Assignment:
Part A : Consolidation Case Study: Perth Ltd and Summer Ltd
Perth Ltd acquired 80% of the share capital of Summer Ltd on 1 July 2011. The following equity balances appeared in the records of Summer Ltd at the date of acquisition:
|
Share capital (210,000 shares)
|
|
$210,000
|
|
General reserve
|
|
6,100
|
|
Retained earnings
|
|
75,000
|
Financial information at 30 June 2016 of Perth Ltd and its subsidiary company, Summer Ltd, is shown below.
|
|
Perth Ltd
|
Summer Ltd
|
|
|
$
|
$
|
|
Sales revenue
|
708,000
|
492,000
|
|
Cost of sales
|
(273,000)
|
(178,500)
|
|
Gross Profit
|
435,000
|
313,500
|
|
Other revenue:
|
|
|
|
Debenture interest
|
-
|
10,500
|
|
Management fees
|
10,500
|
-
|
|
Dividend from Summer Ltd
|
16,800
|
-
|
|
|
462,300
|
324,000
|
|
Administrative expenses
|
(31,500)
|
(16,800)
|
|
Distribution expenses
|
(189,000)
|
(126,000)
|
|
Depreciation on machinery
|
(31,500)
|
(31,500)
|
|
Finance expenses
|
(27,600)
|
(12,000)
|
|
Other expenses
|
(29,400)
|
(25,200)
|
|
Total operating expenses
|
(309,000)
|
(211,500)
|
|
Profit before tax
|
153,300
|
112,500
|
|
Income tax expense
|
(52,500)
|
(34,500)
|
|
Profit after tax
|
100,800
|
78,000
|
|
Retained earnings (1/7/2015)
|
105,000
|
94,500
|
|
|
205,800
|
172,500
|
|
Transfer to general reserve
|
(6,300)
|
-
|
|
Interim dividend paid
|
(31,500)
|
(21,000)
|
|
Final dividend declared
|
(37,800)
|
(42,000)
|
|
|
(75,600)
|
(63,000)
|
|
Retained earnings (30/6/2016)
|
130,200
|
109,500
|
|
General reserve
|
105,000
|
36,000
|
|
Other components of equity (1/7/2015)
|
27,300
|
21,000
|
|
Share capital
|
630,000
|
210,000
|
|
Liabilities:
|
|
|
|
|
Debentures
|
255,000
|
|
60,000
|
|
Deferred tax liability
|
-
|
|
14,700
|
|
Current tax liability
|
52,500
|
|
35,700
|
|
Dividend payable
|
37,800
|
|
42,000
|
|
Other current liabilities
|
189,000
|
|
25,200
|
|
|
1,426,800
|
|
554,100
|
|
Cash and cash equivalents
|
107,100
|
|
6,000
|
|
Trade receivables
|
68,250
|
|
40,200
|
|
Inventory
|
189,000
|
|
58,500
|
|
Debentures in Perth Ltd
|
|
|
105,000
|
|
Shares in Summer Ltd
|
270,000
|
|
-
|
|
Machinery (cost)
|
252,000
|
|
214,200
|
|
Accumulated depreciation - machinery
|
(136,500)
|
|
(115,500)
|
|
Other depreciable assets
|
159,600
|
|
115,500
|
|
Accumulated depreciation
|
(84,000)
|
|
(52,500)
|
|
Deferred tax asset
|
179,250
|
|
63,000
|
|
Land
|
422,100
|
|
119,700
|
|
|
1,426,800
|
|
554,100
|
Additional information
i. At 1 July 2011, all the identifiable assets and liabilities of Summer Ltd were recorded at fair value except for the following assets:
|
|
Carrying amount
|
Fair value
|
|
Land
|
$62,000
|
$80,000
|
|
Machinery (cost 135,000)
|
105,000
|
120,000
|
|
Receivable
|
42,000
|
36,000
|
The machinery has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2011 was sold on 1 March 2013 for $84,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings. By 30 June 2012, receivables had all been collected.
ii. Perth Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2011 was $66,000.
iii. Opening inventory of Summer Ltd includes unrealised profit of $5,000 on inventory sold by Perth Ltd. It was all sold by Summer Ltd during the year.
iv. During the year, intragroup sales by Summer Ltd to Perth Ltd were $80,000. The mark-up on cost of all sales was 25%. At 30 June 2016, Perth Ltd's inventory included $35,000 of items acquired from Summer Ltd.
v. On 1 January 2016, Summer Ltd sold an item of inventory to Perth Ltd for $18,000 at a profit before tax of $3000. Perth Ltd had treated this item as an addition to its machinery and depreciated at 10% p.a. straight-line.
vi. On 1 April 2016, Perth Ltd sold $15,000 worth of inventory to Summer Ltd. The cost of this inventory was $9000. By 30 June 2016, Summer Ltd had sold 60% of the inventory to outside entities.
vii. Some of the items manufactured by Summer Ltd are used as machinery by Perth Ltd. One of the machinery items held by Perth Ltd at 30 June 2016 was purchased from Summer Ltd on 1 January 2015. It had cost Summer Ltd $17,500 to manufacture this item and was sold to Perth Ltd for $25,000. Perth Ltd depreciates such items at 10% p.a. on cost.
viii. Management fees derived by Perth Ltd were all from Summer Ltd and represented charges made for administration.
ix. The tax rate is 30%.
Required:
a) Prepare the acquisition analysis at 1 July 2011
b) Prepare i) the consolidation journal entries; ii) consolidation worksheet (Show all workings) for the year ended at 30 June 2016.
Part B : Theory Questions
Q1. a) Discuss four prescriptions contained in AASB 10 Consolidated Financial Statements when applying to the consolidation process.
b) Discuss four issues that may challenge existing policies and procedures of the consolidation process when applying AAASB 10 Consolidated Financial Statements.
Q2. Why is it necessary to make adjustments for intragroup transactions? When does an intragroup transaction consolidation adjustment require us to perform a consolidation adjustment to tax expense?