Acc705 Corporate Accounting And Reporting Assessment Answers
Questions:
The operations of Sam Ltd are primarily in the fine fruit market. Believing that the acquisition of Sam Ltd would enable Ben Ltd to expand its supply of quality produce to its customers, Ben Ltd commenced actions to acquire the shares of Sam Ltd. On 1 July 2013, Ben Ltd acquired all the issued shares (cum div.) of Sam Ltd for $123 500. At this date the equity of Sam Ltd consisted of:
Reserves 5 000
Retained earnings 10 000
Sam Ltd also had some customer databases that were not recorded as assets but Ron Ltd placed affair value of $6000 on these items. Sam Ltd believed that the databases had a future life of 4 years. All of the identifiable assets and liabilities of Sam Ltd were recorded at amounts equal to their fair values except for the following:
In February 2016, Sam Ltd transferred $3000 of the reserves on hand at 1 July 2013 to retained earnings. The remaining $2000 was transferred in February 2017.
The court case involving the damages sought by the customer was settled in May 2017.
Sam Ltd was required to pay $7500 to the customer.
(a) Profit for the year was $581 000.
(b) Balance of retained earnings at 1 July 2015 was $80 000.
(c) During the year $30 000 was transferred from retained earnings to general reserve.
(d) A final dividend of 8c per share has been declared by directors and is not subject to shareholders’ approval.
Answers:
Question 1
In terms of financial accounting, consolidate implies the consolidation of financial statements, wherein every subsidiary reports under the umbrella of its holding company. Consolidation is the process of merging financial outcomes of different subsidiary firms into the eventual financial outcomes of the holding firm. This approach is normally applied when a holding firm has more than 50% shares of other company. The parent company makes consolidated financial statements by preparing adjustment entries and removing intercompany transactions. A combined tax return is filed by the parent company when a minimum of 80% of the voting shares of the subsidiaries is owned by it (AASB, C.A.S., 2014).
The group’s equity, assets and liabilities are combined by the holding firm on the consolidated balance sheet and all the assets and liabilities of the subsidiaries are included, even if the ownership of the voting shares is below 100%. In Australia, AASB 10 has been formulated in respect of consolidation of financial statements. The main aim of this accounting standard is to set principles concerning the preparation and presentation of consolidated statements when a company controls one or more other companies. However, this standard does not address the accounting requisites for business combinations plus their impact on consolidation, encompassing goodwill resultant from such combinations (Howieson, 2013).
Working note
Analysis of Acquisition at 1 July 2013:
|
Net fair value of identifiable assets and liabilities acquired |
$100 000 + $5 000 + $10 000 (equity) |
$115 000 |
|
Revaluation of assets |
$2000(1-30%)+5000(1-30%)+4000(1-30%) |
$7 700 |
|
Consideration transferred |
$123 500 | |
|
Goodwill |
$800 |
Tax is assumed to be 30%
Worksheet entries at 1 July 2016
Business combination valuation entries
Inventory Dr 4 000
Deferred tax liability Cr 1 200
Business combination valuation reserve Cr 2 800
Land Dr 5 000
Deferred tax liability Cr 1 500
Business combination valuation reserve Cr 3 500
*Accumulated depreciation - equipment Dr 26 000
Equipment Cr 24 000
Deferred tax liability Cr 600
Business combination valuation reserve Cr 1 400
*refer to end of solution for an alternative to this journal entry
Goodwill Dr 800
Business combination valuation reserve Cr 800
Pre-acquisition entries
Retained earnings (1/7/16) Dr 10 000
Share capital Dr 100 000
Reserves Dr 5 000
Business combination valuation reserve Dr 8 500
Shares in Ben Ltd Cr 123 500
Worksheet entries at 30 June 2017
Business combination valuation entries
Cost of sales Dr 4 000
Income tax expense Cr 1 200
Transfer from business combination
valuation reserve Cr 2 800
Land Dr 5 000
Deferred tax liability Cr 1 500
Business combination valuation reserve Cr 3 500
Accumulated depreciation - equipment Dr 26 000
Equipment Cr 24 000
Deferred tax liability Cr 600
Business combination valuation reserve Cr 1 400
Depreciation expense Dr 200
Accumulated depreciation Cr 200
(10% x $2 000)
Deferred tax liability Dr 60
Income tax expense Cr 60
(30% x $200)
Goodwill Dr 800
Business combination valuation reserve Cr 800
Debtors Dr 6 000
Business combination valuation reserve Cr 6 000
Dividend payables Dr 6 000
Retained earnings Cr 6 000
Impairment loss – goodwill Dr 7 000
Accumulated impairment losses – goodwill Cr 7 000
Pre-acquisition entries
Retained earnings (1/7/16) Dr 10 000
Share capital Dr 100 000
Reserves Dr 5 000
Business combination valuation reserve Dr 8 500
Shares in Ben Ltd Cr 123 500
General reserve Dr 3 000
Transfer to general reserve Cr 3 000
Transfer from business comb. valuation reserve Dr 2 800
Business combination valuation reserve Cr 2 800
Question 2
AASB 101
The Australian Accounting Standards Board, under sec 334 of the Corporations Act 2001, formulated AASB 101 in relation to Presentation of Financial Statements. This standard outlines the grounds for presenting general purpose financial statements for ensuring comparability both the financial records of other companies and with the previous years’ financial statements of the same company. This standard prescribes a range of important principles concerning disclosure, all of which are aimed at helping a user of these statements in comprehending that company’s performance. Any error in its application is going to mislead the user or will provide him/her with inadequate information to take a decision, especially in context of making investment in that company (Hodgson and Russell, 2014). This standard is applicable uniformly to all entities, entailing those which record their consolidated financial statements as per AASB 10 and also those that prepare separate statements as per AASB 127. Paragraph 10 of AASB 101, outlines a complete range of financial statements as encompassing all the four important statements i.e. statement of financial position, statement of profit or loss, statement of changes in equity and statement of cash flow (Jeanjean and Stolowy, 2008).
Statement of Financial Position
The statement of financial position is also known as balance sheet. This is one of the most crucial statements and reports the company’s liabilities, assets and the difference in their total amount. Entities are also required to reveal, either in the SOP or in the notes, the subcategorization of the line items reported, categorized in a way suitable to the operations (Ho Kim and Taylor, 2011). The SOP of Heaven Ltd. prepared below reflects the company’s financial position as of 30th June 2016. It depicts the accumulated outcomes of all the individual years of Heaven Ltd. operations put together.
Table 1: Statement showing financial position of Heaven Ltd on 30th June 2016
|
Notes | ||
|
ASSETS | ||
|
Current Assets | ||
|
Accounts receivables |
1 |
$590,000.00 |
|
Inventory |
$520,000.00 | |
|
$1,110,000.00 | ||
|
Non-Current Assets | ||
|
Building |
$900,000.00 | |
|
Land |
$600,000.00 | |
|
Plant and equipment |
$800,000.00 | |
|
Goodwill |
$300,000.00 | |
|
Long-Term Investments |
$460,000.00 | |
|
$3,060,000.00 | ||
|
Total Assets |
$4,170,000.00 | |
|
Liabilities and Equity | ||
|
Current Liabilities | ||
|
Accounts Payable |
$400,000.00 | |
|
Bank overdraft |
$200,000.00 | |
|
Income tax payable |
$249,000.00 | |
|
Dividend payable |
$256,000.00 | |
|
Total Current Liabilities |
$1,105,000.00 | |
|
Non- Current Liabilities | ||
|
Total Liabilities |
$1,105,000.00 | |
|
Net Assets |
$3,065,000.00 | |
|
Equity | ||
|
EQUITY | ||
|
Paid Up Capital |
$2,400,000.00 | |
|
Retained Profit |
2 |
$375,000.00 |
|
General reserve |
$290,000.00 | |
|
Total Equity |
$3,065,000.00 |
Notes to accounts
|
Note1 Account receivable | ||
|
Closing balance of Account receivable |
$600,000.00 | |
|
Less |
Impairment |
($60,000.00) |
|
Add |
Other debtors |
$50,000.00 |
|
Total |
$590,000.00 | |
|
Note 2 Retained Earnings | ||
|
Opening Balance |
$80,000.00 | |
|
Add |
Profit for the period |
$581,000.00 |
|
Less |
Transfer to general reserve |
-$30,000.00 |
|
Less |
Dividend Payable |
-$256,000.00 |
|
Closing balance |
$375,000.00 |
Statement of Changes in Equity
A statement of changes in equity is a statement which exhibits the changes in the share capital, retained earnings, and accumulated reserves over an accounting period. It classifies changes in the interest of the owner in the company, plus in the application of surplus or retained earning from one period to the other. Line items mainly cover loss or profit from operations, share issue or redemption, paid dividends, revaluation reserve and all other items credited or charged to accumulated other income. This statement also entails non-controlling interest which needs to be attributed to other entities and individuals. The statement of equity typically depicts the movements of equity together with accumulated losses and earnings in order to allow the users of financial statements to identify the sources (i.e. from where it originated) and outlets (where it went). This statement must show the total comprehensive income for the concerned period, depicting separately the sums attributable to parent company owners and non-controlling assets (Mayorga and Sidhu, 2012). The Statement of changes in equity of Heaven Ltd. shows that the company transferred some amount to general reserve and also declared dividend.
Table 2: Statement showing Changes in equity of Heaven Ltd
|
Share capital |
Retained earnings |
General Reserve |
Total equity | |
|
Opening balance |
$2,400,000.00 |
$80,000.00 |
- |
$2,480,000.00 |
|
Changes in equity for the year 2016 | ||||
|
Issue of share capital |
- |
- |
- |
- |
|
Profit of financial year |
- |
$581,000.00 |
- |
$581,000.00 |
|
Transfer to general reserve |
- |
-$30,000.00 |
$30,000.00 |
- |
|
Dividend Declared |
- |
-$256000.00 |
- |
- |
|
Closing balance |
$2,400,000.00 |
$375,000.00 |
$30,000.00 |
$2,805,000.00 |
References
Ho Kim, S. and Taylor, D., 2011. Labour cost disclosures: have IFRSs made a difference?. Journal of Human Resource Costing & Accounting, 15(2), pp.127-146.
Hodgson, A. and Russell, M., 2014. Comprehending comprehensive income. Australian Accounting Review, 24(2), pp.100-110.
Howieson, B., 2013. Defining the Reporting Entity in the Not?for?profit Public Sector: Implementation Issues Associated with the Control Test. Australian Accounting Review, 23(1), pp.29-42.
Jeanjean, T. and Stolowy, H., 2008. Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of accounting and public policy, 27(6), pp.480-494.
Mayorga, D.M. and Sidhu, B.K., 2012. Corporate disclosures of the major sources of estimation uncertainties. Australian Accounting Review, 22(1), pp.25-39.
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