Deegan5e SM Ch30

Chapter 30
Further consolidation issues II: Minority Interests

30.1
The entire proportion of the inter-entity transactions will need to be eliminated

even in the presence of minority interests. Paragraph 24 of AASB 127 states:
Intragroup balances, transactions, income and expenses shall be
eliminated in full.
A group is defined in AASB 127 as a parent and all its subsidiaries. Paragraph
25 further states:
Intragroup balances and transactions, including income, expenses and
dividends, are eliminated in full. Profits and losses resulting from
intragroup transactions that are recognised in assets, such as inventory
and fixed assets, are eliminated in full.
30.2
AASB 127 defines a minority interest as that portion of the profit or loss and
net assets of a subsidiary attributable to equity interests that are not owned,
directly or indirectly through subsidiaries, by the parent. AASB 127 requires
separate disclosure of the minority interests share of capital, retained profits
or accumulated losses. Paragraph 33 of AASB 127 states:
Minority interests shall be presented in the consolidated balance sheet
within equity, separately from the parent shareholders equity.
Minority interests in the profit or loss of the group shall also be
separately disclosed.
Pages 1043 to 1045 of the text provide possible disclosure formats.
30.3
AASB 127 requires that the consolidated financial statements be prepared

after the effects of intragroup transactions have been eliminated in full. A
number of adjustments need to be made when calculating minority interests in
the presence of intragroup transactions. As we know, minority interests in the
profit or loss of the group must be separately shown, as must the minority
interests share of the economic entitys share capital and reserves. In relation
to different types of intragroup transactions, and their impacts on minority
interests, we can consider the following:
Dividends: The minority interests share of the dividends paid by the
subsidiary will be shown in the consolidated financial statements. That is,
the minority interests share in the dividends paid or proposed by the
subsidiary will not be eliminated on consolidation. This is appropriate
because the dividends paid to the minority interests represent resource
flows away from the group. The dividends distributed to the minority
interests will act to reduce the minority interests share in the equity of the
subsidiary. The consolidated balance sheet will show any dividends
payable to the minority interests as a liability.
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan
301
Intragroup sale of inventory: When we calculate the minority interests

share of the profits of the subsidiary we need to calculate the subsidiarys
profit after adjustments to eliminate income and expenses of the subsidiary
that are unrealised from the economic entitys perspective.
If the gains or losses have been recognised then no adjustment is necessary
when calculating minority interest. For example, if a subsidiary sold
inventory to the parent at a gain, and the parent entity has in turn sold all
the inventory to external parties, the minority interests share of profit
would not need to be reduced as the related gain would be deemed to have
been realised from the perspective of the group. An adjustment only needs
be made to the extent that the asset sold within the economic entity, such
as inventory, is still on hand at reporting date (that is where profits
recorded in the individual accounts of a group member have not been
recognised from the perspective of the economic entity). Adjustments to
the calculation of the minority interests share of the subsidiarys profits
will be needed where some or all of the inventory sold by the subsidiary is
still on hand with the parent entity at reporting date.
If there are unrealised profits in closing inventory, this will mean that in
the next financial period there will be unrealised profits in opening
inventory. In the next financial period we would need to adjust the
minority interests share of opening retained earnings (by reducing it) and
provide a corresponding increase in the minority interests share of that
periods profits.
Intragroup sale of non-current assets: As with inventory, if a subsidiary
sells a non-current asset such as an item of property, plant and equipment
to another entity within the group, to the extent that the asset stays within
the group, then the gain or loss on sale has not been recognised from the
groups perspective and the minority interests share of profits will need to
be adjusted. However, the gain or loss is considered to be realised across
the life of the asset as the asset is used up, that is as it is depreciated. As
the assets, such as plant, are used, perhaps to produce inventory, the
intragroup profit is considered to be realised as the service potential of the
plant becomes embodied in goods produced by the plant, for example, in
inventory.
Intragroup service and interest payments: To the extent that there is no
related asset that is retained in the economic entity upon which any profit
has accrued, no adjustments are necessary in calculating the minority
interest in the subsidiarys profit (of course, consolidation adjustments will
still be required but this discussion is about calculating the minority
interests share of profits for presentation purposes and not for the purpose
of generating consolidation journal adjustments).
From the discussion so far we can summarise some rules to use when
calculating minority interests in profits or losses. The general principles
are:
302
We only need to make adjustments to minority interests share of

profits where an intragroup transaction affects the subsidiarys profit or
loss.
We make adjustments for profits or losses made by the subsidiary to

the extent they are unrealised from the economic entitys perspective,
that is the respective asset is still on hand at reporting date.
For profits relating to transactions that do not involve the transfer of

assets, such as those relating to interest, management fees and so forth,
no adjustments to minority interests are necessary. The related profits
are deemed to be recognised at the point of the transaction.
We do not need to make adjustments for unrealised gains or losses

made by the parent entity when calculating the minority interest in
profits.
30.4
Some of the intragroup transactions we make adjustments for were discussed

in the answer provided to Question 30.3. in calculating minority interests in
the profits of the economic entity we start with the reported after-tax profit of
the subsidiary and calculate a proportionate share in this unadjusted amount.
We then make adjustments for profits made in the accounts of the subsidiary
that are unrealised at year end from the perspective of the economic entity. In
calculating minority interests, we do not make any adjustments for unrealised
profits that were recorded in the accounts of the parent entity. Minority
interests in the economic entitys profits and reserves will be impacted by
intragroup transactions such as payments of dividends, intragroup sale of
inventory and non-current assets, and intragroup service or interest payments
to the extent that related assets are still on hand at balance date.
30.5
(a)
(b)
(c)
Purchase consideration
Company As share of the net assets of Company B at
the date of acquisition ($10m 0.7):
Goodwill acquired
$10 000 000
Purchase consideration
Company As share of the net Assets of Company B at
the date of acquisition ($10m 1.0):
Goodwill acquired
$14 285 714
$ 7 000 000
$ 3 000 000
$10 000 000

$ 4 285 714
As we know, when we consolidate the accounts of the parent entity and

its controlled entities we include 100 per cent of the identifiable assets
(tangible and intangible) of the parent entity and the controlled entities
in the consolidated financial statements. However, for goodwill, we
only include the acquired goodwill, which is based upon the parent
entitys ownership interest in the subsidiary. This is in accord with the
requirement that only purchased goodwill shall be brought to account.
Students should be encouraged to consider the conceptual logic of this
requirement.
303
30.6
Consolidated income statement of Backbeach Limited and its controlled

entities
for the year ended 30 June 2009
Consolidated
2009
$000
Revenue
5 000
Cost of goods sold
1 500
Gross Profit
3 500
Dividend revenue
200
Interest expense
(100)
Depreciation expense
(50)
Other expenses
(10)
Profit before income tax
3 540
Income tax expense
(X)
Profit for the period
3 540
Profit attributable to minority interest
342*
Profit attributable to members of parent entity interest 3 198
* $342,000 was determined as being Consolidated profit, less the parent
entity profit multiplied by the minority interest. That is, ($3,540 - $2,400)
x 0.30 = $342,000. We can do this calculation in this manner as there were
apparently no intra-group transactions and therefore no adjustments for
unrealised profits.
30.7
Dividend out of pre-acquisition earnings

On 15 August 2008 Slater Ltd paid a dividend of $50 000 out of preacquisition earnings. Kelly Ltd would have received $35 000, being 70 percent
of these dividends. Kelly Ltd would have made the following entry in its own
journal:
Dr
Cr
Cash
Investment in Slater Ltd
35 000
35 000
Consolidation journal entries

Dr Investment in Slater
35 000
Cr Retained earnings, 1 July 2008 Slater
35 000
The above entry has the effect of reinstating the investment as if the preacquisition dividend had not been paid.
Dr
Dr
Dr
Dr
Cr
Share Capital
Retained earnings
Revaluation reserve
Goodwill
Investment in Slater Ltd
126 000
35 000
42 000
97 000
300 000
304
30.8
Consolidation adjustments and eliminations:

Fair value adjustment:
Dr Land
Cr Revaluation reserve
Dr
Cr
Revaluation reserve
Deferred tax liability
Elimination of investment
Dr Share capital
Dr Retained earnings
Dr Revaluation reserve
Dr Goodwill
Cr Investment in Beachly Ltd
50 000
50 000
15 000
15 000
315 000
90 000
31 500
63 500
500 000
Elimination of intra group sales:

Dr
Cr
Sales
Cost of goods sold
60 000
60 000
Elimination of unrealised profit in closing inventory

Dr Cost of goods sold
7 500
Cr Inventory
7 500
Consideration of the tax paid or payable on the sale of inventory that is still
held within the group
Dr Deferred tax asset
Cr Income tax expense
($7 500 x 30 per cent)
2 250
Elimination of intragroup management fees:

Dr Management fees revenue
10 000
Cr Management fees expense
2 250
10 000
Reversal of profit recognised on sale of asset and reinstatement of cost and

accumulated depreciation
Dr Profit on sale of plant
10 000
Dr Plant
10 000
Cr Accumulated depreciation
20 000
Impact of tax on profit on sale of item of plant
Dr Deferred tax asset
3 000
3 000
Reinstating accumulated depreciation in the balance sheet

Layne Ltd would be depreciating the asset on the basis of the cost it incurred
to acquire the asset. Its depreciation charge would be $40 000 4 = $10 000.
305
From the economic entitys perspective, the asset had a carrying value of
$30,000, which was to be allocated over the next four years giving a
depreciation charge of $30 000 4 = $7 500. An adjustment of $2 500 is
therefore required.
Dr
Cr
Accumulated depreciation
Depreciation expense
2 500
2 500
Consideration of the tax effect of the reduction in depreciation expense

Dr Income tax expense
750
Cr Deferred tax asset
750
Minority interests in 2009 profits
Reported profit of Beachly Ltd

Adjustments
Unrealised profit in closing inventory
Profit on sale of plant:
Unrealised portion (after tax)
Realised portion (depreciation
adjustment after tax)
Minority interests in 2009 profits
30.9
70 000
10%
Minority interest
7 000
(5 250)
(525)
(7 000)
(700)
1 750
175
5 950
Elimination of the investment in Thruster Ltd and recognition of goodwill

on consolidation
Thruster Ltd
Parent Entitys
70% interest
$
$
Share capital at acquisition date - 1 July 2007

Retained earnings at acquisition date - 1 July 2007
3 000 000
1 400 000
Investment in Thruster Ltd

Goodwill on consolidation
2 100 000
980 000
3 080 000
4 000 000
920 000
As shown above, the net assets of Thruster Ltd are $4.4 million at acquisition date.
The proportional interest acquired in these net assets (70 per cent) amounts to
$3.080 million. As $4 million is paid for the investment, the goodwill amounts to
$920 000. The consolidation entry to eliminate the investment is:
(a)Dr
Dr
Dr
Cr
Share capital
Retained earnings
Goodwill
2 100 000
980 000
920 000
4 000 000
What should be noted at this point is that we are recognising only the goodwill that
has been purchased by Anderson Ltd. This is in accord with the requirements in
our accounting standards that only purchased goodwill be brought to account.
306
Implications for minority interests: Recognising minority interest in share

capital and reserves at acquisition date
In recognising the minority interests share in share capital and reserves at
reporting date we will make three initial calculations:
1.
2.
We need to determine the minority interests at acquisition date.

We need to consider the minority interest in movements in share capital and
reserves between the date of the parent entitys acquisition and the
beginning of the current reporting period.
We need to consider the minority interest in the current periods profit as

well as movements in reserves in the current period. In determining the
minority interests share of current periods profit or loss we will
subsequently need to adjust for gains and losses of the subsidiary that are
unrealised from the economic entitys perspective.
Remember that in calculating minority interests we do not make any consolidation
journal entries; we are doing the calculations so that we can disclose the relative
proportions of consolidated profits and consolidated share capital and reserves that
are attributable to parent entity interests and minority interests.
3.
Thruster Ltd
Minoritys
30% interest
$
$
Share capital at acquisition date
3 000 000
900 000(A)
Retained earnings at acquisition date
1 400 000
420 000(B)
1 320 000
(Remember, the markers A and B are used to allow us to reference the calculations
to the consolidation worksheet.). Including minority interests on the consolidation
worksheet is optional.
Recognising minority interest in movements in share capital and reserves
from acquisition date to the beginning of current financial period
Balance at 1 July Balance at 30 June
2007
$
Retained earnings1 400 000
2008
$
1 600 000
Change
$
200 000
Minority
interest 30%
$
60 000(C)
Recognition of the minority interest in current period (unadjusted) profit

The profit of the subsidiary for the current financial year as reported in the
accounts of the subsidiary is $110 000. This is our starting point, which we will
subsequently adjust for unrealised gains and losses. The minority interest in this
unadjusted balance is 30 per cent, or $33 000. When we calculate the minority
interest in profits we start with this unadjusted share of $33 000. Then we make a
number of adjustments to take account of any unrealised components - from the
perspective of the subsidiarys profits - that are included within the $33 000.
307
Thruster Ltd
$
Profit for year ended 30 June 2009
110 000
Minoritys
30% interest
$
33 000 (D)
We move the above calculations (A to D) of the minority interest in capital and

reserves and current period profits to the minority interest column in the
consolidation journal. It is further emphasised that the above calculations do not
lead to consolidation adjustments. They are simply part of the process of
determining the minority interests share in total equity as at reporting date.
Subsequent adjustments to the minority interest will be necessary to take account
of intragroup transactions that have created unrealised profits in the accounts of
the subsidiary. So while we have moved the $33 000 to the consolidated
worksheet to represent the minority interest in current periods profit, this
unadjusted share will be adjusted for unrealised gains or losses, as we will
demonstrate shortly.
Elimination of intercompany sales
We need to provide consolidation journal entries to eliminate the intercompany
sales because, from the perspective of the economic entity, the sales did not
involve external parties. This will ensure that we do not overstate the total sales of
the economic entity.
Sale of inventory from Thruster Ltd to Anderson Ltd
(b)Dr Sales
Cr Cost of goods sold
45 000
45 000
Under the periodic inventory system, the above credit entry would be to purchases,
which would ultimately lead to a reduction in cost of goods sold. (Cost of goods
sold equals opening inventory plus purchases less closing inventory, so any
reduction in purchases leads to a reduction in cost of goods sold.)
As all the inventory sold by Thruster to Anderson Ltd has since been sold by
Anderson Ltd then there is no unrealised profit in closing inventory, and therefore
no adjustments need to be made.
Impairment of goodwill
In the absence of information about the impairment of goodwill we will assume

that there has been no impairment of goodwill, and hence no adjustment is
necessary.
Dividends paid
We eliminate the dividends paid within the group. Only the dividends paid to
parties outside the entity (to the minority interests and to the shareholders of the
parent entity) are to be shown in the consolidated accounts.
308
(c)Dr Other revenue

Cr Dividend paid
56 000
56 000
Implications for minority interests: Dividends paid
We need to consider the impacts of the dividends on minority interests. The

payment and declaration of dividends by a subsidiary acts to reduce the interest of
the minority in the subsidiarys closing retained earnings.
Reduction in minority interest
$
Thruster Ltd
Dividend paid
$
80 000
Minoritys
30% interest
$
(24 000) (E)
Next we transfer the above consolidation journal entries and minority interest
calculations to the consolidation worksheet.
309
Consolidation worksheet for Anderson Ltd and its controlled entity for the year ending 30 June
2010
Eliminations
and adjustments
Anderson Ltd
($000)
Thruster Ltd
($000)
Dr
($000)
Cr
($000)
Consolidated
statements
($000)
Minority
Interest
($000)
Adjustments
Reconciliation of opening and

closing retained earnings
Sales revenue
less Cost of goods sold
less Other expenses
Other revenue
800
(200)
(120)
310
200
(80)
(60)
85
45(b)
Profit before tax
790
145
879
Tax
170
35
205
Profit after tax
620
110
674
Retained earnings- 30 June 2008 2 000
1 600
45(b)
56(c)
955
(235)
(180)
339
33D
980(a)
33
60C
420B
480
2 620
3 294
2 620
1 710
400
2 220
80
1 630
2 220
8 000
1 630
3 000
120
80
200
1 200
500
1700
11 540
5 210
13 670
Current assets
Cash
Accounts receivable
Inventory
300
500
1 000
50
350
600
350
850
1 600
Non-current assets
Land
Plant (net)
Goodwill
2 800
2 940
4 000
2 210
2 000
920(a)
4 000(a)
______
5 010
4 940
920
11 540
5 210
2 166.52
2 166.52
13 670
Dividends paid
Totals
56(c)
424
2 870
(24)E
(24)
489
Balance sheet
Shareholders equity
Retained earnings
Share capital
Current liabilities
Accounts payable
Non-current liabilities
Loans
2 870
8 900
2 100(a)
5(i)
900A
1 389
The above worksheet provides the data for the consolidated income statement and
balance sheet. As can be seen, the dividend payments total $424 000. These represent
dividends paid to parties external to the economic entity ($400 000 by Anderson Ltd,
and 30 per cent of the $80 000 paid by Thruster Ltd). AASB 127 requires that
additional disclosures be made to show the share of minority interests in capital,
retained earnings, reserves, and profit or loss. Hence we need to allocate these
accounts between the parent entity and the minority interests. The allocation is done
after making adjustments for unrealised gains or losses associated with intragroup
transactions. In this question there were no unrealised gains.
900
3010
Summary of minority interest

30%
Minority interest
Profit
Profit of Thruster Ltd
110 000
33 000
1 600 000
480 000
Dividends
Paid by Thruster Ltd
(80 000)
Minority interest in closing retained earnings
Minority interest in share capital
3 000 000
Total minority interest
(24 000)
489 000
900 000
1 389 000
Opening retained earnings

Opening retained earnings of Thruster
We are now in a position to present the consolidated financial statements. A

suggested format for the consolidated accounts would be as follows (prioryear comparatives for the accounts of the parent entity, both of which would
be required in practice, have not been provided):
Consolidated income statement of Anderson Ltd and its subsidiaries
$
Sales 955 000
Cost of good sold
Gross profit
Other revenue
Other expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest
235 000
720 000
339 000
1 059 000
180 000
879 000
205 000
674 000
33 000
641 000
3011
Consolidated balance sheet of Anderson Ltd and its subsidiaries

as at 30 June 2010
Parent
entity
interest
$
Minority
interest
$
Current assets
Cash 350 000
Accounts receivable
Inventory
Consolidated
$
850 000
1 600 000
2 800 000
Non-current assets
Land
Plant and equipment (net)
Goodwill
5 010 000
4 940 000
920 000
10 870 000
13 670
Total assets
Current liabilities
Accounts payable
200 000
Loan
Total liabilities
1 700 000
1 900 000
Shareholder's equity
Share capital
Retained earnings - 30 June 2009 (x)
Total shareholders equity
Total equities
8 000 000
2 381 000
10 381 000
900 000
489 000
1 389 000
8 900 000
2 870 000
11 770 000
13 670 000
Notes to and forming part of the consolidated accounts
Note x: Retained earnings

Retained earnings - 1 July 2008
Profit after income tax
Interim dividend
Retained earnings - 30 June 2009
Parent
entity
interest
$
Minority
interest
$
2 140 000
641 000
(400 000)
2 381 000
480 000
33 000
(24 000)
489 000
Consolidated
$
2 620 000
674 000
(424 000)
2 870 000
3012
30.10 (a) Consolidation Worksheet Journal Entries

a Revalue Land to Fair Value (consistent with AASB116)
Dr Land
225 000
Cr Revaluation Reserve
b
Tax Effect: Revalue Land to Fair Value

Dr Revaluation Reserve
Cr Deferred Tax Liability [225,000 x 0.30]
225 000
67 500
67 500
c Eliminate Investment in Natasha against Borris Ltds share of Natasha Ltds

Owners Equity at acquisition
Dr Share Capital [5,500,000 x .8]
4 400 000
Dr Revaluation Reserve
[(225,000 67,500) x .8]
126 000
Dr Retained earnings 1/7/07
[3,500,000 x .8]
2 800 000
Dr Goodwill
674 000
Cr Investment in Natasha
8 000 000
d Impairment of Goodwill
Dr Other expenses - Impairment loss
goodwill [674,000 500,000]
174 000
Cr Accumulated Impairment Losses - Goodwill
e
Elimination of inter entity Sales

Dr Sales Revenue
Cr Cost of Goods Sold (Purchases)
174 000
290 000
290 000
Elimination of Unrealised Profit in Closing Inventory (earned by Natasha)

Dr Cost of Goods Sold (Closing Inventory
P+L) [(290,000 200,000) x 0.50]
45 000
Cr Inventory (B/S)
45 000
Tax Effect: Elimination of Unrealised Profit in Closing Inventory

Dr Deferred Tax Asset [45,000 x .3]
13 500
Cr Income Tax Expense
13 500
Reversal of profit recognised on sale of non-current asset

Dr Profit on sale of plant [250,000 200,000] 50 000
Dr Plant [400,000 250,000]
150 000
i Impact of tax on profit on sale of item of plant

Dr Deferred tax asset [50,000 x 0.3]
200 000
15 000
15 000
j Reinstating accumulated depreciation in the balance sheet

Borris Ltd would be depreciating the asset on the basis of the cost it incurred to
acquire the asset. Its depreciation charge would be $250 000 5 = $50 000. From
3013
the economic entitys perspective, the asset had a carrying value of $200 000,
which was to be allocated over the next six years giving a depreciation charge of
$200,000 5 = $40,000. An adjustment of $10,000 is therefore required.
Dr Accumulated depreciation
Cr Depreciation expense
10 000
10 000
k Consideration of the tax effect of the reduction in depreciation expense

3 000
3 000
l
Intragroup payment of management fees

Dr Other revenues (management fees)
Cr Other expenses (management fees)
30 000
m Elimination of Interim Dividend paid by Natasha to Borris

Dr Other Revenues (Dividend Revenue)
[100,000 x .8]
80 000
Cr Interim Dividend (P + L Appropriation)
n
Elimination of Final Dividend declared by Natasha to Borris

Dr Other Revenues (Dividend Revenue)
[50,000 x .8]
40 000
Cr Final Dividend (P + L Appropriation)
30 000
80 000
40 000
Elimination of inter-entity Debt: Borriss Share of Natashas declared Final

Dividend
Dr Dividends Payable (Liability)
[50,000 x .8]
40 000
Cr Dividends Receivable (Asset)
40 000
3014
Eliminations
and adjustments
Borris Ltd
($000)
Ntasha Ltd
($000)
Dr
($000)
Detailed reconciliation of opening

and closing retained earnings
Sales revenue
5200
1550
290(e)
Cost of goods sold
(3000)
(500)
45(f)
Gross profit
Other revenue
2200
200
1050
150
Other expenses
(400)
(200)
Profit before tax
2000
1000
Tax expense
(500)
(350)
50(h)30(l)
80(m),40(n)
174(d)
Cr
($000)
6460
290(e)
Interim dividend
Final Dividends paid
650
4000
(500)
-
(100)
(50)
Retained earnings - 30 June 2009 7000
4500
3255
3205
150
10(j),30(l)
(734)
2621
3(k)
13.5(g),
15(i)
Profit for the year

1500
Retained earnings 1 July 2008 6000
Consolidated
statements
($000)
824.5
1796.5
7200
2800(c)
80(m)
40(n)
(520)
(10)
8466.5
Balance sheet
Shareholders equity
Retained earnings
Revaluation reserve
Share capital
Current liabilities
Accounts payable
Dividends payable
Loans
Current assets
Cash
Accounts receivable
Dividends receivable
Inventory
Non-current assets
Deferred tax asset
Land
Plant
Investment in Natasha Ltd
Goodwill
Accumulated amortisation
7000
4500
15000
5500
67.5(b)
126(c)
4400(c)
250
100
50
40(o)
225(a)
8466.5
31.5
16100
350
10
650
150
67.5(b)
67.5
800
22900
10300
25825.5
250
650
40
2800
300
250
1200
40(o)
45(f)
550
900
3955
250
1100
13.5(g)
15(i)
3(k)
1375.5
4910
7500
(1500)
8000
3450
5000
(1000)
225(a)
150(h)
10(j)
200(h)
8000(c)
174(d)
8585
12650
(2690)
674
(174)
9233
25825.5
674(c)
22900
10300
9233
3015
Calculation of Minority Interest

minority interest
Minority Interest in 2009 Profit after Income Tax

Natashas Reported Profit after Income Tax Expense
Less
Unrealised Profit in Closing Inventory
Tax Effect of Unrealised Profit in Closing Inventory
Profit on sale of plant:
Unrealised portion
Realised portion
650,000
(45,000)
13,500
(31,500)
(35,000)
7,000
(28,000)
Natashas Adjusted Profit after Income Tax Expense
590,500
Minority Interest in (Opening) Retained Earnings 1/7/08
118,100
4,000,000
800,000
918,100
Minority Interest in Dividends

Natashas Reported Interim Dividend
Natashas Reported Final Dividend
Minority Interest in Closing Retained Earnings
100,000
50,000
Minority Interest in Share Capital

Natashas Reported Share Capital
Minority Interest in Revaluation Reserve
Natashas revaluation reserve recognised on acquisition
150,000
(30,000)
888,100
5,500,000
1,100,000
157,500
Minority Interest in Natashas Equity 30 June 2009
2,019,600
c.
Consolidated income statement of Borris Ltd and its subsidiaries
$
Sales 6,460,000
Cost of good sold
Gross profit
Other revenue
Other expenses
Income tax expense
3,255,000
3,205,000
150,000
(734,000)
2,621,000
824,500
1,796,500
118,100
1,678,400
3016
Consolidated balance sheet of Borris Ltd and its subsidiaries

as at 30 June 2009
Parent
entity
interest
$
Minority
interest
$
Current assets
Cash 550,000
Accounts receivable
Inventory
900,000
3,955,000
5,405,000
Non-current assets
Land
Plant and equipment
less Accumulated depreciation
Goodwill
less Accumulated impairment loss
Deferred tax asset
8,585,000
12,650,000
(2,690,000)
674,000
(174,000)
1,375,500
20,420,500
25,825,500
Total assets
Current liabilities
Accounts payable
Dividends payable
350,000
10,000
360,000
Loan
800,000
67,500
867,500
1,227,500
Total liabilities
Shareholders equity
Share capital
Revaluation reserve
Total equities
Consolidated
$
15,000,000
7,578,400
_________
22,578,400
1,100,000
888,100
31,500
2,019,600
16,100,000
8,466,500
31,500
24,598,000
25,825,500

Interim dividend
Final dividend
Parent
entity
interest
$
Minority
interest
$
Consolidated
$
6,400,000
1,678,400
(500,000)
________
7,578,400
800,000
118,100
(20,000)
(10,000)
888,100
7,200,000
1,796,500
(520,000)
(10 000)
8,466,500
3017
30.11 Elimination of the investment in Richards Ltd and the recognition of

goodwill on consolidation
Richards Ltd
Parent entitys
80% interest
$
$
Share capital at acquisition date - 1 July 2000500 000
400 000
Retained earnings at acquisition date - 1 July 2000425 000
340 000
740 000
Investment in Richards Ltd
890 000
Goodwill on consolidation
150 000
As shown, the net assets of Richards Ltd are $925 000 at acquisition date. The
proportional interest acquired in these net assets (80 per cent) amounts to $740000.
As $890 000 is paid for the investment, the goodwill amounts to $150 000. As we
know, this represents only the portion of goodwill acquired by Mark Ltd and not
the entire goodwill of Richards Ltd at acquisition date. The consolidation entry to
eliminate the investment is:
(a)Dr
Dr
Dr
Cr
Share capital
Retained earnings
Goodwill
400 000
340 000
150 000
890 000
Implications for minority interests: Recognising minority interest in share

capital and reserves at acquisition date
To recognise the minority interests share in share capital and reserves at reporting
date, we make three calculations:
(i)
We need to determine the minority interests at acquisition date.
(ii)
(iii)
We need to consider the minority interest in movements in share capital

and reserves between the date of the parent entitys acquisition and the
beginning of the current reporting period.
We need to consider the minority interest in the current periods profit, as
well as movements in reserves in the current period. In determining the
minority interests share of current period profit or loss we will need to
adjust for gains and losses of the subsidiary that are unrealised from the
economic entitys perspective.
Richards Ltd
$
Share capital at acquisition date
Retained earnings at acquisition date
500 000
425 000
Minoritys
20% interest
$
100 000 (A)
85 000(B)
185 000
3018
Recognising minority interest in movements in share capital and reserves

from acquisition date to the beginning of current financial period
Balance at 1 July
Balance at 30 June
2000
Retained earnings425 000
Change
2008
598 000
Minority
interest 20%
173 000 34 600 (C)
Recognition of the minority interest in current period (unadjusted) profit

The profit of the subsidiary for the current year is $252 000. The minority interest
in this is 20 per cent, or $50 400.
Richards Ltd
$
Profit for year ended 30 June 2009
252 000
Minoritys
20% interest
$
50 400 (D)
Elimination of intercompany sales

We need to eliminate the intragroup sales because, from the perspective of the
economic entity, no sales have in fact occurred. This will ensure that we do not
overstate the turnover of the economic entity.
Sale of inventory from Richards Ltd to Mark Ltd
(b)Dr Sales
130 000
130 000
Under the periodic inventory system, the above credit entry would be to purchases,
which would ultimately lead to a reduction in cost of goods sold. (Cost of goods
sold equals opening inventory plus purchases less closing inventory, so any
reduction in purchases leads to a reduction in cost of goods sold.)
In this case, the unrealised profit in closing inventory amounts to $14 000. In
accordance with AASB 102 Inventories, we must value the inventory at the
lower of cost and net realisable value. Hence on consolidation we must reduce the
value of recorded inventory, as the amount shown in the accounts of Mark Ltd
exceeds what the inventory cost the economic entity.
(c)Dr Cost of goods sold
14 000
Cr Inventory
14 000
Under the periodic inventory system, the above debit entry would be to closing
inventory - profit and loss. We increase cost of goods sold by the unrealised profit
in closing inventory because reducing closing inventory effectively increases cost
of goods sold. (Remember, cost of goods sold equals opening inventory plus
purchases less closing inventory.) The effect of the above entries is to adjust the
value of inventory so that it reflects the cost of the inventory to the group.
3019
Consideration of the tax paid or payable on the sale of inventory that is still held
within the group
From the groups perspective, $14 000 has not been earned. However, from
Richards Ltds individual perspective (as a separate legal entity), the full amount of
the sale has been earned. This will attract a tax liability in Richards Ltds accounts
of $4 200 (30 per cent of $14 000). However, from the groups perspective, some
of this will represent a prepayment of tax, as the full amount has not been earned
by the group even if Richards Ltd is obliged to pay the tax.
(d)Dr Deferred tax asset
($14 000 x 30 per cent)
4 200
4 200
Implications for minority interest: Adjustment to minority interest for unrealised

profit in closing inventory
This sale was made by the subsidiary and is unrealised - therefore requiring us to
adjust minority interest. If we look at the above consolidation adjustments we see
that the after-tax impact of the intragroup transaction is $9 800.
Richards Ltd
$
After-tax profit on unrealised component of sale(9800)
Minoritys
20% interest
$
(1 960) (E)
3020
Sale of inventory from Mark Ltd to Richards Ltd

During the current financial period Mark Ltd sold inventory to Richards Ltd at a
price of $162 500. At year end Richards Ltd has $30 000 of this inventory on
hand, which portion of inventory cost Mark Ltd $24 000 to produce.
(e) Dr Sales
162 500
(f) Dr Cost of goods sold

Cr Inventory
6 000
(g) Dr Deferred tax asset

($6000 x 30 per cent)
1 800
162 500
6 000
1 800
We do not need to make any adjustments to minority interests as profit was not
recorded in the accounts of the subsidiary.
Unrealised profit in opening inventory
At the end of the preceding financial year, Mark Ltd had $105 000 of inventory on
hand, which had been purchased from Richards Ltd. The inventory cost Richards
Ltd $87 500 to produce.
It is assumed that the inventory has been sold to an external party in the current
period and hence is realised - so there is no need to adjust closing balance of
inventory. Therefore, we need to increase the minority interests share of current
periods profits.
(h) Dr Retained earnings - 30 June 2008
Cr Cost of sales
12 250
5 250
17 500
Implications for minority interest: Unrealised profit in opening inventory

Regarding the impact on minority interest, in the last period it was considered as
unrealised from the perspective of the minority interest and hence their share of
opening retained earnings is decreased and their share of current period profit is
increased. Specifically, we increase minority interest share in profit by 20 per cent
of $12 250, which equals $2 450, and make a corresponding reduction in minority
interests share of opening retained earnings.
3021
Richards Ltd
Reduction on opening retained earnings

Increase in current period profit
$
(12 250)
12 250
Minoritys
20% interest
$
(2 450)(F)
2 450(G)
Adjustments for intragroup sale of plant
On 1 July 2008 Mark Ltd sold an item of plant to Richards Ltd for $290 000 when
its carrying value in Richards Ltds accounts was $202 500 (cost of $337 500 and
accumulated depreciation of $135 000). This item of plant was being depreciated
over 10 years, with no expected residual value.
Reversal of profit recognised on sale of asset and reinstatement of cost and
accumulated depreciation
The result of the sale of the item of plant to Richards Ltd is that the profit of $93
500 - the difference between the sales proceeds of $290 000 and the carrying
amount of $202 500 - will be shown in Mark Ltds financial statements. However,
from the economic entitys perspective there has been no sale and, therefore, no
gain on sale given that there has been no transaction with a party external to the
group. The following entry is necessary so that the accounts will reflect the
balances that would have been in place had the intragroup sale not occurred.
(i) Dr Profit on sale of plant
Dr Plant
87 500
47 500
135 000
The result of this entry is that the intragroup profit is removed and the asset and
accumulated depreciation accounts revert to reflecting no sales transaction. The
profit of $87 500 will be recognised progressively in the consolidated financial
report of the economic entity by adjustments to the amounts of depreciation
charged by Richards Ltd in its accounts. As the service potential or economic
benefits embodied in the asset are consumed, the $87 5000 profit will be
progressively recognised from the economic entitys perspective. This is shown in
journal entry (k).
Impact of tax on profit on sale of item of plant
From Richards Ltds individual perspective it would have made a profit of $87 500
on the sale of the plant and this gain would have been taxable. At a tax rate of 30
per cent, $26 250 would be payable by Mark Ltd. However, from the economic
entitys perspective no gain has been made, which means that the related tax
expense must be reversed and a related deferred tax benefit recognised. A deferred
tax asset is recognised because, from the economic entitys perspective, the amount
paid to the Tax Office represents a prepayment of tax.
(j) Dr Deferred tax asset
26 250
26 250
3022
Reinstating accumulated depreciation in the balance sheet
Mark Ltd would be depreciating the asset on the basis of the cost it incurred to
acquire the asset. Its depreciation charge would be $290 000 6 = $48 333. From
the economic entitys perspective, the asset had a carrying value of $202 500,
which was to be allocated over the next six years giving a depreciation charge of
$202 500 6 = $33 750. An adjustment of $5833 is therefore required.
(k)Dr Accumulated depreciation
Cr Depreciation expense
14 583
14 583
Consideration of the tax effect of the reduction in depreciation expense
The increase in the tax expense from the perspective of the economic entity is due
to the reduction in the depreciation expense. The additional tax expense is $4 375,
which is $14 583 x 30 per cent. This entry represents a partial reversal of the
deferred tax asset of $26 250 recognised in the earlier entry. After 10 years the
balance of the deferred tax asset relating to the sale of the item of plant will be
$nil.
(l) Dr Income tax expense
4 375
4 375
Implications for minority interest: Intragroup sale of a non-current asset
Because the profit was in the accounts of Mark Ltd there is no adjustment to the
minority interest in profits.
Impairment of goodwill
(m)Dr Retained earnings 1 July 2008
56 250
Dr Impairment loss - goodwill
7 500
Cr Accumulated impairment losses - goodwill
63 750
There is no implication for the minority interest as this only relates to the parent
entitys share.
Elimination of intragroup transactions - management fees
All of the management fees paid within the group will need to be eliminated on
consolidation.
(n)Dr Management fee revenue
66 250
Cr Management fee expense
66 250
Implications for minority interests: Intragroup payment of management fees
It is not necessary to make any adjustments to minority interest of profits as the

profits associated with the management are deemed to be recognised.
Dividends paid
We eliminate the dividends paid within the group. Only the dividends paid to
parties outside the entity (the minority interests) are to be shown in the
consolidated accounts.
(o)Dr Dividend revenue
Cr Dividend paid
186 000
186 000
3023
Implications for minority interests: Dividends paid and declared
We need to consider the impacts of the dividends on minority interests. The

payment and declaration of dividends by the subsidiary act to reduce the interest of
the minority in the subsidiary.
Reduction in minority interest
Richards Ltd
Dividend paid
$
232 500
Minoritys
20% interest
$
46 500 (J)
Now we can post the consolidation journal entries and the minority interest
calculations to the consolidation worksheet.
3024
Eliminations
and adjustments
Mark Ltd
($000)
Richards Ltd
($000)
Dr
($000)
Cr
($000)
Consolidated
statements
($000)
Minority
Interest
($000)
Adjustments
Detailed reconciliation of opening

and closing retained earnings
Sales revenue
1 725
1 450
Cost of goods sold
(1 160)
(595)
565
855
-
186
66.25
87.5
(77)
(61.25)
(252.75)
(96.75)
(142))
(66.25)
(192.5)
Profit before tax
513.75
357.5
Tax expense
153.75
105.5
Gross profit
Other revenue
Dividends received - from
Richards
Management fee revenue
Profit on sale of plant
Expenses
Administrative expenses
Depreciation
Management fee expense
Other expenses
130(b)
162.5(e)
14(c)
6(f)
2 882.5
130(b)
162.5(e)
17.5(h)
1465
1 417.5
186(o)
66.25(n)
87.5(i)
14.583(k)
66.25(n)
7.5(m)
(173.75)
(188.667)
(452.75)
602.333
5.25(h)
4.2(d)
4.375(l)
1.8(g)
236.625
26.25(j)
Profit for the year
360
252
365.708
50.4(D)
(1.96)(E)
2.45(F)
50.89
Retained earnings - 30 June 2008 798.5
598
340(a)
12.25(h)
56.25(m)
988
85(B)
34.6(C)
(2.45)(G)
117.15
Dividends paid
1 158.5
(343.5)
(46.5)
850
(232.5)
186(o)
1 353.708
(390)
815
617.5
815
875
100
617.5
500
Current liabilities
Accounts payable
Tax payable
136.75
103.25
115.75
62.5
252.5
165.75
Loans
433.75
290
723.75
2 363.75
1 585.75
3 080.708
148.5
230
155.75
72.5
(46.5)(H)
963.708
Balance sheet
Shareholders equity
Retained earnings
Share capital
Current assets
Accounts receivable
Inventory
Non-current assets
Deferred tax asset
Land and buildings
Plant - at cost
14(c)
6(f)
4.2(d)
1.8(g)
26.25(j)
560
749.625
(214.375)
815
889.5
(347)
963.708
975
400(a)
47.5(i)
14.583(k)
100(A)
304.25
282.5
4.375(l)
27.875
135(i)
1 375
1 686.625
(681.793)
3025
Totals

Goodwill
Accumulated amortisation
890
890(a)
63.75(m)
150
(63.75)
1 722.208
3 080.708
150(a)
2 363.75
221.54
1 585.75
1 722.208
Summary of minority interest

20%
minority interest
Profit
Profit of Richards Ltd
Adjustments
Unrealised profit in closing inventory
252 000
50 400
12 250
(9 800)
2 450
(1 960)
50 890
Opening retained earnings

Opening retained earnings of Richards Ltd 598 000
(12 250)
119 600
(2 450)
117 150
Dividends
Paid by Richards Ltd
(232 500)
(46 500)
(46 500)
Minority interest in closing retained earnings

Minority interest in share capital
500 000
Total minority interest
100 000
121 540
100 000
221 540
We are now in a position to present the consolidated financial statements. A

suggested format for the consolidated accounts would be as follows (prior year
comparatives for the accounts of the parent entity, both of which would be
required in practice, have not been provided):
Consolidated income statement of Mark Ltd and its subsidiaries
$
Sales 2 882 500
Cost of good sold
Gross profit
Administrative expenses
Depreciation
Other expenses
Income tax expense
1 465 000
1 417 500
(173 750)
(188 668)
(452 750)
602 332
236 625
365 707
50 890
314 817
3026
Consolidated balance sheet of Mark Ltd and its subsidiaries

as at 30 June 2009
Parent
entity
interest
$
Minority
interest
$
Current assets
Accounts receivable
Inventory
304 250
282 500
586 750
Non-current assets
Land and buildings
Plant and equipment
less Accumulated depreciation
Goodwill
less Accumulated impairment loss
Deferred tax asset
1 375 000
1 686 625
(681 192.5)
150 000
(63 750)
27 875
2 493 957.5
3 080 707.5
Total assets
Current liabilities
Accounts payable
Tax payable
252 500
165 750
418 250
Loan
Total liabilities
Shareholders equity
Share capital
Total equities
Consolidated
$
723 750
1 142 000
875 000
842 167.5
1 717 167.5
100 000
121 540
221 540
975 000
963 707.5
1 938 707.5
3 080 707.5

Final dividend
Parent
entity
interest
$
Minority
interest
$
Consolidated
$
870 850
314 817.5
(343 500)
842 167.5
117 150
50 890
(46 500)
121 540
988 000
365 707.5
(390 000)
963 707.5
3027

Deegan5e SM Ch30

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Deegan5e SM Ch30

Uploaded by

Copyright:

Available Formats

Chapter 30

Further consolidation issues II: Minority Interests

The entire proportion of the inter-entity transactions will need to be eliminated

AASB 127 requires that the consolidated financial statements be prepared

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Intragroup sale of inventory: When we calculate the minority interests

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

We only need to make adjustments to minority interests share of

We make adjustments for profits or losses made by the subsidiary to

For profits relating to transactions that do not involve the transfer of

We do not need to make adjustments for unrealised gains or losses

Some of the intragroup transactions we make adjustments for were discussed

$10 000 000

$14 285 714

$10 000 000

As we know, when we consolidate the accounts of the parent entity and

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Consolidated income statement of Backbeach Limited and its controlled

Dividend out of pre-acquisition earnings

Consolidation journal entries

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Consolidation adjustments and eliminations:

Elimination of intra group sales:

Elimination of unrealised profit in closing inventory

Elimination of intragroup management fees:

Reversal of profit recognised on sale of asset and reinstatement of cost and

Reinstating accumulated depreciation in the balance sheet

Consideration of the tax effect of the reduction in depreciation expense

Reported profit of Beachly Ltd

Elimination of the investment in Thruster Ltd and recognition of goodwill

Share capital at acquisition date - 1 July 2007

Investment in Thruster Ltd

Implications for minority interests: Recognising minority interest in share

We need to determine the minority interests at acquisition date.

We need to consider the minority interest in the current periods profit as

Recognition of the minority interest in current period (unadjusted) profit

We move the above calculations (A to D) of the minority interest in capital and

In the absence of information about the impairment of goodwill we will assume

(c)Dr Other revenue

Implications for minority interests: Dividends paid

We need to consider the impacts of the dividends on minority interests. The

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Reconciliation of opening and

Profit before tax

Profit after tax

Retained earnings- 30 June 2008 2 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Summary of minority interest

Opening retained earnings

We are now in a position to present the consolidated financial statements. A

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Consolidated balance sheet of Anderson Ltd and its subsidiaries

Notes to and forming part of the consolidated accounts

Note x: Retained earnings

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

30.10 (a) Consolidation Worksheet Journal Entries

Tax Effect: Revalue Land to Fair Value

c Eliminate Investment in Natasha against Borris Ltds share of Natasha Ltds

Elimination of inter entity Sales

Elimination of Unrealised Profit in Closing Inventory (earned by Natasha)

Tax Effect: Elimination of Unrealised Profit in Closing Inventory

Reversal of profit recognised on sale of non-current asset

i Impact of tax on profit on sale of item of plant