ACCT20002 Lecture Notes - Lecture 8: Accounts Receivable, Accounts Payable, Hedeby Stones

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lavendermoose527

5 Jun 2018

School

University of Melbourne

Department

Accounting

Course

ACCT20002

Professor

Jagjit Kaur

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In class Tutorial Questions & Solutions

Exercise 25.5 Accounting by an acquirer

Howard Ltd is seeking to expand its share of the widgets market and has negotiated to

take over the operations of Falcon Ltd on 1 January 2021. The statements of financial

position of the two companies as at 31 December 2020 were as follows.

Howard Ltd is to acquire all the identifiable assets, except cash, of Falcon Ltd. The

assets of Falcon Ltd are all recorded at fair value except the following.

In exchange, Howard Ltd is to provide sufficient extra cash to allow Falcon Ltd to

repay all of its outstanding debts and its liquidation costs of $2400, plus two fully paid

shares in Howard Ltd for every three shares held in Falcon Ltd. The fair value of a

share in Howard Ltd is $3.20.

Costs of issuing the shares were $1200.

Required

Prepare the acquisition analysis and journal entries to record the business combination

in the records of Howard Ltd.

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HOWARD LTD – FALCON LTD

Acquisition analysis:

Net fair value of assets and liabilities acquired:

Accounts receivable $34 700

Inventory 39 000

Freehold land 130 000

Buildings 40 000

Plant and equipment 46 000

$289 700

Consideration transferred:

Shares: 2/3 x 60 000 x $3.20 $128 000

Cash

Accounts payable $45 100

Mortgage and interest 44 000

Debentures and premium 52 500

Liquidation expenses 2 400

144 000

Cash already held by Falcon (12 000) 132 000

$260 000

Gain on bargain purchase = $289 700 - $260 000

= $29 700

HOWARD LTD

General Journal

Accounts receivable Dr 34 700

Inventory Dr 39 000

Freehold land Dr 130 000

Buildings Dr 40 000

Plant and equipment Dr 46 000

Cash Cr 132 000

Share capital Cr 128 000

Gain on bargain purchase Cr 29 700

(Acquisition of net assets of

Falcon Ltd and shares issued)

Share capital Dr 1 200

Cash Cr 1 200

(Costs of issuing shares)

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Exercise 26.6 Options

Toby Ltd and Fred Ltd own 80% and 20% respectively of the ordinary shares that carry

voting rights at a general meeting of shareholders of Stella Ltd. Toby Ltd sells half of its

interest to Coco Ltd and buys call options from Coco Ltd that are exercisable at any time

at a premium to the market price when issued and, if exercised, would give Toby Ltd its

original 80% ownership interest and voting rights. At the end of the current financial

period, the options are out of the money.

Required

Discuss whether Toby Ltd is the parent of Stella Ltd. (LO2)

Facts:

Toby Ltd - 40% of ordinary shares of Stella Ltd

Fred Ltd - 20% of ordinary shares of Stella Ltd

Coco Ltd - 40% of ordinary shares of Stella Ltd

Toby Ltd owns call options that would give it 80% of the voting rights of Stella Ltd.

When considering potential voting rights, an investor shall consider the purpose and design of

the instrument, as well as the purpose and design of any other involvement the investor has

with the investee. This includes an assessment of the various terms and conditions of the

instrument as well as the investor’s apparent expectations, motives and reasons for agreeing to

those terms and conditions.

If the investor also has voting or other decision-making rights relating to the investee’s

activities, the investor assesses whether those rights, in combination with potential voting

rights, give the investor power.

An investor, in assessing whether it has power, considers only substantive rights relating to an

investee (held by the investor and others). For a right to be substantive, the holder must have

the practical ability to exercise that right. It is necessary to consider any barriers that might

prevent the holder from exercising the rights. Examples of such barriers include:

(i) Financial penalties and incentives that would prevent (or deter) the holder from exercising

its rights.

(ii) An exercise or conversion price that creates a financial barrier that would prevent (or deter)

the holder from exercising its rights.

(iii) Terms and conditions that make it unlikely that the rights would be exercised, for example,

conditions that narrowly limit the timing of their exercise.

(iv) The absence of an explicit, reasonable mechanism in the founding documents of an

investee or in applicable laws or regulations that would allow the holder to exercise its

rights.

(v) The inability of the holder of the rights to obtain the information necessary to exercise its

rights.

(vi) Operational barriers or incentives that would prevent (or deter) the holder from exercising

its rights (e.g. the absence of other managers willing or able to provide specialised services

or provide the services and take on other interests held by the incumbent manager).

(vii) Legal or regulatory requirements that prevent the holder from exercising its rights (e.g.

where a foreign investor is prohibited from exercising its rights).

As the call options are out of money, Toby Ltd’s management will certainly not exercise the

options. As such, the options are not substantive and therefore they should not be considered

in determining control.

In conclusion, Toby Ltd is not the parent of Stella Ltd.

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Document Summary

Howard ltd is seeking to expand its share of the widgets market and has negotiated to take over the operations of falcon ltd on 1 january 2021. The statements of financial position of the two companies as at 31 december 2020 were as follows. Howard ltd is to acquire all the identifiable assets, except cash, of falcon ltd. The assets of falcon ltd are all recorded at fair value except the following. The fair value of a share in howard ltd is . 20. Prepare the acquisition analysis and journal entries to record the business combination in the records of howard ltd. Net fair value of assets and liabilities acquired: Gain on bargain purchase (acquisition of net assets of. At the end of the current financial period, the options are out of the money. Discuss whether toby ltd is the parent of stella ltd. (lo2)

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

magentacoyote308

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

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

Consolidation entries at 1 July 2017

Consolidation entries at 30 June 2018

Presentation

Total

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

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

	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

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 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.

lilachorse999

Topic 2: Consolidation: Intra-grouptransactions

	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

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:

All interests on the 8% debentures has been paid and brought toaccount in the records of both companies.

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.

orchiddeer92

ACCT20002 Lecture Notes - Lecture 8: Accounts Receivable, Accounts Payable, Hedeby Stones

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