Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.
Hamish Ltd
Income statement for theyear ended 30 June 2018
$
Income
904,000
Revenue from Sales
850,000
Interest Revenue
18,000
Rent Revenue
36,000
Expenses
647,000
Administration and sellingexpenses
133,000
Wages and salary expenses
250,000
Doubtful debts expense
20,000
Goodwill impairment
20,000
Insurance expense
54,000
Depreciation expense - plant
90,000
Long-service leave expenses
35,000
Warrantee expenses
45,000
Net Profit beforetax
257,000
Hamish Ltd
Extract from the Balancesheet as at 30 June 2018
$
Assets
Cash
40,000
Inventory
90,000
Accounts receivable (net)
80,000
Prepaid insurance
?
Interest receivable
6,000
Goodwill
?
Plant
?
Liabilities
Accounts payable
50,000
Wages and salaries owing
30,000
Provision for long-service leaveexpenses
25,000
Rent revenue received inadvance
?
Provision for warranteeexpenses
30,000
Loan payable
200,000
The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:
At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.
The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.
Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.
The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).
Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.
During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.
Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.
During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.
At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.
The tax rate was always 33% but changedto 28% during the current year.
Required:
Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.
Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.
Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9
Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.
Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.
Hamish Ltd | |
Income statement for theyear ended 30 June 2018 | $ |
Income | 904,000 |
Revenue from Sales | 850,000 |
Interest Revenue | 18,000 |
Rent Revenue | 36,000 |
Expenses | 647,000 |
Administration and sellingexpenses | 133,000 |
Wages and salary expenses | 250,000 |
Doubtful debts expense | 20,000 |
Goodwill impairment | 20,000 |
Insurance expense | 54,000 |
Depreciation expense - plant | 90,000 |
Long-service leave expenses | 35,000 |
Warrantee expenses | 45,000 |
Net Profit beforetax | 257,000 |
Hamish Ltd | |
Extract from the Balancesheet as at 30 June 2018 | $ |
Assets | |
Cash | 40,000 |
Inventory | 90,000 |
Accounts receivable (net) | 80,000 |
Prepaid insurance | ? |
Interest receivable | 6,000 |
Goodwill | ? |
Plant | ? |
Liabilities | |
Accounts payable | 50,000 |
Wages and salaries owing | 30,000 |
Provision for long-service leaveexpenses | 25,000 |
Rent revenue received inadvance | ? |
Provision for warranteeexpenses | 30,000 |
Loan payable | 200,000 |
The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:
At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.
The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.
Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.
The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).
Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.
During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.
Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.
During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.
At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.
The tax rate was always 33% but changedto 28% during the current year.
Required:
Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.
Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.
Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9
Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.
Related questions
Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests
Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.
Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.
All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:4
| Carrying amount | Fair value | |
| $ | $ | |
| Plant (cost $150,000) | 100,000 | 110,000 |
| Land | 60,000 | 76,000 |
The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.
Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:
|
| Parent Ltd | Subsidiary Ltd |
| $ | $ | |
| Sales | 632,000 | 440,000 |
| Other revenue: | ||
| Debenture interest | 10,000 | - |
| Management and consulting fees | 10,000 | - |
| Dividends from Subsidiary Ltd | 24,000 | - |
| Total revenue | 676,000 | 440,000 |
| Cost of sales | 260,000 | 170,000 |
| Manufacturing expenses | 180,000 | 120,000 |
| Depreciation on plant | 30,000 | 30,000 |
| Administrative expenses | 30,000 | 16,000 |
| Financial expenses | 22,000 | 10,000 |
| Other expenses | 28,000 | 24,000 |
| Total expenses | 550,000 | 370,000 |
| Profit before tax | 126,000 | 70,000 |
| Income tax expense | (50,000) | (34,000) |
| Operating profit after tax | 76,000 | 36,000 |
| Retained earnings 1 July 2016 | 100,000 | 90,000 |
| 176,000 | 126,000 | |
| Transfer to general reserve | 6,000 | - |
| Interim dividend paid | 20,000 | 20,000 |
| Final dividends declared | 20,000 | 10,000 |
| 46,000 | 30,000 | |
| Retained earnings 30 June 2017 | 130,000 | 96,000 |
| General reserve | 100,000 | 20,000 |
| Other components of equity | 26,000 | 20,000 |
| Share capital | 600,000 | 200,000 |
| Debentures | 400,000 | 200,000 |
| Current tax liability | 50,000 | 34,000 |
| Dividend payable | 20,000 | 10,000 |
| Deferred tax liability | - | 14,000 |
| Other liabilities | 180,000 | 24,000 |
| 1,506,000 | 618,000 | |
| Assets | ||
| Financial assets | 100,000 | 120,000 |
| Debentures in Subsidiary Ltd | 200,000 | - |
| Shares in Subsidiary Ltd | 263,200 | - |
| Plant (cost) | 240,000 | 204,000 |
| Accumulated depreciation â plant | (130,000) | (110,000) |
| Other depreciable assets | 152,000 | 110,000 |
| Accumulated depreciation | (80,000) | (50,000) |
| Inventory | 180,000 | 170,000 |
| Deferred tax asset | 170,800 | 60,000 |
| Land | 402,000 | 114,000 |
| Dividend receivable | 8,000 | - |
| 1,506,000 | 618,000 |
Additional information:
(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.
(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.
(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.
(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.
(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.
(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.
(g) The tax rate is 30%.
Required:
Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.
Note: show all necessary workings and narrations.
| Question 1 | Max. marks allocated |
| Acquisition analysis | 5 |
| Consolidation entries - accuracy | 35 |
| Total | 40 |
Emerald Ltd, a manufacturing company, commenced operations on 1 July 2016 by issuing 350 000 $5.00 shares, payable in full on application on a first-come, first-served basis. By 31 July 2016 the shares were fully subscribed and duly allotted. There were share issue costs of $10 000. No additional shares were issued during the year ending 30 June 2017.
For the year ending 30 June 2018, the company recorded the following aggregate transactions:
| $ | |
| Sales | 5 120 000 |
| Interest income | 34 000 |
| Sundry income | 25 000 |
| Cost of Sales | 2 465 000 |
| Employee benefit expenses | 856 000 |
| Depreciation expense | 244 000 |
| Amortisation - franchise | 25 000 |
| Rental expense | 120 000 |
| Advertising expense | 147 000 |
| Insurance expense | 48 000 |
| Freight out expense | 110 000 |
| Doubtful debts expense | 16 000 |
| Interest expense | 36 000 |
| Borrowing Costs | 9 000 |
| Other expenses | 8 000 |
| Income tax expense | 320 000 |
The following additional information was noted during the preparation of financial statements for the year ended 30 June 2018:
75 000 fully paid ordinary shares have been issued on 1 October 2017 at the price of $4.00.
$135 000 dividends (31.76 cents per share) were declared and paid during the 2018 financial year. A final dividend for 2018 of $51 850 was proposed but not recognised in the financial statements.
There was a gain of $20 000 from the cash flow hedge arrangement during the 2018 financial year. Any gain or loss associated with the cash flow hedge is directly recognised in equity. There was no previously recognised cash flow hedge reserve before the 2018 financial year.
$25 000 of bank loans is repayable within 1 year.
$90 000 of other loans is repayable within 1 year.
The employee benefits of $32 000 are expected to be settled wholly within 12 months.
Emerald Ltd measures inventory at the lower of cost and net realizable value and property, plant and equipment using a cost model.
The summarised balances are provided below:
| Year-end balances, 30 June 2018 | $ |
| Cash on hand | 960 000 |
| Cash on deposit, at call | 82 000 |
| Accounts Receivables | 665 000 |
| Allowance for doubtful debts/ Impairments | 24 000 |
| Other debtors | 27 000 |
| Finished goods inventories, 30 June 2018 | 600 000 |
| Work in Progress inventories 30 June 2018 | 105 000 |
| Land | 94 000 |
| Buildings | 230 000 |
| Accumulated depreciation â buildings | 60 000 |
| Plant and equipment | 1 385 000 |
| Accumulated depreciation â plant and equipment | 330 000 |
| Franchises | 140 000 |
| Accumulated amortisation of franchise | 50 000 |
| Goodwill | 620 000 |
| Bank loans | 92 000 |
| Other loans | 440 000 |
| Accounts payable | 696 000 |
| Provision for employee benefits | 116 000 |
| Income tax payable | 35 000 |
| Deferred tax liability | 140 000 |
| Retained earnings, 30 June 2017 | 225 000 |
| Dividends paid | 135 000 |
| Cash flow hedge reserve (equity) | 20 000 |
Required:
For the year ending 30 June, 2018,
a) Using the pro forma table supplied in appendix B, prepare a preliminary trial balance for Emerald Ltd; (5 Marks)
b) Prepare a statement of profit or loss and comprehensive income for Emerald Ltd in accordance with the requirements of AASB 101. Emerald Ltd uses the single statement format for the statement of comprehensive income and classifies expenses by function within the statement; (18 marks)
c) Prepare a statement of changes in equity for Emerald Ltd in accordance with the requirements of AASB 101; (15 marks)
d) Prepare a statement of financial position for Emerald Ltd in accordance with AASB 101. Use the current/non-current presentation format; (17 marks)
e) Prepare appropriate notes to the accounts. (You do not need to prepare notes related to income taxes. Include the following note as note 1. You may optionally add accounting policies to this note): (25 marks).
â1. Summary of significant accounting policies
Basis of accounting
The financial report is a general purpose financial report which has been prepared on the historical cost basis, except where stated otherwise.
Statement of Compliance
The financial statements have been prepared in accordance with the requirements of the Corporations Act, Australian Accounting Standards which include Australian equivalents to International Financial Reporting Standards (AIFRSs) and AASB Interpretations. Compliance with AIFRSs ensures the financial statements and notes comply with International Financial Reporting Standardsâ
APPENDIX A: PRESENTATION REQUIREMENTS (Departures attract a penalty)
The hard copy of the assignment must be handed in to the lecturer in class. It is also required to be submitted through Turnitin by the due date;
It is worth 20% of the final grade but will be marked out of 100;
The assignment will be marked on the basis of a requirement of "suitable for publication", that is, the relevant statements/notes comprise an external report and each statement is to be presented on one page;
The assignment must be performed individually.
You are to employ an aggregated format whenever appropriate and consistent with provision of minimum line items prescribed in AASB101;
The financial statements and the notes are to be typed in 12 point font;
You are not to use specialized accounting software packages, such as are employed by professional accounting firms, to produce your financial reports;
You are to apply the âcost of salesâ method to the classification of expenses in the income statement (see AASB101 paras 97-105);
You are directed to use the current/non-current format for the statement of financial position (balance sheet) and supply a ânet assetsâ line item;
The notes are to be simplified equivalences to published reports; that means a list of constituent components of a given line item with their respective dollar amounts, not footnotes
Your hard copy assignment is to be collated in the following order:
Coversheet (optional for electronic version but mandatory, signed with ticked module and Turnitin ID, for hard copy), Part A followed by Part B (trial balance, statement of profit or loss comprehensive income, statement of changes in equity, statement of financial position, and notes to the accounts.
APPENDIX B
| Emerald Ltd - Trial Balance as at 30 June 2018 | DR | CR |
| Sales | $â000 | $â000 |
| Interest income | ||
| Sundry income | ||
| Cost of sales | ||
| Employee benefit expenses | ||
| Depreciation expense | ||
| Amortisation - franchise | ||
| Rental expense | ||
| Advertising expense (selling) | ||
| Insurance expense | ||
| Freight out expense | ||
| Doubtful debts expense | ||
| Interest expense | ||
| Borrowing costs | ||
| Other expenses | ||
| Income tax expense | ||
| Cash on hand | ||
| Cash on deposit, at call | ||
| Accounts Receivables | ||
| Allowance for doubtful debts/ Impairments | ||
| Other debtors | ||
| Finished goods inventories, 30 June 2018 | ||
| Work in Progress inventories 30 June 2018 | ||
| Land | ||
| Buildings | ||
| Accumulated depreciation â buildings | ||
| Plant and equipment | ||
| Accumulated depreciation â plant and equipment | ||
| Franchise | ||
| Accumulated amortisation of franchise | ||
| Goodwill | ||
| Bank loans | ||
| Other loans | ||
| Accounts payable | ||
| Provision for employee benefits | ||
| Income tax payable | ||
| Deferred tax liability | ||
| Retained earnings, 30 June 2017 | ||
| Dividends paid | ||
| Cash flow hedge reserve | ||
| Share capital | ||
| Totals |
On 1 July 2017, Panda Ltd acquired all the issued shares ofSmarty Ltd. Panda Ltd paid $250,000 more than the equity itacquired in the fair value of Smarty Ltdâs net assets. At the dateof acquisition, the shareholderâs equity of S
On 1 July 2017, Panda Ltd acquired all the issued shares ofSmarty Ltd. Panda Ltd paid $250,000 more than the equity itacquired in the fair value of Smarty Ltdâs net assets. At the dateof acquisition, the shareholderâs equity of Smarty Ltd was asfollows.
$
Share capital
100,000
Retained earnings
175,000
Total
275,000
All the assets and liabilities of Smarty Ltd were recorded atamounts equal to their fair values at the acquisition date, exceptfor some assets detailed below.
Remaining useful life
Cost
Carrying amount
Fair value
$
$
$
Plant
5 years
180,000
90,000
120,000
Computer equipment
5 years
90,000
40,000
60,000
Required:
Prepare the acquisition analysis at 1 July 2017.
Prepare the consolidation worksheet entries for Panda Ltdâs groupat 1 July 2017.
Prepare the consolidation worksheet entries for Panda Ltdâs groupat 30 June 2018.
Question 1
Max. marks allocated
Acquisition analysis
3
Consolidation entries at 1 July 2017
6
Consolidation entries at 30 June 2018
10
Presentation
1
Total
20
Question 2 [35 marks]
Topic 2: Consolidation: Intra-group transactions
On 1 July 2015, Ping Pong Ltd acquired all the issued shares ofSing Song Ltd. At the date of acquisition, the shareholdersâ equityof Sing Song Ltd consisted of share capital $120,000; generalreserve $25,000 and retained earnings $55,000. The identifiable netassets of Sing Song Ltd were recorded at amounts equal to theirfair values, except for the following assets:
Carrying amount
Fair value
$
$
Land
100,000
130,000
Inventories
78,500
86,100
Machinery (cost $86,000)
52,000
56,000
Vehicles (cost $58,000)
47,000
53,000
The assets of Sing Song Ltd at acquisition date includedgoodwill recorded at $15,000 arising from a business combinationtransaction in 2011. As at the date of acquisition, the vehiclesand machinery were expected to have a further useful life of 6 and8 years respectively, with benefits to be received evenly overthose periods. Inventories on hand on 1 July 2015 was all sold by31 January 2016. The land owned at 1 July 2015 was sold inSeptember 2016 for $150,000. The machinery on hand at 1 July 2015was sold on 1 January 2018 for $38,000.
Adjustments for the differences between carrying amount and fairvalues of assets and liabilities on hand at acquisition date arerecognised on consolidation. When assets are sold or derecognised,any related valuation reserves are transferred to retainedearnings.
At 1 July 2015, Sing Song Ltd owned but had not recorded aninternally generated brand name, an identifiable asset included aspart of the business combination transaction. This brand name wasconsidered by Ping Pong Ltd to have a fair value of $29,000 and anindefinite useful life. An impairment test conducted with respectto the brand name on 30 June 2018 concluded that its recoverableamount at that date was $2,000 less than its carrying amount.
In June 2017, Sing Song Ltd paid a share dividend worth $20,000from the general reserve on hand at 1 July 2015.
The trial balances of both companies at 30 June 2018 showed thefollowing balances:
Ping Pong Ltd
Sing Song Ltd
Dr ($)
Cr ($)
Dr ($)
Cr ($)
Sales revenue
450,000
320,000
Dividend revenue
17,000
-
Other income
11,400
17,000
Proceeds on sale of equipment
18,000
-
Proceeds on sale of machinery
-
38,000
Cost of sales
210,000
192,550
Income tax expense
30,000
32,000
Depreciation and other expenses
39,000
36,000
Carrying amount of equipment sold
21,000
-
Carrying amount of machinery sold
-
30,500
Dividend paid
10,000
5,000
Dividend declared
20,000
12,000
Transfer to general reserve
10,000
5,000
Share capital
200,000
140,000
General reserve
35,000
10,000
Retained earnings (1 July 2017)
51,300
67,500
Accounts payable
69,500
36,000
Loan payable (due 30 June 2022)
25,000
15,000
Dividend payable
20,000
12,000
Provisions
12,500
9,300
Current tax liability
43,000
34,000
Deferred tax liability
11,800
5,000
Accumulated depreciation-vehicles
16,400
60,000
Accumulated depreciation-equipment
-
34,500
8%Debentures (matures 30 June 2021)
25,000
-
Cash
2,500
1,250
Receivables
27,000
13,000
Inventories
39,700
24,500
Other current assets
15,200
8,200
Deferred tax assets
7,500
3,500
Vehicles
88,000
158,000
Equipment
-
42,000
Land
140,000
180,000
Financial assets
68,000
14,800
Goodwill
28,000
15,000
Shares in Sing Song Ltd
250,000
-
Debentures in Ping Pong Ltd
-
25,000
1,005,900
1,005,900
798,300
798,300
Additional information:
On 1 January 2018, Ping Pong Ltd sold an item of equipment toSing Song Ltd for $18,000. The equipment had a carrying amount atthe date of sale of $21,000. Both companies depreciate equipment at20% on a straight line basis.
On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for$7,800. The machine had a carrying amount of $7,000 at the date ofsale. Ping Pong Ltd recorded the machine as inventories. Theinventories item was sold to an external party in November 2017 for$8,200.
All interests on the 8% debentures has been paid and brought toaccount in the records of both companies.
During the 2017-2018 financial year, Ping Pong Ltd sold inventoriesto Sing Song Ltd for $75,000. The cost of these inventories to SingSong Ltd was $70,000. Of these inventories, 25% is still on hand at30 June 2018.
The transfer to the general reserve recorded by Sing Song Ltd inthe current year was from retained earnings recorded at 1 July2015.
The tax rate is 30%.
Required:
Prepare an acquisition analysis.
Prepare the consolidation worksheet entries necessary to preparethe consolidated financial statements for the year ending 30 June2018 for the group comprising Ping Pong Ltd and Sing Song Ltd.
Note: you are not required to prepare the consolidationworksheet and the consolidated financial statements.
marty Ltd was as follows.
$ | |
Share capital | 100,000 |
Retained earnings | 175,000 |
Total | 275,000 |
All the assets and liabilities of Smarty Ltd were recorded atamounts equal to their fair values at the acquisition date, exceptfor some assets detailed below.
Remaining useful life | Cost | Carrying amount | Fair value | |
$ | $ | $ | ||
Plant | 5 years | 180,000 | 90,000 | 120,000 |
Computer equipment | 5 years | 90,000 | 40,000 | 60,000 |
Required:
Prepare the acquisition analysis at 1 July 2017.
Prepare the consolidation worksheet entries for Panda Ltdâsgroup at 1 July 2017.
Prepare the consolidation worksheet entries for Panda Ltdâsgroup at 30 June 2018.
Question 1 | Max. marks allocated |
Acquisition analysis | 3 |
Consolidation entries at 1 July 2017 | 6 |
Consolidation entries at 30 June 2018 | 10 |
Presentation | 1 |
Total | 20 |
Question 2 [35 marks]
Topic 2: Consolidation: Intra-grouptransactions
On 1 July 2015, Ping Pong Ltd acquired all the issued shares ofSing Song Ltd. At the date of acquisition, the shareholdersâ equityof Sing Song Ltd consisted of share capital $120,000; generalreserve $25,000 and retained earnings $55,000. The identifiable netassets of Sing Song Ltd were recorded at amounts equal to theirfair values, except for the following assets:
Carrying amount | Fair value | |
$ | $ | |
Land | 100,000 | 130,000 |
Inventories | 78,500 | 86,100 |
Machinery (cost $86,000) | 52,000 | 56,000 |
Vehicles (cost $58,000) | 47,000 | 53,000 |
The assets of Sing Song Ltd at acquisition date includedgoodwill recorded at $15,000 arising from a business combinationtransaction in 2011. As at the date of acquisition, the vehiclesand machinery were expected to have a further useful life of 6 and8 years respectively, with benefits to be received evenly overthose periods. Inventories on hand on 1 July 2015 was all sold by31 January 2016. The land owned at 1 July 2015 was sold inSeptember 2016 for $150,000. The machinery on hand at 1 July 2015was sold on 1 January 2018 for $38,000.
Adjustments for the differences between carrying amount and fairvalues of assets and liabilities on hand at acquisition date arerecognised on consolidation. When assets are sold or derecognised,any related valuation reserves are transferred to retainedearnings.
At 1 July 2015, Sing Song Ltd owned but had not recorded aninternally generated brand name, an identifiable asset included aspart of the business combination transaction. This brand name wasconsidered by Ping Pong Ltd to have a fair value of $29,000 and anindefinite useful life. An impairment test conducted with respectto the brand name on 30 June 2018 concluded that its recoverableamount at that date was $2,000 less than its carrying amount.
In June 2017, Sing Song Ltd paid a share dividend worth $20,000from the general reserve on hand at 1 July 2015.
The trial balances of both companies at 30 June 2018 showed thefollowing balances:
Ping Pong Ltd | Sing Song Ltd | |||
Dr ($) | Cr ($) | Dr ($) | Cr ($) | |
Sales revenue | 450,000 | 320,000 | ||
Dividend revenue | 17,000 | - | ||
Other income | 11,400 | 17,000 | ||
Proceeds on sale of equipment | 18,000 | - | ||
Proceeds on sale of machinery | - | 38,000 | ||
Cost of sales | 210,000 | 192,550 | ||
Income tax expense | 30,000 | 32,000 | ||
Depreciation and other expenses | 39,000 | 36,000 | ||
Carrying amount of equipment sold | 21,000 | - | ||
Carrying amount of machinery sold | - | 30,500 | ||
Dividend paid | 10,000 | 5,000 | ||
Dividend declared | 20,000 | 12,000 | ||
Transfer to general reserve | 10,000 | 5,000 | ||
Share capital | 200,000 | 140,000 | ||
General reserve | 35,000 | 10,000 | ||
Retained earnings (1 July 2017) | 51,300 | 67,500 | ||
Accounts payable | 69,500 | 36,000 | ||
Loan payable (due 30 June 2022) | 25,000 | 15,000 | ||
Dividend payable | 20,000 | 12,000 | ||
Provisions | 12,500 | 9,300 | ||
Current tax liability | 43,000 | 34,000 | ||
Deferred tax liability | 11,800 | 5,000 | ||
Accumulated depreciation-vehicles | 16,400 | 60,000 | ||
Accumulated depreciation-equipment | - | 34,500 | ||
8%Debentures (matures 30 June 2021) | 25,000 | - | ||
Cash | 2,500 | 1,250 | ||
Receivables | 27,000 | 13,000 | ||
Inventories | 39,700 | 24,500 | ||
Other current assets | 15,200 | 8,200 | ||
Deferred tax assets | 7,500 | 3,500 | ||
Vehicles | 88,000 | 158,000 | ||
Equipment | - | 42,000 | ||
Land | 140,000 | 180,000 | ||
Financial assets | 68,000 | 14,800 | ||
Goodwill | 28,000 | 15,000 | ||
Shares in Sing Song Ltd | 250,000 | - | ||
Debentures in Ping Pong Ltd | - | 25,000 | ||
1,005,900 | 1,005,900 | 798,300 | 798,300 | |
Additional information:
On 1 January 2018, Ping Pong Ltd sold an item of equipment toSing Song Ltd for $18,000. The equipment had a carrying amount atthe date of sale of $21,000. Both companies depreciate equipment at20% on a straight line basis.
On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for$7,800. The machine had a carrying amount of $7,000 at the date ofsale. Ping Pong Ltd recorded the machine as inventories. Theinventories item was sold to an external party in November 2017 for$8,200.
All interests on the 8% debentures has been paid and brought toaccount in the records of both companies.
During the 2017-2018 financial year, Ping Pong Ltd soldinventories to Sing Song Ltd for $75,000. The cost of theseinventories to Sing Song Ltd was $70,000. Of these inventories, 25%is still on hand at 30 June 2018.
The transfer to the general reserve recorded by Sing Song Ltd inthe current year was from retained earnings recorded at 1 July2015.
The tax rate is 30%.
Required:
Prepare an acquisition analysis.
Prepare the consolidation worksheet entries necessary to preparethe consolidated financial statements for the year ending 30 June2018 for the group comprising Ping Pong Ltd and Sing Song Ltd.
Note: you are not required to prepare the consolidationworksheet and the consolidated financial statements.
