CONSOLIDATION

PART 2 ICAP MODULE B FINANCIAL ACCOUNTING & MODULE D COST ACCOUNTING.NEW CLASSES.JOIN KHALID AZIZ

JOIN KHALID AZIZECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:0322-33857520312-2302870R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

IllustrationConsider a family of 3

Father (employed as a manager)Weekly take-home pay of $500

Mother (sells food parcels from home)Collects an average of $100/week Receives $150/week from husband for housekeeping

1 child, Mere (full-time student)Receives $25/week as pocket-money from her parentsReceives $15/week as allowance from her sponsor

IllustrationCalculate how much each family member receives in a weekFamily MemberAmountFather500Mother100 + 150 =250Mere 25 + 15 = 40Total $790

IllustrationCalculate how much the family receives in a weekFamily MemberAmountFather 500Mother100 + 150 150 = 100Mere 25 + 15 25 = 15Total$615We must exclude or eliminate transactions within the family

5. Elimination EntriesThe purpose of an elimination entry isTo exclude or eliminatetransactions between members of the entity

Known asIntra-group or Inter-company transactionsLearning Objective 5

Learning ObjectivesYou will be able to1.Define an Economic EntityExplain the concept of Control3.Identify factors that indicate Control4.Differentiate between pre & post acquisition equityExplain the purpose of Elimination EntriesRecord Elimination Entries forPre-acquisition EquityDividends from pre-acquisition profitsGoodwill on acquisitionRevaluation of assets at acquisition date

6. Record Elimination EntriesHow is an elimination entry constructed?Its just like selecting the Undo optionor reversing an arithmetic processor reversing balance-day adjustmentsLearning Objective 6

Example 1On 1 April 2006,Tonga Ltd acquired all the shares of Nuku Ltdfor a cash payment of $225,000

On that date, the equity of Nuku Ltd consisted ofShare Capital$150,000Reserves$ 30,000Retained Profits$ 20,000

TongaLimitedNuku Limited 100%From Lecture May 1st

6.a Pre-acquisition Equity Eliminate intra-group equityCapital 150,000Reserves 30,000Retained Profits 20,000 200,000Books of Nuku LtdShares in Nuku Ltd 225,000Books of Tonga LtdEliminate intra-group assets

6.a Pre-acquisition Equity Elimination entry at date of acquisition

Dr Share Capital 150,000Dr Reserves 30,000Dr Retained Profits 20,000Dr Goodwill 25,000 Cr Shares in Nuku Ltd 225,000This is known as the pre-acquisition entryMust be made in the Worksheet every year

6.b Dividends from Pre-acquisition ProfitsSuch dividends Are treated as a return of capitalReduce value of investment (shares) in subsidiary

Example 2Immediately after the acquisition, Nuku Ltd declared a dividend of $12,000out of pre-acquisition profits

Same Companies in Example 1

6.b Dividends from Pre-acquisition ProfitsWhen the dividend is declared, what entries will be passed by

Nuku Ltd (Subsidiary)Tonga Ltd (Parent)

6.b Dividends from pre-acquisition profitsBooks of Nuku Ld (Subsidiary)Dr Dividend Provided12,000 Cr Dividend Payable 12,000Reduction to Retained ProfitsLiability

6.b Dividends from pre-acquisition profitsEntries in books of Tonga Ld (Parent)Dr Dividend Receivable12,000 Cr Shares in Nuku Ltd 12,000These are both AssetsInvestment in Nuku Ltd now = $213,000 Originally $225,000Less Return of Capital $ 12,000

JOIN KHALID AZIZECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:0322-33857520312-2302870R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

6.b Dividends from Pre-acquisition ProfitsWhat elimination entries are required?Intra-group Payable/ReceivablePre-acquisition entry

6.b Dividends from Pre-acquisition ProfitsIntra-group Payable/ReceivableDr Dividend Payable 12,000 Cr Dividend Receivable 12,000All intra-group payables & receivables are eliminated in this mannerAccounts Payable/ReceivableLoans Payable/ReceivableDebentures Payable/Receivable

6.b Dividends from Pre-acquisition ProfitsPre-acquisition entry

Dr Share Capital 150,000Dr Reserves 30,000Dr Retained Profits (Opening) 20,000 Dr Goodwill 25,000 Cr Dividend Provided12,000 Cr Shares in Nuku Ltd 213,000

6.b Dividends from Pre-acquisition ProfitsPre-acquisition entry

Dr Retained Profits (Opening) 20,000 Cr Dividend Provided 12,000

In future periodsClose Dividend Provided to Retained ProfitsNet Effect 20,000 12,000 = 8,000All PNL items are adjusted against R/Profits

6.b Dividends from Pre-acquisition ProfitsHow do we treat a dividend already declared (but not paid) by the subsidiary at acquisition date?If cum div,subtract from cost of acquisitionIf ex div,excluded from analysispayable to previous shareholders

6.c Goodwill on AcquisitionAny goodwill is recognised as a consolidation adjustmentIf subsidiary already has goodwill in its booksDeduct recorded goodwill from FV of INAJournalise difference in pre-acquisition entry

See Comprehensive Example 14.6 page 566

6.d Revaluation of AssetsIf assets of the subsidiary are revalued upon consolidation, an adjustment is necessaryDr Asset Cr Business Combination Valuation Reserve Cr DTLBCVR is a component of EquityAdded when calculating FV of INAEliminated through pre-acquisition entry

6.d Revaluation of AssetsAlso need to provide additional DepreciationIncrease in Value divided by remaining useful lifeDr Depreciation Expense Cr Acc. DepreciationThis extra Expense effectively reduces Profit & TaxDr DTL Cr I/Tax Expense

Example 3In addition to the information in Example 1

Nuku Ltd has only 1 asset (Equipment)

Cost $45,000Book value$27,000Fair value$36,000Remaining Useful life = 3 years

Tax Rate = 30%Same Companies in Example 1

6.d Revaluation of AssetsWhat revaluation entries are required in the consolidated statements?Dr Acc.Depn- Equipment 18,000Cr Equipment 9,000 Cr BCVR 6,300 Cr DTL 2,700$45,000 - $36,00030% of $9,000Known as the revaluation entryMade every year until the asset is soldThen change account to Transfer to BCVR

6.d Revaluation of AssetsOn 31 March 2007

Dr Depreciation3,000 Cr Acc. Depn- Equipment3,000(9,000/3 years)

Dr DTL 900 Cr I/Tax Expense 900 (2,700/3 years)

Calculate Fair Valueof Identifiable Net AssetsStep 1Equity Item AmountShare Capital 150,000Reserves 30,000BCVR 6,300Retained Profits 20,000Total$206,300

Calculate Cost of AcquisitionImmediate cash payment of $225,000Step 2

Calculate GoodwillStep 3Cost of Acquisition 225,000Less Fair Value of INA 206,300Goodwill $ 18,700

6.d Revaluation of AssetsPre-acquisition entry on 31 March 2007Dr Share Capital 150,000Dr Reserves 30,000Dr Retained Profits 20,000 Dr BCVR 6,300Dr Goodwill 18,700 Cr Dividend Provided 12,000Cr Shares in Nuku Ltd 213,000Assuming Dividend was paid during the year

JOIN KHALID AZIZECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT:0322-33857520312-2302870R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.