ACCT20002 Lecture Notes - Lecture 10: Retained Earnings, Book Value, Share Capital
5 Jun 2018
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In class question: Accounting for Groups – Non Controlling Interest
Question
On 1 July 2012, Fin Ltd acquired 75% of the shares (cum div.) of Whale Ltd for
$67 500. At this date the equity of Whale Ltd consisted of:
Share capital
General reserve
Retained earnings
$ 30 000
3 000
15 000
At the date of the business combination, all the identifiable assets and liabilities of
Whale Ltd had carrying amounts equal to their fair values except for:
Carrying
amount
Fair value
Plant (cost $60 000)
$40 000
$55 000
Inventories
25 000
31 000
Receivables
33 000
30 000
The plant had a further useful life of 5 years. It was sold by Whale Ltd on 1 April 2017
for $3000. By 30 June 2013, all the inventories were sold to entities outside the group.
Also, by 30 June 2013, receivables of $33 000 had been collected. One of the liabilities of
Whale Ltd at 1 July 2012 was dividend payable of $10 000. The tax rate is 30%. Fin Ltd
uses the partial goodwill method.
Additional information
(a) At 30 June 2016, inventories of Fin Ltd included assets sold to it by Whale Ltd for a
before-tax profit of $300. These items were sold to external entities during the 2016–
17 year.
(b) During the 2016–17 year, Whale Ltd had sold inventories to Fin Ltd for $60 000.
The mark-up on sales was 25% on cost. At 30 June 2017, Fin Ltd still had some of
these inventories on hand, amounting to items acquired from Whale Ltd for $3000.
(c) On 1 January 2017, Whale Ltd sold plant to Fin Ltd for a before-tax profit of
$1200. This plant was carried at $3000 (original cost $20 000) in the records of
Whale Ltd at time of sale. Depreciation on this type of plant is calculated using a
20% p.a. straight-line method.
(d) Financial information provided by Whale Ltd concerning events affecting it during
the 2016–17 year was as follows.
Profit for the year
$23 400
Retained earnings at 1 July 2016
30 000
53 400
Dividend paid
(12 000)
Dividend declared
(6 000)
Transfer to general reserve
(1 500)
19 500
Retained earnings at 30 June
2017
$33 900
Whale Ltd also reported a comprehensive income for the year of $34 650, which
included gains on revaluation of land of $750, as the asset revaluation surplus in
relation to the land had increased from $3000 to $3750 over the year.
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Required
Prepare the consolidation worksheet entries for the preparation of the consolidated
financial statements of Fin Ltd at 30 June 2017.
FIN LTD – WHALE LTD
75%
Fin Ltd Whale Ltd
Fin Ltd 75%
NCI 25%
1. Consolidation Worksheet Entries at 30 June 2017 (Fin Ltd uses the partial goodwill
method)
Acquisition analysis at 1 July 2012
Net fair value of identifiable assets
and liabilities of Whale Ltd = ($30 000 + $3 000 + $15 000) (equity)
+ ($55 000 - $40 000) (1 – 30%) (BCVR - plant)
+ ($31 000 - $25 000) (1 – 30%) (BCVR - inventories)
- ($33 000 - $30 000) (1 – 30%) (BCVR - receivables)
= $60 600
(a) Net consideration transferred = $67 500 – (75% x $10 000) (dividends)
= $60 000
(b) NCI in Whale Ltd = 25% x $60 600
= $15 150
Aggregate of (a) and (b) = $75 150
Goodwill acquired – parent only = $75 150 - $60 600
= $14 550
As this method recognises NCI based on the proportionate share of the identifiable assets and
liabilities of Whale Ltd at acquisition date, there won’t be any goodwill recognised for NCI.
The entire goodwill calculated here will belong to the parent and will be recognised in the pre-
acquisition entry.
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a. Business combination valuation entries
Depreciation expense - plant Dr 2 250
Carrying amount of plant sold Dr 750
Income tax expense Cr 900
Retained earnings (1/7/16) Dr 8 400
Transfer from business combination
valuation reserve Cr 10 500
(Depreciation is 20% x $15 000 p.a.)
As the plant is not in the business at the end of the period (it was sold during the current
period), but was on hand at the beginning of the period, a BCVR entry needs to be posted for
plant to adjust the depreciation expenses and to transfer the BCVR for it to retained earnings,
while also adjusting the carrying amount of the plant sold to reflect the carrying amount from
the group’s perspective just before the external sale. Given that the plant was sold on 1 April
2017 (4 ¾ years after the acquisition date), the carrying amount recognised by Whale Ltd at
the moment of sale is $40 000 - $40 000 / 5 x 4.75 years = $2 000, while the carrying amount
from the group’s perspective (based on the fair value at acquisition date) at the moment of
sale is $55 000 - $55 000 / 5 x 4.75 years = $2 750; therefore, a $750 increase is necessary to
be recorded against the carrying amount – that is equivalent to the depreciation adjustments
that we did not adjust for because the plant was sold: i.e. ($55 000 - $40 000) / 5 years x (5
years – 4.25 years). There are no adjustments needed for the plant account or the related
accumulated depreciation account as they were written off and they should stay written off.
The adjustments for previous depreciation expenses and the related tax effect will be posted
against Retained earnings (1/7/16), while the adjustments for the current depreciation
expenses and the related tax effect will be recognised against the Depreciation expense and
Income tax expense account respectively. This is because the previous period’s expenses are
now in the Retained earnings (1/7/16). All the tax effects are realised as the asset is
derecognised and therefore no deferred tax needs to be recognised. As inventories and
receivables existing at acquisition date are derecognised prior to the beginning of the current
period, there are no BCVR entries needed now for them.
b. Pre-acquisition entries
Retained earnings (1/7/16)* Dr 12 825
Share capital Dr 22 500
Business combination valuation reserve** Dr 7 875
General reserve Dr 2 250
Goodwill Dr 14 550
Shares in Whale Ltd Cr 60 000
*75% x ($15 000 + $4 200 (transfer from BCVR - inventories) – $2 100 (transfer from BCVR
- receivables)])
**75% x $10 500 (BCVR – plant)
As now we are after the period that included the acquisition date, the first pre-acquisition entry
is not the same as the one posted at acquisition date, but it should be different based on the
transfers from pre-acquisition equity that took place in the previous periods. As such, the
amounts to be eliminated now will be equal to the parent share of the amounts in the equity
accounts at acquisition date, adjusted for the prior period pre-acquisition equity transfers. The
only such transfer in the prior period is the transfer from BCVR to retained earnings caused by
the sale of inventories undervalued at acquisition date and the collection of accounts receivable
overvalued at acquisition date. Therefore, the amount of retained earnings to be eliminated will
be calculated as 75% (parent share) of the amount reported in Retained earnings at acquisition
date ($15 000) plus the amount transferred from BCVR ($4 200 BCVR inventories - $2 100
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Document Summary
In class question: accounting for groups non controlling interest. On 1 july 2012, fin ltd acquired 75% of the shares (cum div. ) of whale ltd for. At this date the equity of whale ltd consisted of: At the date of the business combination, all the identifiable assets and liabilities of. Whale ltd had carrying amounts equal to their fair values except for: The plant had a further useful life of 5 years. It was sold by whale ltd on 1 april 2017 for . By 30 june 2013, all the inventories were sold to entities outside the group. Also, by 30 june 2013, receivables of 000 had been collected. Whale ltd at 1 july 2012 was dividend payable of 000. Additional information (a) at 30 june 2016, inventories of fin ltd included assets sold to it by whale ltd for a before-tax profit of . These items were sold to external entities during the 2016 .
