Reference no: EM13348041

A non-parent entity, L Ltd, acquired on 1 July 2010 a 21% voting interest in P Ltd for $190,000 cash.  The recorded identifiable net assets and assumed liabilities of P Ltd as at the date of acquisition were represented by the following equity items:

Issued capital              $231,000

Retained earnings       $166,070

Total equity                

At the date of acquisition, all of the identifiable assets and liabilities of P Ltd were stated in the accounts at fair value except for plant and equipment which was carried at $230,000 and had a fair value of $351,000.  At this date it was considered to have a further working life of 5 years.

The following information has been extracted from the management accounts for both entities for 30 June 2012:

Management statements of financial position as at 30 June 2012
	L Ltd		P Ltd
	$		$
Assets
Current assets
Inventories	500,000		607,361
Other current assets	1,150,000		1,016,727
Non current assets
Investment in associates	200,000		-
Property, plant and equipment	800,000		650,000
Accumulated depreciation - ppe	-140,000		-80,000
Total assets	2,510,000		2,194,088
Current liabilities
Trade and other payables	850,000		1,544,353
Total liabilities	850,000		1,544,353
Net assets	1,660,000		649,735
Shareholders' equity
Issued capital	600,000		231,000
Revaluation surplus	340,000		130,000
Retained earnings	720,000		288,735
Total shareholders' equity	1,660,000		649,735

Additional information

1 On 30 June 2012 L Ltd carried inventory sold to it by P Ltd at a mark-up of $49,365.

2 On 30 June 2011 L Ltd had carried inventory sold to it by P Ltd at a mark-up of $66,481.  The entire inventory had subsequently been sold.

3 L Ltd has not recognized an impairment loss in relation to its investment in P Ltd in its financial statements for the year ended 30 June 2012.

4 P Ltd revalued its property plant and equipment on 30 June 2012.

5 The company tax rate is 30%

Required:

Apply the equity method to L's investment in P Ltd. Prepare the statement of comprehensive income, changes in equity, financial position and any other relevant disclosures for the notes to the financial statement of L Ltd as required by AASB 128 for the year ended 30 June 2012.

Q2

On 1 July 2006 ABC Ltd acquired 75% of the share capital in XYZ Ltd for $150,000 cash.  In addition to the cost of the shares ABC Ltd paid valuation fees associated with the acquisition of $6,000.  At acquisition date the equity of XYZ Ltd consisted of:

Share capital	$90,000
General reserve	10,000
Retained earnings	20,000

All the assets and liabilities of XYZ Ltd at the date of acquisition were recorded at fair value other than the following:

	Carrying amount	Fair value
Plant (Cost $92,000)	$60,000	85,000
Land	40,000	75,000
Contingent liability	0	12,000

All fair value adjustments are recorded on consolidation.  The plant has a remaining useful life of 8 years.  The revalued land was sold outside the group on 1 July 2007 for $85,000.  The contingent liability was settled for $12,000 on 1 December 2006.  The tax rate is 30%.

ABC Ltd uses the full goodwill method.  The value of the non-controlling interest has been estimated at $50,000.

Other information:

a) The inventory of XYZ Ltd on 1 July 2009 included inventory purchased from ABC Ltd for $5,000.  The original cost of the inventory was $17,000.  The inventory was not considered impaired at the time of the sale by ABC Ltd.  The inventory was sold outside the group in September 2009.
b) The inventory of ABC Ltd on 1 July 2009 included inventory purchased from XYZ Ltd for $5,000 above cost.  The inventory was sold outside the group in December 2009.
c) ABC Ltd sold inventory to XYZ Ltd on 1 February 2010 for $15,000.  The original cost of the inventory was $8,000.  The inventory had been entirely sold outside the group by 30 June 2010.
d) XYZ Ltd sold inventory to ABC Ltd for $25,000 on 1 June 2010.  The sale price represented a mark-up of 25% on cost.  By 30 June 2010 ABC Ltd had sold 90% of this inventory outside the group.
e) On 1 July 2008 XYZ Ltd sold an item of plant to ABC Ltd for $10,000.  The carrying amount at the time of sale was $15,000 (cost was $25,000).  At the time of the sale the asset had a remaining useful life of 10 years.
f) ABC Ltd charged XYZ Ltd a management fee of $12,000 for the current financial year.
g) On 30 June 2010 XYZ Ltd owes ABC Ltd $20,000.  XYZ Ltd paid $500 to ABC Ltd in interest on 30 June 2010.
h) Goodwill on acquisition is not considered impaired.

Required

1) Prepare an acquisition analysis.

2) Prepare all necessary consolidation adjustment entries needed to prepare the consolidated financial statements as at 30 June 2010.  The balance sheets and income statement of ABC Ltd and XYZ Ltd can be found on the worksheet below.

3) Using the adjustments you prepared in 2) complete the worksheet as at 30 June 2010.

4) Prepare the disclosures of the NCI in profit and equity for the year ended 30 June 2010.

	ABC Ltd	XYZ Ltd	Adjustments		Group Data
			Debit	Credit
Sales revenue	$1,200,000	$125,000
Cost of goods sold	850,000	55,000
Gross profit	$350,000	$70,000
Add dividend revenue	7,500	0
Add interest revenue	600	0
Add management fee	12,000	0
Add: Gain on sale of plant	0	1,000
Less depreciation expense	15,000	9,000
Less interest expense	25,000	1,000
Less other expenses	150,100	13,000
Profit before tax	180,000	48,000
Less income tax expense	50,000	11,700
Profit for the year	130,000	36,300
Add retained earnings July 1 2009	120,000	22,000
Less dividends paid	15,000	5,000
Less dividends declared	20,000	5,000
Retained earnings June 30 2010	215,000	48,300
General reserve	50,000	10,000
Share capital	240,000	90,000
NCI equity (goodwill)	0	0
Fair value adjustment	0	0
Shareholders' equity	505,000	148,300
	====	====
Assets
Cash	60,000	49,000
Accounts receivable	102,000	29,000
Inventory	73,000	40,000
Dividend receivable	7,500	0
Investment in XYZ	150,000	0
Land	130,000	57,000
Plant	245,000	147,000
Accumulated depreciation	-108,000	-80,000
Goodwill
Loan receivable	88,500	0
Deferred tax asset	75,000	30,000
Total assets	823,000	272,000
Less liabilities
Accounts payable	75,000	6,700
Dividend payable	15,000	5,000
Tax payable	25,000	7,000
Loans payable	200,000	100,000
Deferred tax liabilities	3000	5,000
Net assets	505,000	148,300