Reference no: EM132380926
Question 1.
On 1 July 2017, Bolan Ltd purchased 40% of the shares of Rex Ltd for $151 680 and signed a joint venture agreement with the two other shareholders in Rex Ltd. At that date, equity of Rex Ltd consisted of:
Share capital $300 000
Retained earnings 26 400
At 1 July 2017, the identifiable assets and liabilities of Rex Ltd were recorded at amounts equal to their fair values.
Information about income and changes in equity for both companies for the year ended 30 June 2020 was as shown.
|
Bolan Ltd |
Rex Ltd |
| Profit before tax Income tax expense |
$ 62 400 |
$ 56 400 |
| Profit |
(25 440) 36 960 |
(12 960) |
| Retained earnings (1/7/19) |
43 200 |
43 440 |
|
80 160 |
38 400 |
| Dividend paid |
(12 000) |
81 840 |
| Dividend declared |
(24 000) |
(9 600) (12 000) |
|
(36 000) |
(21 600) |
| Retained earnings (30/6/20) |
$ 44 160 |
$ 60 240 |
Additional information
(a) Bolan Ltd recognised the final dividend revenue from Rex Ltd before receipt of cash. Rex Ltd declared a $14 400 dividend in June 2019, this being paid in August 2019.
(b) On 31 December 2019, Rex Ltd sold Bolan Ltd a motor vehicle for $28 800. The vehicle had originally cost Rex Ltd $43 200 and was written down to $21 600 for both tax and accounting purposes at time of sale to Bolan Ltd. Both companies depreciated motor vehicles at the rate of 20% p.a. on cost.
(c) The beginning inventory of Rex Ltd included goods at $9 600 bought from Bolan Ltd; their cost to Bolan Ltd was $7 680.
(d) The ending inventory of Bolan Ltd included goods purchased from Rex Ltd at a profit before tax of
$3 840.
(e) The tax rate is 30%.
Required
A. Prepare the journal entries in the records of Bolan Ltd to account for the investment in Rex Ltd in accordance with AASB 128 for the year ended 30 June 2020 assuming Bolan Ltd does not prepare consolidated financial statements.
B. Prepare the consolidated worksheet entries in relation to the investment in Rex Ltd, assuming Bolan Ltd does prepare consolidated financial statements at 30 June 2020.
In both parts show in addition to the journal entries the calculation of the NCI's share of the profit after the adjustments for inter entity transfers.
Question 2.
On 1 July 2017, Ormolu Ltd paid $330 960 for 75% of the share capital of Clock Ltd. At this date, the equity of Clock Ltd consisted of:
|
Share capital (280 000 shares)
General reserve
Retained earnings
|
|
$ 280 000
112 000 56 000
|
A comparison of the carrying amounts and fair values of Clock Ltd's assets at the acquisition date showed the following:
Carrying Amount
|
Land
|
$257 600
|
$280 000
|
|
Plant (cost $210 000)
|
140 000
|
168 000
|
|
Inventory
|
91 000
|
126 000
|
|
Accounts receivable
|
56 000
|
49 000
|
|
Goodwill
|
5 600
|
|
In relation to these assets, the following information is available:
• The plant had a further 5-year life but was sold on 1 January 2019.
• All the inventory was sold by 30 June 2018.
• All the accounts receivable were collected by 30 June 2018.
Any valuation reserves arising on consolidation are transferred on realisation of the asset to retained earnings. Ormolu Ltd uses the partial goodwill method.
The following transactions occurred between 1 July 2017 and 30 June 2019:
2018
Jan. 19 Clock Ltd transferred $28 000 from general reserve to retained earnings.
Feb. 24 Clock Ltd paid an $11 200 dividend, half being from profits earned prior to1 July 2017.
April 23 Clock Ltd sold inventory to Ormolu Ltd for $70 000 recording a before-tax profit of $14 000. Both companies use a perpetual inventory system. The tax rate is 30%.
June 28 Clock Ltd declared a $21 000 dividend.
30 Clock Ltd recorded a profit of $182 000. One-quarter of the inventory sold by Clock Ltd to Ormolu Ltd on 23 April 2018 is still on hand in Ormolu Ltd.
Aug. 30 The $21 000 dividend declared by Clock Ltd was paid.
Sept. 29 2019 The remaining inventory in Ormolu Ltd sold to it by Clock Ltd was sold outside the group.
Jan. 19 Clock Ltd paid a $22 400 dividend.
June 30 Clock Ltd recorded a profit of $210 000.
Required
Prepare the consolidation worksheet JOURNAL ENTRIES for the preparation of consolidated financial statements by Ormolu Ltd at 30 June 2019.
Note a consolidation worksheet is NOT required.
Your answer should include an acquisition analysis with a calculation of goodwill/gain on bargain purchase, business combination valuation entries, pre-acquisition entries, the NCI share of equity at acquisition date, from acquisition date to the beginning of the year of consolidation, and for the year of consolidation, dividend adjustments, intragroup sales, and asset disposals.
(35 marks)
Question 3.
Cashless Ltd went into voluntary liquidation on 1 April 2019.
|
|
Cashless Ltd
Statement of Financial Position
|
|
|
|
|
as at 1 April 2019
|
|
Liabilities and equity Share capital:
280 000 ordinary shares fully paid
Retained earnings
Mortgage loan
Debentures
Bank overdraft
Accounts payable
Other payables
|
|
$322 000
7 000
105 000
70 000
56 000
56 000
33 600
|
|
|
Assets
Land and buildings (net)
Plant (net)
Bank deposit
Accounts receivable
Investments Inventory
|
|
$175 000
280 000
7 000
68 600
35 000
84 000
|
|
|
|
$649 600
|
|
|
|
|
$649 600
|
Additional information
(a) The liquidator discovered that debenture interest of $5 250 was due on 1 April 2019. The overdraft with the Katherine Bank had been secured by a mortgage over the plant. The bank has agreed that the liquidator may sell the plant and use the proceeds to repay the overdraft. The mortgage loan is secured over land and buildings which will be sold by the mortgagee to repay the amount owing. The inventory has been used as a circulating security for the debentures. The other payables were loans from directors that were made on 1 December 2018.
(b) The sale of the assets realised the following amounts:
|
Land and buildings
Less: Rates and selling expenses Less: Mortgage loan
|
$ 280 000
(11 200) (105 000)
|
|
$163 800
|
|
Plant and equipment
Bank deposit
Accounts receivable
Investments
Inventory
|
|
|
|
273 000
8 400
63 000
21 000
70 000
|
|
(c) The following payments were made by the liquidator:
|
|
|
|
$ 599 200
|
|
Debentures
Debenture interest
Bank overdraft
Accounts payable (after creditors' discounts)
Other payables
Additional amounts not recorded in the records:
Liquidator's remuneration
Liquidation expenses
Holiday pay - employee
Retrenchment payment - employee
Income tax penalty
|
|
|
|
|
$70 000
5 250
56 000
53 200
33 600
17 500
7 700
7 000
2 800
2 100
$255 150
|
You are required to prepare the following accounts, using T accounts, and not journal entries: A. The Liquidation Account.
B. The Liquidator's Statement of Receipts and Payments.
C. The Shareholders' Distribution account.
Question 4.
George Ltd acquired 60% of the shares of Orwell Ltd in February 2017. Although George Ltd has 100% subsidiaries this is the first acquisition that George Ltd has made with a non-controlling interest (NCI) partly funding the other company. Eric Blair, the financial accountant of George Ltd has asked you to write a report advising him as to the best approach he should take when he prepares the consolidated financial statements for the Orwell Group of companies.
As he has never had to calculate the share of the equity in Orwell Ltd funded by the NCI he is worried about how he should calculate it. He is especially interested in how the calculation should take place in the years after the acquisition date. He tells you that some of his colleagues in other companies have mentioned a ‘step' approach which apparently makes accounting for the accounting periods after the date of acquisition very easy as it is then necessary to prepare only one step.
Required
Prepare a report for Eric, explaining the step approach to the calculation of NCI and the effects of this approach in the years after the date of acquisition.
The report should take the format of a formal business report, written by your firm with yourself as lead author. Marks will be awarded for presentation style and an appropriate business format.