Professional Documents
Culture Documents
to accompany
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
REVIEW QUESTIONS
A simple example such as that below could be used to illustrate these points:
A Ltd has acquired all the issued shares of B Ltd. The balance sheets of both companies
immediately after acquisition are as follows:
The balance of the “Shares in B Ltd” account can be changed to introduce goodwill/ gain on
bargain purchase amounts.
2. When there is a dividend payable by the subsidiary at acquisition date, under what
conditions should the existence of this dividend be taken into consideration in preparing the
pre-acquisition entries?
Discuss:
- the difference between ex div and cum div acquisitions
- the effects on the acquisition journal entry in the records of the parent under each
circumstance.
Assume for example that A Ltd acquires all the issued shares of B Ltd for $500 000 when at
acquisition date B Ltd has recorded a dividend payable of $10,000.
- the effects on the acquisition analysis
- the differences in the pre-acquisition entries at acquisition date if the acquisition is cum div
versus ex div. [ the cum div entry will need to eliminate the dividend receivable raised by the
parent and the dividend payable raised by the subsidiary]
Discuss:
- the definition of acquisition date
- the meaning of pre-acquisition and post-acquisition equity
- according to para 38A of AASB 127 an entity shall recognise a dividend from a
subsidiary in profit or loss ie as revenue – regardless of whether it is paid from pre- or
post-acquisition equity
4. If the subsidiary has recorded goodwill in its records at acquisition date, how does this affect
the preparation of the pre-acquisition entries?
Discuss:
- the difference between internally generated and acquired goodwill, and how the goodwill can
be internally generated to the subsidiary but acquired by the parent
- the effects on the worksheet in relation to the goodwill eg if the subsidiary has recorded
goodwill of $50 and the parent acquires all the shares in a subsidiary for $4,050 when the
equity of the subsidiary is $3 950
In calculating the net fair value of the identifiable assets and liabilities acquired, there must be an
adjustment for the unidentifiable asset, goodwill, to calculate the goodwill acquired by the group.
The goodwill acquired, but not recorded, is recognised in the business combination valuation
entries. The pre-acquisition entries will eliminate the BCVR as pre-acquisition equity.
On consolidation, the adjustment columns in the worksheet contain the adjustment necessary so
that the group goodwill is shown in the consolidated balance sheet. This amount is the total of the
goodwill recognised by the subsidiary at acquisition date and the goodwill recognised on
consolidation. This equals the total goodwill acquired by the parent in its acquisition of the
subsidiary.
5. Explain how the existence of an excess affects the pre-acquisition entries, both in the year of
acquisition and in subsequent years.
Year of acquisition:
Subsequent years:
The excess is subsumed into the opening balance of retained earnings. It reduces the balance
recorded by the subsidiary as the parent paid less for the subsidiary than the fair value of the
identifiable assets and liabilities of the subsidiary.
6. At the date the parent acquires a controlling interest in a subsidiary, if the carrying amounts
of the subsidiary’s assets are not equal to fair value, explain why adjustments to these assets
are required in the preparation of the consolidated financial statements.
AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary be shown
at fair value. The standard-setters believe that the fair value of the assets and liabilities provides
the most relevant information to users.
Even though the standard refers to an allocation of the cost of a business combination, the
standard does not require the identifiable assets and liabilities acquired to be recorded at cost.
The only asset acquired that is not measured at fair value is goodwill.
The fair value approach is emphasised by the required accounting for any bargain purchase on
combination. It is not accounted for as a reduction in the fair values of the identifiable assets and
liabilities acquired such that these items are recorded at cost. Instead, the fair values are
unchanged and the excess is recognised as a gain.
The formation of a parent–subsidiary relationship by the parent obtaining control over the subsidiary
is a business combination. The parent, being the controlling entity is an acquirer, with the subsidiary
being the acquiree. The acquisition analysis is then totally based on AASB 3. The acquisition analysis
reflects the application of the acquisition method:
Step 1: Identify the acquirer – in this case, it is the parent.
Step 2: Determine the acquisition date
Step 3: Recognise and measure the identifiable assets acquired and the liabilities assumed at fair
value. The differences between the carrying amounts and fair values of the identifiable
assets, liabilities and contingent liabilities of the subsidiary are recognised via business
combination valuation reserves. The effect is to recognise the assets and liabilities of the
subsidiary at fair value.
Step 4: Recognise and measure goodwill or a gain from a bargain purchase. The goodwill is
recognised in the BCVR entries while the gain is recognised in the pre-acquisition entries.
The purpose of these entries is to make consolidation adjustments so that in the consolidate balance
sheet the identifiable assets, liabilities and contingent liabilities of the subsidiary are reported at fair
value. This is to fulfil step 3 of the acquisition method required to account for business combinations
by AASB 3.
9. Using an example, explain how the business combination valuation entries affect the pre-
acquisition entries.
Assume at acquisition date, the subsidiary has land recorded at a carrying amount of $10 000 and
having a fair value of $15 000. The tax rate is 30%.
At acquisition date, the BCVR entries will recognise an increment to land of $5 000, a deferred tax
liability of $1 500 and a BCVR of $3 500. This BCVR is pre-acquisition equity. Hence in the pre-
acquisition entry, if prepared at acquisition date, there would be a debit adjustment to BCVR to
eliminate the balance of pre-acquisition equity.
In subsequent periods, if the land is sold, in the BCVR entries, on sale of the land, there would be a
credit adjustment to “Transfer from BCVR”, as the reserve is transferred to retained earnings. In
preparing the pre-acquisition entries in the year of sale, the initial entry carried forward from the
previous period will still include the BCVR relating to land. A further entry is then required debiting
the “Transfer from BCVR” account – hence eliminating pre-acquisition equity – and crediting the
BCVR account as this account no longer exists.
10. Why are some adjustment entries in the previous period’s consolidation worksheet also
made in the current period’s worksheet?
The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not affect the
underlying financial statements or the accounts of the parent or the subsidiary. Hence, if last year’s
profits required to be adjusted on consolidation, then potentially retained earnings needs to be
adjusted in the current period.
Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in the
consolidation worksheet for each year that the land remains in the subsidiary. The entry does not
change from year to year. Again the reason is that the adjustment to the carrying amount of the land is
only made in a worksheet and not in the actual records of the subsidiary itself.
CASE STUDIES
Lynx Ltd has just acquired all the issued shares of Indus Ltd. The accounting staff at
Lynx Ltd has been analysing the assets and liabilities acquired in Indus Ltd. As a result
of this analysis, it was found that Indus Ltd had been expensing its research outlays in
accordance with AASB 138 Intangible Assets. Over the past 3 years, the company has
expensed a total of $20 000, including $8000 immediately before the acquisition date.
One of the reasons that Lynx Ltd acquired control of Indus Ltd was its promising
research findings in an area that could benefit the products being produced by Lynx
Ltd.
There is disagreement among the accounting staff as to how to account for the
research abilities of Indus Ltd. Some of the staff argue that, since it is research, the
correct accounting is to expense it, and so it has no effect on accounting for the group.
Other members of the accounting staff believe that it should be recognised on
consolidation, but are unsure of the accounting entries to use, and are concerned about
the future effects of recognition of an asset, particularly as no tax advantage remains in
relation to the asset.
Required
Advise the group accountant of Lynx Ltd on what accounting is most appropriate for
these circumstances.
Accounting for research and development in the subsidiary itself is governed by AASB 138
Intangible Assets. Research outlays are expensed under AASB 138 para 54.
Recognition of intangibles acquired in a business combination is discussed in paras 33-41 of AASB
138. Para 13 of AASB 3 recognises that some intangible assets not recognised by an acquiree may be
recognisable by the acquirer.
In a business combination the intangible asset is measured at its fair value, using the hierarchy in
AASB 138.
In order to recognise an intangible asset, it must meet the definition of an asset.
In preparing the consolidated financial statements, Lynx Ltd will recognise the in-process research
asset in its business combination valuation entries, for example:
In-Process Research Dr x
Deferred Tax Liability Cr x
Business Combination Valuation Reserve Cr x
The tax-effect, in this case a liability relating to the expected tax to be paid on the earnings from the
research asset, is recognised.
In future periods, the in-process research will be subject to the amortisation procedures in AASB 138,
resulting in further BCVR entries such as:
Amortisation Expense Dr x
Accumulated Amortisation Cr x
When the In-Process research is fully amortised, the BCVR will be transferred to retained earnings,
and no future consolidation adjustments will be necessary.
Required
Give the group accountant your opinion on the accounting at acquisition date for consolidation
purposes, as well as any subsequent effects when the entity either wins or loses the case.
Under para 27 of AASB 137 Provisions, Contingent Liabilities and Contingent Assets, an entity’s
contingent liabilities are not recognised in the accounts of the entity but are reported by way of note to
the accounts.
Under AASB 3 para 36, an acquirer must recognise at the acquisition date the acquiree’s identifiable
assets and liabilities that satisfy the recognition criteria at their fair values at that date.
Para 23 of AASB 3 state that the requirements of AASB 137 do not apply in determining which
contingent liabilities to recognise as of acquisition date. However, the liability recognised must be a
present obligation – not a possible obligation. Also, contrary to AASB 137, the acquirer recognises
contingent liability even if it not probable that an outflow of resources will be required. The fair value
measurement takes into account the probability of outflows occurring.
Scorpio Ltd must then recognise the liability in its consolidated financial statements at fair value. This
is done using the BCVR entries, assuming a fair value of $40 000:
If Norma Ltd wins the court case and no damages have to be paid, the consolidation worksheet entry
changes to:
If Norma Ltd loses the court case and pays damages of an amount less than $40 000, say $30 000,
then the worksheet entry is:
If Norma Ltd loses the court case and pays damages of an amount equal to or greater than $40 000,
say $50 000, then the worksheet entry is:
In relation to the court costs, assume that Norma Ltd has at the date of acquisition already incurred
court costs of, say, $10 000 and expects to win the case and get these costs reimbursed.
Under AASB 137, Norma Ltd does not itself recognise a contingent asset in its records. Further under
AASB 3, contingent assets are not recognised by the acquirer as a part of step 3 of the acquisition
method. They therefore do not affect the consolidation process. If the $10 000 were received by
Norma Ltd in a later period upon winning the court case, it would be recognised as a gain by both
Norma Ltd and the group.
Mensa Ltd has acquired all the shares of Cancer Ltd. The accountant for Mensa Ltd,
having studied the requirements of AASB 3 Business Combinations, realises that all the
identifiable assets and liabilities of Cancer Ltd must be recognised in the consolidated
financial statements at fair value. Although he is happy about the valuation of these
items, he is unsure of a number of other matters associated with accounting for these
assets and liabilities. He has approached you and asked for your advice.
Required
Write a report for the accountant at Mensa Ltd advising on the following issues:
1. Should the adjustments to fair value be made in the consolidation worksheet or in
the accounts of Cancer Ltd?
2. What equity accounts should be used when revaluing the assets, and should
different equity accounts such as income (similar to recognition of an excess) be
used in relation to recognition of liabilities?
3. Do these equity accounts remain in existence indefinitely, since they do not seem to
be related to the equity accounts recognised by Cancer Ltd itself?
1. From the point of view of AASB 3 and AASB 127, there is no specification on where the
adjustments are made. However if the assets of the subsidiary are adjusted to fair value in the
accounts of the subsidiary itself then this amounts to adoption of the revaluation model by the
subsidiary and all the regulations in AASB 116 and AASB 138 apply. In particular, the assets
must be continuously adjusted to reflect current fair values. If, on the other hand, the adjustments
are made in the consolidation worksheet, this is a recognition on consolidation of the cost of the
assets to the group entity rather than an adoption of the revaluation model. Hence the recognition
of the subsidiary’s assets at fair value is to measure cost to the acquirer. There is then no need to
make subsequent adjustments to the assets when the fair values change. Because of the costs
associated with using the revaluation model, it is expected that most entities will make the
adjustments in the consolidation worksheet rather than in the accounts of the subsidiary itself.
2. The accounting standards do not specify the name of the equity account raised on valuation of the
assets and liabilities of the subsidiary. Hence, an asset revaluation reserve account could be used
for the assets. Leo et al uses a BCVR because adjustments are made to both assets and liabilities
and the BCVR is then a generic account for all adjustments arising as a result of the business
combination.
It is not appropriate to use income for liabilities as the recognition of equity for both assets and
liabilities does not affect current period profit or loss. There is no gain by the acquirer on
recognition of assets or liabilities not recognised by the subsidiary.
3. The BCVR remains in existence while the underlying assets and liabilities remain unsold,
unconsumed or unsettled. With asset revaluation reserves under the revaluation model there is no
requirement that it ever be transferred to retained earnings, although this is normal practice and is
allowed under AASB 116. Similarly, the BCV reserves could remain indefinitely. However, the
extra benefits/expenses resulting from using the assets or settling the liabilities will flow into the
subsidiary’s retained earnings account. Hence the group recognises the net benefits in the BCVR
while the subsidiary recognises them in retained earnings. This situation requires an adjustment in
the consolidation worksheet every year while such a difference in equity classification occurs. If
on consolidation as the assets are used up or sold and the liabilities settled the BCVR is
transferred to retained earnings, no subsequent consolidation adjustment is required.
When Hydra Ltd acquired the shares of Draco Ltd, one of the assets in the statement of
financial position of Draco Ltd was $15 000 goodwill, which had been recognised by
Draco Ltd upon its acquisition of a business from Valhalla Ltd. Having prepared the
acquisition analysis as part of the process of preparing the consolidated financial
statements for Hydra Ltd, the group accountant, Asmund Asmundson, has asked for
your opinion.
Required
Provide advice on the following issues:
1. How does the recording of goodwill by the subsidiary affect the accounting for the
group’s goodwill?
2. If, in subsequent years, goodwill is impaired, for example by $10 000, should the
impairment loss be recognised in the records of Hydra Ltd or as a consolidation
adjustment?
1. The goodwill recorded by the subsidiary affects the adjustment to goodwill on consolidation.
If the acquisition analysis results in the calculation of a group goodwill of, say, $20 000, then as
the subsidiary has already recorded $15 000, a debit adjustment of $5 000 is required in the
consolidation worksheet.
If the acquisition analysis results in the calculation of a group goodwill of, say, $12 000, then as
the subsidiary has already recorded $15 000, a credit adjustment of $3 000 is required in the
consolidation worksheet.
If the acquisition analysis determines an excess of, say, $2 000, then the whole $15 000 goodwill
is eliminated on consolidation.
Any accumulated impairment losses recorded by the subsidiary at acquisition date must be
adjusted for in the consolidation worksheet.
2. The determination of the impairment loss would be based on the subsidiary as a CGU with the
consolidated numbers representing the carrying amounts of the CGU. In writing off goodwill as
the result of an impairment loss, the goodwill written off could be either that recognised by the
subsidiary or that recognised on consolidation.
If the goodwill on consolidation is written off this is done via the pre-acquisition entries. If the
subsidiary writes off its recorded goodwill, no adjustment is required on consolidation for the
impairment write-down.
If the consolidated goodwill was $20 000, then if an impairment loss of $10 000 occurred, an
amount of at least $5 000 would have to be written off in the subsidiary’s accounts.
The accountant for Carina Ltd, Ms Finn, has sought your advice on an accounting issue
that has been puzzling her. When preparing the acquisition analysis relating to Carina
Ltd’s acquisition of Lyra Ltd, she calculated that there was a gain on bargain purchase
of $10 000. Being unsure of how to account for this, she was informed by accounting
acquaintances that this should be recognised as income. However, she reasoned that this
would have an effect on the consolidated profit in the first year after acquisition date.
For example, if Lyra Ltd reported a profit of $50 000, then consolidated profit would be
$60 000. She is unsure of whether this profit is all post-acquisition profit or a mixture of
pre-acquisition profit and post-acquisition profit.
Required
Compile a detailed report on the nature of an excess, how it should be accounted for
and the effects of its recognition on subsequent consolidated financial statements.
Example:
Assume at acquisition date the recorded retained earnings was $10 000 and a gain on bargain
purchase of $1 000 arose. In the first period subsequent to acquisition date, the subsidiary
recorded a profit of $5 000.
In the first period subsequent to acquisition the group would recognise a zero balance in
retained earnings and a profit of $6 000, being the recorded $5 000 plus the $1 000 gain on
bargain purchase [all post-acquisition].
In the following period, the subsidiary would report an opening balance of $15 000 and the
pre-acquisition entry would show a debit adjustment to retained earnings (opening balance) of
$9 000, thus showing a post-acquisition balance of $6 000.
PRACTICE QUESTIONS
On 1 July 2016, Max Ltd acquired all the issued shares of Rodney Ltd for $200 000. The
financial statements of Rodney Ltd showed the equity of Rodney Ltd at that date to be:
All the assets and liabilities of Rodney Ltd were recorded at amounts equal to their fair values
at that date.
During the year ending 30 June 2017, Rodney Ltd undertook the following actions.
• On 10 September 2016, paid a dividend of $20 000 from the profits earned prior to 1 July
2016.
• On 28 June 2017, declared a dividend of $20 000 to be paid on 15 August 2017.
• On 1 January 2017, transferred $15 000 from the general reserve existing at 1 July 2016 to
retained earnings.
Required
A. Prepare the pre-acquisition entries at 1 July 2016.
B. Prepare the pre-acquisition entries at 30 June 2017.
Acquisition analysis:
At 1 July 2016:
Net fair value of identifiable assets
and liabilities acquired = $100 000 + $40 000 + $60 000 (equity)
= $200 000
Consideration transferred = $200 000
Goodwill = $0
Note that neither of the dividend transactions have any effect on the pre-acquisition entries regardless
of whether the dividends are paid/declared from pre- or post-acquisition equity.
On 1 July 2016, Jackson Ltd acquired all the issued shares (cum div.) of Laurie Ltd for $240
000. At that date the financial statements of Laurie Ltd showed the following information:
All the assets and liabilities of Jackson Ltd were recorded at amounts equal to their fair values
at that date.
The dividend payable reported at 1 July 2016 by Laurie Ltd was paid on 15 August 2016.
Laurie Ltd paid a $25 000 dividend on 2 February 2017.
Required
A. Prepare the consolidation worksheet entries at 1 July 2016.
B. Prepare the consolidation worksheet entries at 30 June 2017.
C. What differences would occur in the entries in A and B above if the shares were bought on
an ex div. basis?
Acquisition analysis:
At 1 July 2016:
Net fair value of identifiable assets
and liabilities acquired = $100 000 + $50 000 + $70 000 (equity)
= $220 000
Consideration transferred = $240 000 - $20 000 (dividend receivable)
= $220 000
Goodwill = $0
and liabilities acquired = $100 000 + $50 000 + $70 000 (equity)
= $220 000
Consideration transferred = $240 000
Goodwill = $20 000
The worksheet entries at 1 July 2016 and 30 June 2017 are the same:
Goodwill Dr 20 000
Business combination valuation reserve Cr 20 000
2. Pre-acquisition entries
Retained earnings (1/7/16) Dr 70 000
Share capital Dr 100 000
General reserve Dr 50 000
Business combination valuation reserve Cr 20 000
Shares in Laurie Ltd Cr 240 000
On 1 January 2017, the records of Leslie Ltd also showed that the company had recorded the
asset goodwill at cost of $5000. Further Leslie Ltd had a dividend payable liability of $10 000,
the dividend to be paid in March 2017. All other assets and liabilities were carried at amounts
equal to their fair values.
Required
A. Prepare the consolidation worksheet entries on 1 January 2017, immediately after
combination.
B. Prepare the consolidation worksheet entries at 30 June 2017.
C. Prepare the consolidation worksheet entries at 1 January 2017 assuming the consideration
transferred was $259 000.
Goodwill Dr 3 000
Business combination valuation reserve Cr 3 000
Pre-acquisition entries
The entries are the same as in A. above except that the dividend payable/receivable entry will no
longer be required as the dividend has been paid by Leslie Ltd.
At 1 January 2017:
Pre-acquisition entries
Note: this situation would occur where the parent pays less than the full fair value of the subsidiary. If
the real goodwill of the subsidiary was only $4000 then there should be an impairment adjustment of
$1000 to goodwill in the subsidiary prior to preparing the consolidation entries. In this case the
following adjustment entry would be required:
Goodwill is then shown in the CFS at $4000 and no impairment loss is shown.
All the identifiable assets and liabilities were recorded at amounts equal to their fair values.
Required
A. Prepare the consolidation worksheet entries at 1 July 2016 and 1 July 2017 assuming John
Ltd paid $153 000 for the shares in Robert Ltd.
B. Prepare the consolidation worksheet entries at 1 July 2016 and 1 July 2017 assuming John
Ltd paid $148 000 for the shares in Robert Ltd.
C. Prepare the consolidation worksheet entries at 1 July 2016 assuming John Ltd paid $145 000
for the shares in Robert Ltd and at that date Robert Ltd had recorded goodwill of $4000.
Acquisition analysis:
At 1 July 2016:
Net fair value of identifiable assets
and liabilities of Robert Ltd = ($80 000 + $30 000 + $40 000) (equity)
= $150 000
Consideration transferred = $153 000
Goodwill acquired = $153 000 – $150 000
= $3 000
Goodwill Dr 3 000
Business combination valuation reserve Cr 3 000
Pre-acquisition entries
Acquisition analysis:
At 1 July 2016:
Net fair value of identifiable assets
and liabilities of Robert Ltd = ($80 000 + $30 000 + $40 000) (equity)
= $150 000
Consideration transferred = $148 000
Gain on bargain purchase = $148 000 – $150 000
= $2 000
Pre-acquisition entries
Acquisition analysis:
At 1 July 2016:
Net fair value of identifiable assets
and liabilities of Robert Ltd = ($80 000 + $30 000 + $40 000) (equity)
- $4 000 (goodwill)
= $146 000
Consideration transferred = $145 000
Gain on bargain purchase = $145 000 – $146 000
= $1 000
2. Pre-acquisition entries
At 1 July 2015, all the identifiable assets and liabilities of Luke Ltd were recorded at amounts
equal to their fair values.
The financial statements of Adam Ltd and Luke Ltd at 30 June 2016 contained the following
information:
Required
Prepare the consolidated financial statements at 30 June 2016.
Acquisition analysis
At 1 July 2015:
Goodwill Dr 2 000
Business combination valuation reserve Cr 2 000
2. Pre-acquisition entries
ADAM LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2016
ADAM LTD
Consolidated Statement of Financial Position
as at 30 June 2016
Current assets:
Cash $12 000
Receivables 28 000
Inventories 85 000
Total current assets 125 000
Non-current assets:
Plant 1 420 000
Accumulated depreciation (945 000)
Fixtures 420 000
Accumulated depreciation (260 000)
Land 340 000
Brands 80 000
Goodwill 12 000
Total non-current assets 1 067 000
Total assets $1 192 000
Equity
Share capital 700 000
General reserve 92 000
Retained earnings 150 000
Total equity 942 000
Current liabilities:
Provisions 50 000
Payables 40 000
Total current liabilities 90 000
Non-current liabilities: Loans 160 000
Total liabilities 250 000
Total equity and liabilities $1 192 000
The patent was considered to have an indefinite life. It was calculated that the plant had a
further life of 10 years, and was depreciated on a straight-line basis. All the inventory was sold
by 30 June 2017. In June 2017, Jeff Ltd conducted an impairment test on the patent, as it was
considered to have an indefinite life, and the goodwill. As a result, the goodwill was considered
to be impaired by $1200.
In May 2017, Jeff Ltd transferred $20 000 from the retained earnings on hand at 1 July 2016
to a general reserve. The tax rate is 30%.
Required
Prepare the consolidation worksheet adjustments entries at 1 July 2016 and 30 June 2017.
At 1 July 2016:
Inventory Dr 6 400
Deferred tax liability Cr 1 920
Business combination valuation reserve Cr 4 480
Patent Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
Goodwill Dr 7 520
Business combination valuation reserve Cr 7 520
2. Pre-acquisition entries
Patent Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
Goodwill Dr 7 520
Business combination valuation reserve Cr 7 520
Pre-acquisition entries
The pre-acquisition entries are affected by:
- transfer from business combination valuation reserve
NB: From these 2 journal entries it is easier to see that the depreciation adjustments then
required at the end of each year for consolidation purposes are based on the $8 000 increase
to fair value. That is, the additional amount of the asset that needs to be depreciated.
In this question….$8,000 / 10years = $800 per year.
Required
Prepare the consolidation worksheet entries for consolidated financial statements prepared by
Stan Ltd at 1 July 2016.
Inventory Dr 3 600
Deferred tax liability Cr 1 080
Business combination valuation reserve Cr 2 520
Patents Dr 45 000
Deferred tax liability Cr 13 500
Business combination valuation reserve Cr 31 500
Goodwill Dr 1 530
Business combination valuation reserve Cr 1 530
Robert Ltd acquired all the issued shares (cum div.) of Matt Ltd on 1 July 2015. At this date the
financial position of Matt Ltd was as follows:
The assets of Matt Ltd did not include a patent that was valued by Robert Ltd at $10 000. Its
useful life was considered to be 5 years, with benefits being received equally over that period.
The plant was considered to have a further 10-year life and is depreciated on a straight-line
basis. All the inventory was sold by 30 June 2016. The goodwill on hand at 1 July 2015 was
written off as the result of an impairment test conducted in June 2017. The dividend on hand at
1 July 2015 was paid in August 2015.
In exchange for the shares in Matt Ltd, Robert Ltd gave the following consideration:
• 50 000 shares in Robert Ltd, each share having a fair value of $2.00 per share.
• Cash of $40 000.
• Artworks having a fair value of $60 000.
Robert Ltd incurred legal and accounting costs of $5000 and share issue costs of $4000.
In January 2019, Matt Ltd paid a bonus dividend of $40 000, being one share for every three
shares held, the dividend being paid from retained earnings on hand at 1 July 2015.
The tax rate is 30%.
Required
Prepare the consolidation worksheet entries for consolidated financial statements prepared by
Robert Ltd at 30 June 2020.
At 1 July 2015:
Net fair value of identifiable assets
and liabilities of Matt Ltd = ($120 000 + $23 200 + $44 000) (equity)
- $4 800 (goodwill)
+ $2 000 (1 – 30%) (plant)
+ $4 000 (1 – 30%) (inventory)
+ $10 000 (1 -30%) (patents)
= $193 600
Consideration transferred = (50 000 x $2) + $40 000 + $60 000
- $8 000 (dividend receivable)
= $192 000
2. Pre-acquisition entries
At 1 July 2015:
At 30 June 2020
This entry is affected by:
- payment of dividend on hand at acquisition date - $8 000
- payment of bonus dividend of $40 000 in 2019 – prior period
- in relation to the BCVR: the inventory was sold in a prior period 2015-6, the goodwill was
impaired in 2017, a prior period, while in the current period, the trademark was written off.
* $44 000 - $1 600 gain on bargain purchase - $40 000 bonus dividend
+ $2 800 (transfer of BCVR – inventory) - $4 800 (transfer of BCVR on
goodwill)
** $1 200 (plant) + $7 000 (patents)
All the identifiable assets and liabilities of Colin Ltd were recorded at amounts equal to their
fair values except for:
Of the inventory on hand at 1 January 2016, 90% was sold by 30 June 2016. The remainder was
all sold by 30 June 2017. The plant was considered to have a further 2-year life with benefits to
be received equally in each of those years. The tax rate is 30%.
Required
Prepare the consolidated worksheet entries for the consolidated financial statements prepared
by Barry Ltd at 30 June 2016, 30 June 2017, and 30 June 2018.
Inventory Dr 400
Deferred tax liability Cr 120
Business combination valuation reserve Cr 280
This entry relates to the 10% of the inventory still on hand at 30 June 2016.
Goodwill Dr 300
Business combination valuation entry Cr 300
Pre-acquisition entries
Goodwill Dr 300
Business combination valuation entry Cr 300
Pre-acquisition entries
Goodwill Dr 1 300
Business combination valuation entry Cr 1 300
Pre-acquisition entries
On analysing the financial statements of Finn Ltd, Erik Ltd determined that all the assets and
liabilities recorded by Finn Ltd were shown at amounts equal to their fair values except for:
The plant and equipment is expected to have a further 4-year life and is depreciated on a
straight-line basis. The inventory was all sold by 30 June 2015.
Finn Ltd had expensed all the outlays on research and development. Erik Ltd placed a fair
value of $12 000 on this asset. Finn Ltd also had reported a contingent liability at 30 June 2014
in relation to claims by customers for damaged goods. Erik Ltd placed a fair value of $3000 on
these claims. The research and development is amortised evenly over a 10-year period. The
claims by customers were settled in May 2015 for $2800.
The company tax rate is 30%.
Required
A. Prepare the consolidated financial statements of Erik Ltd at 1 July 2014, immediately after
the business combination.
B. Prepare the consolidation worksheet entries at 30 June 2015.
At 1 July 2014:
Inventory Dr 4 000
Deferred tax liability Cr 1 200
Business combination valuation reserve Cr 2 800
Goodwill Dr 1 100
Business combination valuation reserve Cr 1 100
2. Pre-acquisition entries
FINN LTD
Consolidated Statement of Financial Position
as at 1 July 2014
Current assets:
Cash and equivalents $31 600
Receivables 32 600
Inventories 101 000
Total current assets 165 200
Non-current assets:
Plant and equipment 314 000
Accumulated depreciation (96 000)
218 000
Other assets 32 000
Total non-current assets 250 000
Total assets $415 200
Equity
Share capital 130 000
Retained earnings 93 500
General reserve 56 500
Total equity 280 000
Current liabilities:
Dividend payable 25 000
Other liabilities 110 200
Total liabilities 135 200
2. Pre-acquisition entries
All the identifiable assets and liabilities of Darren Ltd were recorded at amounts equal to their
fair values at acquisition date except for:
The machinery was considered to have a further 5-year life. Of the inventory, 90% was sold by
30 June 2015. The remainder was sold by 30 June 2016.
Both Darren Ltd and Ethan Ltd use the valuation method to measure the land. At 1 July 2014,
the balance of Ethan Ltd’s asset revaluation surplus was $13 500.
In May 2015, Darren Ltd transferred $3600 from the retained earnings at 1 July 2014 to a
general reserve.
The tax rate is 30%.
The following information was provided by the two companies at 30 June 2015.
Required
Prepare the consolidated financial statements of Ethan Ltd at 30 June 2015.
Acquisition analysis
At 1 June 2014:
Inventory Dr 200
Deferred tax liability Cr 60
Business combination valuation reserve Cr 140
2. Pre-acquisition entries
At 1 July 2014:
ETHAN LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2015
ETHAN LTD
Consolidated Statement of Changes in Equity
for financial period ending 30 June 2015
ETHAN LTD
Consolidated Statement of Financial Position
as at 30 June 2015
Current Assets
Inventories $73 900
Non-current Assets
Property, plant and equipment:
Land 180 000
Plant & machinery $479 600
Accumulated depreciation (135 800) 343 800
Total Non-current Assets 523 800
Equity
Share capital $360 000
Retained earnings 151 280
General reserve 10 000
Asset revaluation surplus 20 500
Total Equity 541 780
Liabilities 55 920
Total Equity and Liabilities $597 700
At this date, Bruce Ltd had recorded a dividend payable of $6000, which was paid on 15
August 2015. Bruce Ltd had also recorded goodwill of $5000, net of accumulated impairment
losses of $7000. Bruce Ltd had an unrecorded asset relating to internally generated trademarks
that had a fair value of $8000. These had a future expected useful life of 8 years. All identifiable
assets and liabilities of Bruce Ltd were recorded at amounts equal to fair value except for the
following:
The plant was expected to have a further 6-year life. In relation to the inventory held at 1 July
2015, 90% was sold by 30 June 2016 and the rest before 30 June 2017. The tax rate is 30%.
In June 2016, Bruce Ltd transferred $2000 from retained earnings on hand at 1 July 2015 to
general reserve, and a further $3000 in June 2017.
Required
A. Prepare the journal entries in Jason Ltd at 1 July 2015 in relation to the business
combination with Bruce Ltd and for the receipt of the dividend in August 2015
B. Prepare the consolidation worksheet at 30 June 2017 for the preparation of the consolidated
financial statements of Jason Ltd.
1 July 2015
Accumulated amortisation - brand Dr 3 000
Brand Cr 3 000
(Writing down to carrying amount)
Brand Dr 4 800
Gain Cr 4 800
(Revaluation prior to sale)
15 August 2015
Cash Dr 6 000
Dividend receivable Cr 6 000
At 1 July 2015:
Net fair value of identifiable assets
and liabilities of Dorado Ltd = ($50 000 + $32 000) (equity)
+ $6 000 (1 – 30%) (plant)
+ $5 000 (1 – 30%) (inventory)
+ $8 000 (1 – 30%) ( trademarks)
- $5 000 (goodwill)
= $90 300
Consideration transferred = $80 000
Previously held equity interest = $20 000
Goodwill = ($80 000 + $20 000) - $90 300
= $9 700
Goodwill recorded = $5 000
Unrecorded goodwill = $4 700
Trademark Dr 8 000
Deferred tax liability Cr 2 400
Business combination valuation reserve Cr 5 600
2. Pre-acquisition entries
Griffin Ltd is a major Australian company operating in the manufacture of women’s clothing.
One of its major competitors was Frank Ltd whose business was established by a French family
over 30 years ago. It had won numerous awards for its designs and has established a number of
brands that have been successful, especially with the teenage market.
In order to expand its business as well as to reduce the number of players in the market, on
1 July 2013 Griffin Ltd acquired all the issued shares (cum div.) of Frank Ltd for $330 000. At
this date the equity of Frank Ltd was as follows:
All the identifiable assets and liabilities of Frank Ltd were recorded at amounts equal to their
fair values except for the following:
The plant’s expected remaining useful life was 5 years with benefits being expected evenly over
that period. The plant was sold on 1 January 2016 for $87 000. The land was sold in February
2015 for $250 000. Of the inventory, 90% was sold by 30 June 2014 and the rest by 30 June
2015.
At 1 July 2013, Frank Ltd had recorded a dividend payable of $10 000 that was paid in
September 2013. Frank Ltd also had some unrecorded assets, in particular the brands relating
to the successful clothing sold in the teenage market. Griffin Ltd valued these brands at $12 000
and assessed them to have an indefinite life. In its financial statements at 30 June 2013, Frank
Ltd raised a contingent liability relating to a guarantee it had made to one of its related
companies. Griffin Ltd assessed the fair value of the guarantee payable at $10 000. In August
2015, Frank Ltd was required to pay $2500 in relation to the guarantee.
All transfers to the general reserve made by Frank Ltd have been from retained earnings
earned prior to 1 July 2013. The tax rate is 30%.
The financial information provided by the two companies at 30 June 2016 is as follows:
Required
Prepare the consolidated financial statements of Griffin Ltd at 30 June 2016.
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Frank Ltd = $200 000 + $20 000 + $50 000 (equity)
+ $8 000 (1 – 30%) (inventory)
+ $20 000 (1 – 30%) (land)
+ $6 000 (1 – 30%) (plant)
- $10 000 (1 – 30%) (guarantee liability)
+ $12 000 (1 – 30%) (brands)
= $295 200
Consideration transferred = $330 000 - $10 000 (divs. receivable)
= $320 000
Goodwill = $24 800
Brands Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
Goodwill Dr 24 800
Business combination valuation reserve Cr 24 800
2. Pre-acquisition entries
At 1/7/2013:
At 30 June 2016:
* $50 000 + $14 000 (BCVR land) + $5 600 (BCVR inventory) - $13 000 gen reserve
GRIFFIN LTD
GRIFFIN LTD
Consolidated Statement of Changes in Equity
for year ended 30 June 2016
GRIFFIN LTD
Consolidated Statement of Financial Position
as at 30 June 2016
Current Assets
Cash $42 000
Accounts receivable 40 000
Inventory 81 000
Total Current Assets 163 000
Non-current Assets
Property, plant, and equipment $550 000
Accumulated depreciation (160 000) 390 000
Goodwill 24 800
Intangibles: Brands 12 000
Total Non-current Assets 426 800
Equity
Share capital $280 000
Reserves: General reserve 20 000
Asset revaluation surplus 24 000
Retained earnings 187 200
Total Equity 511 200
Current Liabilities
Payables 48 000
Provisions 27 000
Total Current Liabilities 75 000
Non-current Liabilities
Deferred tax liability __3 600
Total Liabilities 78 600
Total Equity and Liabilities $589 800
At acquisition date, William Ltd reported a dividend payable of $8000. All the identifiable
assets and liabilities of William Ltd were recorded at amounts equal to their fair values except
for:
The plant was considered to have a further 3-year life. Of the inventory, 90% was sold by
30 June 2016 and the remainder was sold by 30 June 2017. The land was sold in January 2016
for $170 000. William Ltd had recorded goodwill of $2000 (net of accumulated impairment
losses of $12 000).William Ltd was involved in a court case that could potentially result in the
company paying damages to customers. Zack Ltd calculated the fair value of this liability to be
$8000, even though William Ltd had not recorded any liability.
The following events occurred in the year ending 30 June 2016.
• On 12 August 2015 William Ltd paid the dividend that existed at 1 July 2015.
• On 1 December 2015 William Ltd transferred $17 000 from the general reserve existing at
1 July 2015 to retained earnings.
• On 1 January 2016 William Ltd made a call of 10c per share on its issued shares. William
Ltd had 100 000 shares on issue. All call money was received by 31 January 2016.
• On 29 June 2016 William Ltd reassessed the liability in relation to the court case as the
chances of winning the case had improved. The fair value was now considered to be $2000.
Required
Prepare the consolidation worksheet entries for the preparation by Zack Ltd of its consolidated
financial statements at 30 June 2016.
Land Dr 5 000
Deferred tax liability Cr 1 500
Business combination valuation reserve Cr 3 500
Inventory Dr 800
Deferred tax liability Cr 240
Business combination valuation reserve Cr 560
2. Pre-acquisition entries
At 1/7/15:
On 1 July 2013, Sam Ltd had recorded a dividend payable of $6000 and goodwill of $5000
(net of accumulated impairment losses of $7000). The dividend was paid in August 2013. In the
previous year’s annual report Sam Ltd had reported the existence of a contingent liability for
damages based upon a lawsuit by a customer who had slipped on some fallen fruit in one of the
stores operated by Sam Ltd. Ron Ltd calculated that this liability had a fair value of $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:
The plant had an expected remaining useful life of 10 years. The land was sold by Sam Ltd in
February 2015. The inventory was all sold by 30 June 2014.
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.
Required
Prepare the consolidation worksheet entries for the preparation by Sam Ltd of its consolidated
financial statements at 30 June 2017.
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Sam Ltd = ($100 000 + $5 000 + 10 000) (equity)
+ $2 000 (1 – 30%) (plant)
+ $5 000 (1 – 30%) (land)
+ $4 000 (1 – 30%) (inventory)
+ $6 000 (1 – 30%) (data bases)
- $10 000 (1 -30%) (damages payable)
- $5 000 (goodwill)
= $114 900
Consideration transferred = $123 500 - $6 000 (dividend receivable)
= $117 500
Goodwill = $2 600
Recorded goodwill = $5 000
2. Pre-acquisition entries
At 1/7/13:
* = $10 000 + $2 800 (BCVR - inventory) + $3 500 (BCVR – land) + $3 000 (reserve
transfer)
At the acquisition date all the identifiable assets and liabilities of Francis Ltd consisted of:
The inventory was all sold by 30 June 2015. The land was sold on 1 February 2015 for $150
000. The plant was considered to have a further 5-year life. The plant was sold for $155 000 on 1
January 2016. Also at acquisition date Francis Ltd had recorded a dividend payable of $7000
and goodwill (net of accumulated impairment losses of $13 000) of $5000. Francis Ltd had not
recorded some internally generated brands that George Ltd considered to have a fair value of
$12 000. The brand was considered to have an indefinite life. Also not recorded by Francis Ltd
was a contingent liability relating to a current court case in which Francis Ltd was involved and
a supplier was seeking compensation. George Ltd placed a fair value of $15 000 on this liability.
This court case was settled in May 2016 at which time Francis Ltd was required to pay damages
of $16 000.
In February 2015, Francis Ltd transferred $20 000 from the general reserve on hand at 1 July
2014 to retained earnings. A further $15 000 was transferred in February 2016.
Both companies have an equity account entitled ‘Other components of equity’ to which
certain gains and losses from financial assets are taken. At 1 July 2014, the balances of these
accounts were $30 000 (George Ltd) and $15 000 (Francis Ltd). The financial statements of the
two companies at 30 June 2016 contained the following information:
PLEASE NOTE THAT THE BELOW CHANGES DETAILED IN THE WHITE BOXES
WILL BE TAKEN INTO AFFECT IN THE 1 ST REPRINT OF THE TEXT.
Required
Prepare the consolidated financial statements for George Ltd at 30 June 2016.
At 1 July 2014:
= $240 000
Consideration transferred = $246 000
Goodwill acquired = $6 000
Goodwill recorded = $5 000
Unrecorded goodwill = $1 000
Brands Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
2. Pre-acquisition entries
At 1 July 2014:
At 30 June 2016:
The above entry is affected by:
- sale of inventory in prior period
- sale of land in prior period
- settlement of court case in current period
- sale of plant in current period
* = $40 500 + $20 000 (general reserve transfer) + $5 600 (BCVR – inventory)
+ $14 000 (BCVR – land))
GEORGE LTD
Consolidated Statement of profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2016
GEORGE LTD
Consolidated Statement of Changes in Equity
for financial year ended 30 June 2016
GEORGE LTD
Consolidated Statement of Financial Position
as at 30 June 2016
Current Assets
Inventory $70 000
Financial assets 317 000
Cash 15 000
Total Current Assets 402 000
Non-current Assets
Property, plant and equipment:
Land 40 000
Plant 780 000
Accumulated depreciation – Plant (402 000)
Brands 92 000
Goodwill 26 000
Total Non-current Assets 536 000
Total Assets $938 000
Equity
Share capital $150 000
Reserves: General reserve 15 000
Other components of equity 53 000
Retained earnings 168 400
Total Equity 386 400
Liabilities
Current liabilities
Accounts payable 40 000
Non-current liabilities
Deferred tax liabilities 31 600
Other 480 000
Total non-current liabilities 511 600
Total liabilities 551 600
Total Equity and Liabilities $938 000