Act305 Corporate Accounting System - Assessment Answers

Write a report to Bill, advising him how the control requirements of AASB 10 apply in each of the above investments. State, for each investment, where the control rests, citing and explaining how the relevant paragraphs of AASB10 apply, and whether Bill should include the results of the investments within the consolidated accounts explaining the reasons for your decision.

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.

In Response to Question 1

The consolidated financial statements were prepared to account for the Small Ltd interest ad buyout in the Fry Ltd joint venture agreement (Cassar, Ittner and Cavalluzzo 2015). The inter corporate investment was classified as Investment in Associates and the same will be accounted by the company through fair value through profit and loss where the small ltd would report any kind of share of income, share of depreciation or amortization or intergroup sales and transactions under the income statements and the balance sheet of the company will shows and reflect the true and fair market value taking into account the dividends and other forms of balance of the income statement in the company’s financial report (Adcock 2016).

Income Statement	Year 2018	Year 2019	Year 2020
Share of Income (30%)
Profit before Tax	80,000	70,000	60,000
Taxation at 30%	-30,000	-25,000	-20,000
Profit After Tax	50,000	45,000	40,000
Share of Income (30%)	15,000	13,500	12,000
Balance Sheet [Investment in Fry Limited]	Year 2018	Year 2019	Year 2020
Beginning Value of Investment	50,000	41,000	50,000
Add: Share of Income (30%)	15,000	13,500	12,000
Subtract: Share of Dividend
Stake at Company	30%	30%	30%
Dividend for the year	80,000	15,000	10,000
Total Share of Dividend	24000	4500	3000
Ending Value of Investment	41,000	50,000	59,000

Consolidated Financial Statements
In the Books of Small Ltd/Calculation of Goodwill
Particulars	Amount($)
Purchase Price (30% Stake)	50,000
Share Capital	30,000
Retained Earnings	120,000
Total Share Capital	150,000
30% Stake	45000
Goodwill (Purchase Price- Fair Market Value)	5,000

Journal Entries in the Books of Small Ltd
Date	Particulars	Amount($)	Amount($)
1.07.17	Fry Ltd A/c…..Dr	50,000
	To Cash/Bank A/c		50,000
	(Being Investment done in Fry Ltd Company)
30.06.18	Bank A/c……Dr	24,000
	To Interest/Dividend A/c		24,000
	(Being Dividend Received from Fry Ltd Company)
30.06.18	To Interest/Dividend A/c	24,000
	To Profit/Loss Account		24,000
	Being Interest Transferred to Income Statement Account)
30.06.19	Bank A/c……Dr	4,500
	To Interest/Dividend A/c		4,500
	(Being Dividend Received from Fry Ltd Company)
30.06.19	To Interest/Dividend A/c	4,500
	To Profit/Loss Account		4,500
	Being Interest Transferred to Income Statement Account)
30.06.20	Bank A/c……Dr	3,000
	To Interest/Dividend A/c		3,000
	(Being Dividend Received from Fry Ltd Company)
30.06.20	To Interest/Dividend A/c	3,000
	To Profit/Loss Account		3,000
Being Interest Transferred to Income Statement Account)

In Response to Question 2

Rock Bottom Pvt Ltd
Assets		Liabilities
Particulars	Amount($)	Particulars	Amount($)	Amount($)	Payable %
Land and Building	7,500,000	Secured Creditors	9,000,000	9,000,000	100%
Other Assets	6,750,000	Receiver Costs	150,000	150,000	100%
		Liquidating Expenses	600,000	600,000	100%
		Staff Wages Payable	900,000	900,000	100%
		Staff Leave Entitlement	150,000	150,000	100%
		Unsecured Bank Overdraft	750,000	750,000	100%
		Director's Wage Payable	450,000	450,000	100%
		Unsecured Trade Payables	2,400,000	2,250,000	93%
		Local Government Rates	300,000	0	0%
		Taxes Payable	1,050,000	0	0%
		Dividends Payable	450,000	0	0%
Total Assets Market Value	14,250,000	Total Liabilities Market Value	16,200,000	14,250,000

The total amount of value recognized from the company Rock Bottom Ply ltd when the company was declared insolvent was around 14.25 million dollars however the total liabilities of the company were around 16.20 million dollars the deficit amount was around 1.95 million dollars in order to settle off and clear all the liabilities of the company (Giang and Hai 2017). The liabilities of the companies were ranked according to the nature of account and the percentage or the extent of the amount till which the liability will be paid off (Gary et al. 2016).

In Response to Question 3

The use of partial goodwill was used in the case of this sum and since the company Blake Ltd acquired around 80% of the investment in Seven Ltd the same was recorded in the company’s balance sheet at the amount which is around 306,160 (He, Lu and Ongena 2016). The amount and the method of accounting used for accounting of the inter corporate investment was the use of Business Combination method under which the income and the total value of the group company acquired is reported in the consolidated financial statement and in the balance sheet of the parent company minority interest if any is shown in the balance sheet (Goyal et al. 2018).

Partial Goodwill Method (In the books of Blake Ltd)
Particulars	Amount($)	Amount($)
Purchase Consideration Paid	306160
Total Fair Market Value
Share Capital	172,000
Retained Earnings	146,200
Fair Market Value of Seven Ltd		318,200
Total Stake at Seven Ltd	80%
Fair Value of Acquisition		254560
Total Goodwill		51600
Minority Interest	20%
Total Minority Interest		63640

Workings of Blake Ltd	Amount($)
Intra Group Sales Evaluation
Total Sales Made to Seven Ltd from Black Ltd	55,900
Sales done by Seven Ltd	44,720
Percentage of Goods Unsold	25%
Share of Unrealized Profit
[25% of 55,900]	13,975
Closing Inventory Evaluation	Amount($)
Closing Inventory of Seven Ltd from Black Ltd	10,320
Costs for Blake Ltd	8,256
Profit from the Transaction	2,064
Tax Rate	30%
Net Profit from the Transaction	1444.8

Goodwill Calculation	Amount($)
Carrying Value of the Asset	306,160
less: Goodwill Impairment Charges	19350
Total Carrying Value of Goodwill	286,810
Impairment Charges Recognized in Income Statement	2,580
Plant and Machinery	Amount($)
Purchase Consideration Paid by Seven Ltd	99,760
Cost Price	116,100
Accumulated Depreciation	46,440
Carrying Value in Blake Ltd	69,660
Profit in the Books of Blake Ltd	30,100
Taxation Rate	30%
Net Profit on sale of Assets	21070

Journal Entries in the Books of Black Ltd
Date	Particulars	Amount($)	Amount($)
1.07.17	Seven Ltd A/c…..Dr	3,06,160
	To Cash/Bank A/c		3,06,160
(Being Investment done in Seven Ltd Company)

Income Statement	Amount($)
Income from Seven Ltd	86,688
Impairment of Goodwill	-2,580
Share of Unrealised Profits	-13,975
Profit from sale of Inventory	1,445
Profit from sale of Assets	21,070
Total Income	92,648
Balance Sheet	Amount($)
Beginning Value of Assets	3,06,160
Add: Income	92,648
Subtract: Share of division	79,980
Ending Value	3,18,828
Less: Minority Interest @20%	63765.6
Total Net Value	2,55,062

Reconciliation of opening and closing retained earnings	Blake Ltd ($)	Seven Ltd ($)
Sales revenue	5,93,400	4,98,800
Cost of goods sold	-3,99,040	-2,04,680
Gross profit	1,94,360	2,94,120
Dividends revenue from Seven Ltd	63,984	---
Management fee revenue	22,790	---
Profit on sale of plant	30,100	---
Expenses
Administrative expenses	-26,488	-33,282
Depreciation	-21,070	-48,848
Management fee expense	---	-22,790
Other expenses	-86,946	-66,220
Profit before tax	1,76,730	1,22,980
Tax expense	-52,890	-36,292
Profit for the year	1,23,840	86,688
Retained earnings-30 June 2017	2,74,684	2,05,712
Dividends paid	-1,18,164	-79,980
Retained earnings-30 June 2018	2,80,360	2,12,420
Statements of financial position
Shareholders' equity
Retained earnings	2,80,360	2,12,420
Share capital	3,01,000	1,72,000
Current liabilities
Accounts payable	47,042	39,818
Tax payable	35,518	21,500
Non-current liabilities
Loans	1,49,210	99,760
	8,13,130	5,45,498
Current assets
Accounts receivable	51,084	53,578
Inventory	79,120	24,940
Non-current assets
Land and buildings	1,92,640	2,80,360
Plant -at cost	2,57,871	3,05,988
Accumulated depreciation	-73,745	-1,19,368
Investment in Seven Ltd	3,06,160
	8,13,130	5,45,498

In Response to Question 4

Case Study (A)

The Finance director of Northern Australia Global Investment (NAGIL), Mr. Bill Handy should record the transactions in accordance with the AASB 10 standards where the company should report the consolidated financial statements with the group or acquired company that is Struggle Ltd (Lestari and Riyadi 2018).

The loan given to the Struggle Ltd could not be recovered and henceforth the company classified its existing debt holders as equity stakeholders of the company. The consolidated net profit/loss of the Struggle Company then should be reported in the balance sheet of the company and the arising profit and loss from the company should be reported in the income statement of the company (Libby 2017).

The reasons for the decisions of the investment is based on the fact that the company will have to classify the investment as Minority Passive and the reconciliation will e done through the use of the fair value through profit and loss account. The reporting elements under the same would be as if the items in the balance sheet would be reported as fair market value and the interest income or the realized gain or unrealized gain or loss will be reported in the income statement as per the IFRS.

Case Study (B)

The Northern Australia Global Investment should report the investment with the Very Big Company Ltd (VBCL) as a perspective from the minority active perspective in this case of Interoperate Investment.

The investment in associate will be the case where the investor can extent influence on the nature of the operations of the company but cannot show any significant influence but there will be no control over the company (Nguyen and Nguyen 2018).

The reason for such an investment decision and divisions was due to the nature and the type of operations conducted and the type of transactions that were similar to the above justified base of classifications (Paugam, Astolfi and Ramond 2015).

Case Study (C)

The Case study will be reported as the case where the company will report the investment in a consolidated basis as the company enjoys a considerable amount and the amount should be consolidated with the parent company. The consolidated net profit will be shown in the income statement of the company and the balance sheet will shows a minority interest (Su and Wells 2018).

Case Study (D)

The Northern Australia Global Investments Ltd should the investment on a joint venture basis where the control is shared by two or more entities and the valuation method for the same is either equity or the proportionate consolidated method.

The reason for such an investment decision and divisions was due to the nature and the type of operations conducted and the type of transactions that were similar to the above justified base of classifications (Torkkeli and Kukkonen 2017).

Reference

Adcock, K., 2016. Healthways: A Financial Analysis and Recommendations (Doctoral dissertation, University of Mississippi).

Cassar, G., Ittner, C.D. and Cavalluzzo, K.S., 2015. Alternative information sources and information asymmetry reduction: Evidence from small business debt. Journal of Accounting and Economics, 59(2-3), pp.242-263.

Gary, R.F., Moore, J.A., Sisneros, C.A. and Terando, W.D., 2016. The impact of tax rate changes on intercorporate investment. Advances in accounting, 34, pp.55-63.

Giang, N.D. and Hai, N.X., 2017. Agency conflicts in inter-corporate asset sales.

Goyal, A., Muckley, C.B., Qian, J. and Tehranian, H., 2018. Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups.

He, Q., Lu, L. and Ongena, S., 2016. Who gains from credit granted between firms? Evidence from inter-corporate loan announcements made in China.

Lestari, S.D. and Riyadi, S., 2018. The Effect of Firm Size, Financial Leverage, and Profitability on Investment Opportunities Set Policy and Its Implications on Accounting Policy. Advanced Science Letters, 24(4), pp.2342-2346.

Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.

Nguyen, G. and Nguyen, H., 2018. Does Seller Status Matter in Inter-Corporate Asset Sales.

Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do purchase price allocations matter?. Journal of Accounting and Public Policy, 34(4), pp.362-391.

Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre and post IFRS adoption. Accounting Research Journal, (just-accepted), pp.00-00.

Torkkeli, A. and Kukkonen, M., 2017. Reforming capital gains taxation of intercorporate share realizations: a law and economics approach from a Nordic perspective. Nordic Tax Journal, 2017(1), pp.47-58.