Mpa105 Financial Accounting And Reporting Assessment Answers

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:

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

WN-1: Calculation of Goodwill on acquisition

WN-2: Consolidation Worksheet entries as on 1 July, 2016

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