MPA105 Financial Accounting and Reporting
Question 1:
On 1 July 2016, Sisters Ltd acquired all of the issued shares of Brothers Ltd for $950 000. At the acquisition date the equity of Brothers Ltd consisted of:
|
Share capital |
$600 000 |
|
Reserves |
120 000 |
|
Retained earnings |
150 000 |
At the date of acquisition this equity reflected the fair values of all the identifiable assets and liabilities of Brothers Ltd.
The following transaction occurred between the two entities during the financial year:
. On 1 July 2016 Brothers Ltd sold a motor vehicle to Sisters Ltd for $900 000. The motor vehicle had cost Brothers Ltd $1 500 000. It had been used for 5 years and had a carrying amount of $800 000 on Brothers Ltd.’s accounting book on the date of sale. The motor vehicle is recorded under the cost model and the straight-line depreciation method is used by both companies. The remaining useful life of the motor vehicle was estimated to be 5 years.
At 30 June 2017 the directors of Sisters Ltd estimated that purchased goodwill had been impaired by $10 000
Answer:
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Consolidated worksheet of Sisters Ltd and its controlled entity (Brothers Ltd) for the year ended 30 June 2017 | |||||||
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|
|
|
|
|
|
|
($ '000) |
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|
Sisters Ltd |
Brothers Ltd |
Eliminations |
Consolidated | |||
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|
Debit |
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Credit | ||||
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Reconciliation of opening and closing retained earnings |
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|
|
|
|
|
|
|
Sales revenue |
30,000 |
2,200 |
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|
|
|
32,200 |
|
less Cost of goods sold |
(14,000) |
(550) |
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|
|
|
(14,550) |
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Gross profit |
16,000 |
1,650 |
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|
|
|
17,650 |
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Other income |
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|
|
|
|
|
|
|
Gain on sale of fixed asset |
6,000 |
100 |
(b) |
100 |
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|
6,000 |
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Expenses |
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|
|
|
|
|
|
|
Depreciation |
(2,000) |
(400) |
|
|
(d) |
20 |
(2,380) |
|
Other expenses |
(3,800) |
(200) |
(f) |
10 |
|
|
(4,010) |
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Profit before tax |
16,200 |
1,150 |
|
|
|
|
17,260 |
|
Tax expense (30 % Tax Rate) |
(4,860) |
(345) |
(e) |
6 |
(c) |
30 |
(5,181) |
|
Profit after tax |
11,340 |
805 |
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|
|
|
12,079 |
|
Retained earnings-1 July 2016 |
6,000 |
150 |
(a) |
150 |
|
|
6,000 |
|
Retained earnings-30 June 2017 |
17,340 |
955 |
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|
|
18,079 |
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Statement of financial position |
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Shareholders' equity |
|
|
|
|
|
|
|
|
Retained earnings - 30 June 2017 |
17,340 |
955 |
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|
|
|
18,079 |
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Share capital |
10,000 |
600 |
(a) |
600 |
|
|
10,000 |
|
Reserves |
- |
120 |
(a) |
120 |
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|
- |
|
Current liabilities |
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|
|
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|
|
|
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Tax payable |
5,600 |
20 |
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|
|
|
5,620 |
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Non-current liabilities |
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|
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Loans |
4,000 |
750 |
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|
|
4,750 |
|
|
36,940 |
2,445 |
|
|
|
|
38,449 |
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Current assets |
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|
|
|
|
|
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Cash |
5,000 |
800 |
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|
|
|
5,800 |
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Accounts receivable |
7,500 |
335 |
|
|
|
|
7,835 |
|
Inventory/stock |
6,200 |
520 |
|
|
|
|
6,720 |
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Non-current assets |
|
|
|
|
|
|
|
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Land |
14,290 |
320 |
|
|
|
|
14,610 |
|
Vehicles, at cost |
3,450 |
500 |
(b) |
600 |
|
|
4,550 |
|
Vehicle-accumulated depreciation |
(450) |
(30) |
(d) |
20 |
(b) |
700 |
(1,160) |
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Investment in Brothers Ltd |
950 |
- |
|
|
(a) |
950 |
- |
|
Goodwill |
|
|
(a) |
80 |
|
|
80 |
|
Accumulated impairment loss - Goodwill |
|
|
|
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(f) |
10 |
(10) |
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Deferred tax asset |
|
|
(c) |
30 |
(e) |
6 |
24 |
|
|
36,940 |
2,445 |
|
|
|
|
38,449 |
WN-1: Calculation of Goodwill on acquisition
|
Particulars |
|
Amount ($) |
|
Share capital |
|
600,000 |
|
Reserves |
|
120,000 |
|
Retained earnings |
|
150,000 |
|
Total value of assets and liabilities acquired |
|
870,000 |
|
Consideration transferred |
|
950,000 |
|
Goodwill on acquisition |
|
80,000 |
WN-2: Consolidation Worksheet entries as on 1 July, 2016
|
Sr. No. |
Particulars |
Amount ($) |
Remarks | ||
|
(a) |
Share capital |
600,000 |
This entry is required to eliminate the investment in brothers ltd
| ||
|
|
Reserves |
120,000 | |||
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Retained earnings |
150,000 | |||
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Goodwill |
80,000 | |||
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|
To Investment in Brothers Ltd |
(950,000) |
| ||
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| ||
WN-3: Consolidation Worksheet entries as on 30 June, 2017
Elimination of Gain on sale of vehicle
On 1 July, 2016, Brothers Ltd sold vehicle to Sisters Ltd at a profit of $100,000 i.e. 900,000 less 800,000. Since, the transactions is intra group and the profit recorded is an unrealized profit, hence the same needs to be eliminated. The entry for elimination of gain on sale of vehicle is as below:
(b) Gain on sale of vehicle Dr. 100,000
Vehicle Dr. 600,000
To Accumulated Depreciation Cr. 700,000
Recording tax impact of elimination of Gain on sale of vehicle
Every profit and loss transaction has a tax impact, hence in the above elimination of profit transaction also, there is an tax impact on the reversal of gain on sale of vehicle and is calculated at 30% of 100,000. Hence, this tax impact is recorded via below mentioned entry.
(c) Deferred tax asset Dr. 30,000
To Income tax expense Cr. 30,000
Recording reversal of depreciation on Gain on sale of vehicle
Since, due to intra group transaction of sale of vehicle on gain, the Sisters Ltd has recorded the vehicle at a cost higher than its carrying amount i.e. at 900,000. Since, the involved gain is a notional gain and is eliminated, the depreciation impact of such gain is also required to be reversed. This reversal of depreciation is calculated by dividing the gain with remaining useful life i.e. 100,000 divided by 5 years. Hence, the entry for reversal of depreciation is as below:
(d) Accumulated depreciation (100,000/5) Dr. 20,000
To Depreciation expense Cr. 20,000
Recording tax impact on above reversal of depreciation
Since, the reversal of depreciation will increase the profit of the company, so additional tax burden due to this reversal also needs to be taken care off. This impact is calculated at 30% of $20,000 and the entry for the same is as below:
(e) Income tax expense Dr. 6,000
To Deferred tax asset Cr. 6,000
Recording impairment of goodwill
The directors of Sisters Ltd. Estimated that the purchased goodwill has been impaired and hence, the impairment loss on goodwill needs to be recorded. The journal entry for the same is
(f) Impairment loss Dr. 10,000
To Accumulated impairment loss - Goodwill Cr. 10,000
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