from Bass Ltd: 30% x

$80 000)

30 June 2012 Investment in Bass Ltd Dr 15 000 Share of profit or loss of

associates Cr 15 000

(Recognition of profit in Bass Ltd: 30% x $50 000)

2012 2013 Cash Dr 4 500 Investment in Bass Ltd Cr 4 500 (Dividend received: 30% x $15 000) 30 June 2013 Investment in Bass Ltd Dr 13 500 Share of profit or loss of



2013 2014 Cash Dr 3 000 Investment in Bass Ltd Cr 3 000 (Dividend from associate:

30% x $10 000)

Investment in Bass Ltd * Dr 12 000 Share of profit or loss of




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Question 20.1 (contd) B. Consolidation Worksheet Entries 30 June 2012: Investment in Bass Ltd Dr 15 000 Share of profit or loss of associates Cr 15 000 (30% x $50 000 Dividend revenue Dr 24 000 Investment in Bass Ltd Cr 24 000 (30% x $80 000 30 June 2013: Retained earnings (1/7/12) Dr 9 000 Investment in Bass Ltd Cr 9 000 (30% x $(30 000)) Investment in Bass Ltd Dr 13 500 Share of profits or losses of associates Cr 13 500 (30% x $45 000) Dividend revenue Dr 4 500 Investment in Bass Ltd Cr 4 500 (30% x $15 000) 30 June 2014: Investment in Bass Ltd Dr 0 Retained earnings (1/7/13) Cr 0 (30% [$30 000 + $(30 000)]) Investment in Bass Ltd Dr 12 000 Share of profit or loss of associates Cr 12 000 (30% x $40 000) Dividend revenue Dr 3 000 Investment in Bass Ltd Cr 3 000 (30% x $10 000)


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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 Councils 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: http://www.asx.com.au/about/corporate_governance/index.htm According to the 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 companys corporate governance practices. As such, the guidance provided in the Principles is


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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.


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PRACTICE QUESTIONS Question 20.1

ACOUSTIC LTD BASS LTD

30% Acoustic Ltd Bass Ltd

At 1 July 2011: Net fair value of identifiable assets and liabilities of Bass Ltd = $150 000 Net fair value acquired = 30% x $150 000 = $45 000 Cost of investment = $50 000 Goodwill = $5 000 A. Journal Entries in the Accounts of Acoustic Ltd 1 July 2011 Investment in Bass Ltd Dr 50 000 Cash/Payable Cr 50 000 (Acquisition of shares in Bass Ltd) 2011 2012 Cash Dr 24 000 Investment in Bass Ltd Cr 24 000 (Dividend received from Bass Ltd: 30% x

$80 000)

30 June 2012 Investment in Bass Ltd Dr 15 000 Share of profit or loss of



2012 2013 Cash Dr 4 500 Investment in Bass Ltd Cr 4 500 (Dividend received: 30% x $15 000) 30 June 2013 Investment in Bass Ltd Dr 13 500 Share of profit or loss of



2013 2014 Cash Dr 3 000 Investment in Bass Ltd Cr 3 000 (Dividend from associate:

30% x $10 000)

Investment in Bass Ltd * Dr 12 000 Share of profit or loss of




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Question 20.1 (contd) B. Consolidation Worksheet Entries 30 June 2012: Investment in Bass Ltd Dr 15 000 Share of profit or loss of associates Cr 15 000 (30% x $50 000 Dividend revenue Dr 24 000 Investment in Bass Ltd Cr 24 000 (30% x $80 000 30 June 2013: Retained earnings (1/7/12) Dr 9 000 Investment in Bass Ltd Cr 9 000 (30% x $(30 000)) Investment in Bass Ltd Dr 13 500 Share of profits or losses of associates Cr 13 500 (30% x $45 000) Dividend revenue Dr 4 500 Investment in Bass Ltd Cr 4 500 (30% x $15 000) 30 June 2014: Investment in Bass Ltd Dr 0 Retained earnings (1/7/13) Cr 0 (30% [$30 000 + $(30 000)]) Investment in Bass Ltd Dr 12 000 Share of profit or loss of associates Cr 12 000 (30% x $40 000) Dividend revenue Dr 3 000 Investment in Bass Ltd Cr 3 000 (30% x $10 000)

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