Problem
I. What does 'control' mean in the context of consolidation accounting, and of what relevance is 'control' to the decision to include, or exclude, the financial accounts of an entity within the consolidated financial statements?
II. What is the role of consolidated financial statements?
III. The consolidated statement of financial position will show the total assets controlled by the entity (group) and the total assets owed to parties outside the economic entity. As such, will liabilities owing to, and amounts receivable from, organisations within the group (that is, within the economic entity) be eliminated in the consolidation process, and not be shown in the consolidated statement of financial position? Why?
IV. Will the financial statements of the parent entity, or the subsidiary companies, as at the beginning of the financial period reflect prior period consolidation adjustments? Why?
V. Will we have to eliminate the parent entity's investment in the subsidiaries each year as part of our consolidation entries, or will we have to do the elimination only in the first year following acquisition, but not thereafter? Why?
VI. Biggins Ltd acquires 100 per cent of the shares of Smallin Ltd on 1 July 2022 for a consideration of $730,000. The share capital and reserves of Smallin Ltd at the date of acquisition are:
Share capital $200,000
Retained earnings $100,000
Revaluation surplus $150,000
There are no transactions between the entities and all assets are fairly valued at the date of acquisition. The financial statements of Biggin Ltd and Smallin Ltd at June 30 2023 (one year after acquisition) are shown below.
VII. Use the worksheet below to prepare the consolidated financial statements as at June 30 2023.
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Biggin Ltd
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Smallin Ltd
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Elimination and adjustments
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Consolidated statement
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|
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Dr
|
Cr
|
|
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$000
|
$000
|
$000
|
$000
|
$000
|
|
Statement of profit or loss and other comprehensive income together with reconciliation of opening and closing retained earnings
|
|
|
|
|
|
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Profit before tax
|
300
|
100
|
|
|
|
|
Tax
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(100)
|
(30)
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|
|
|
Profit after tax
|
200
|
70
|
|
|
|
|
Retained earnings at 1 July 2022
|
200
|
100
|
|
|
|
|
Statement of financial position
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|
|
|
|
|
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Shareholders' equity
|
|
|
|
|
|
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Retained earnings at 30 June 2023
|
400
|
170
|
|
|
|
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Share capital
|
1 000
|
200
|
|
|
|
|
Revaluation surplus
|
300
|
200
|
|
|
|
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Current liabilities
|
|
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|
|
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Accounts payable
|
60
|
40
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Non-current liabilities
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|
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|
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Loans
|
600
|
250
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|
|
|
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|
2 360
|
860
|
|
|
|
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Current assets
|
|
|
|
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|
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Cash
|
80
|
45
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Accounts receivable
|
350
|
95
|
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Non-current assets
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|
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|
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Land
|
200
|
120
|
|
|
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Plant
|
1 000
|
600
|
|
|
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Investment in Smallin Ltd
|
730
|
|
|
|
|
|
Goodwill
|
0
|
0
|
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|
|
|
|
2 360
|
860
|
|
|
|
Show the consolidation worksheet journal entries.