Financial statement disclosures You are the financial accountantfor Superstore Ltd, and are in the process of preparing itsfinancial statements for the year ended 30 June 2018. Whilstpreparing the financial statements, you become aware of thefollowing situations:
On 1 July 2017, the directors made a decision, using informationobtained over the last couple of years, to revise the useful lifeof an item of manufacturing equipment. The equipment was acquiredon 1 July 2015 for $800,000, and has been depreciated on astraight-line basis, based on an estimated useful life of 10 yearsand residual value of nil. Superstore Ltd uses the cost model formanufacturing equipment. The directors estimate that as at 1 July2017, the equipment has a remaining useful life of 6 years and aresidual value of nil. No depreciation has been recorded as yet forthe year ended 30 June 2018 as the directors were unsure how toaccount for the change in the 2018 financial statements, and unsurewhether the 2016 and 2017 financial statements will need to berevised as a result of the change.
In June 2018, the accounts payable officer discovered that aninvoice for repairs to equipment, with an amount due of $20,000,incurred in June 2017, had not been paid or provided for in the2017 financial statements. The invoice was paid on 12 July 2018.The repairs are deductible for tax purposes. The accountantresponsible for preparing the companyâs income tax returns willamend the 2017 tax return, and the company will receive a taxrefund of $6,000 as a result (30% x $20,000). No journal entrieshave been done as yet in the accounting records of Superstore Ltd,as the directors are unsure how to account for this situation, andwhat period adjustments need to be made in.
Superstore Ltd holds shares in a listed public company, ABC Ltd,which are valued in the draft financial statements on 30 June 2018at their market value on that date - $600,000. A major fall in thestock market occurred on 10 July 2018, and the value ofSuperstoreâs shares in ABC Ltd declined to $250,000.
On 21 July 2018, you discovered a cheque dated 20 April 2018 of$32,000 authorised by the companyâs previous accountant, Max. Thepayment was for the purchase of a swimming pool at Maxâs house. Thepayment had been recorded in the accounting system as anadvertising expense. You advise the directors of this fraudulentactivity, and they will investigate.
Assume that each event is material. Required:
i) State the appropriate accounting treatment for eachsituation. Provide explanations and references to relevantparagraphs in the accounting standards to support your answers.Where adjustments to Superstore Ltdâs financial statements arerequired, explain which financial statements need to be adjusted(ie. 2016, 2017, 2018 or 2019).
ii) Prepare any note disclosures and adjusting journal entriesthat are needed in the 2018 financial statements for eachsituation.
Financial statement disclosures You are the financial accountantfor Superstore Ltd, and are in the process of preparing itsfinancial statements for the year ended 30 June 2018. Whilstpreparing the financial statements, you become aware of thefollowing situations:
On 1 July 2017, the directors made a decision, using informationobtained over the last couple of years, to revise the useful lifeof an item of manufacturing equipment. The equipment was acquiredon 1 July 2015 for $800,000, and has been depreciated on astraight-line basis, based on an estimated useful life of 10 yearsand residual value of nil. Superstore Ltd uses the cost model formanufacturing equipment. The directors estimate that as at 1 July2017, the equipment has a remaining useful life of 6 years and aresidual value of nil. No depreciation has been recorded as yet forthe year ended 30 June 2018 as the directors were unsure how toaccount for the change in the 2018 financial statements, and unsurewhether the 2016 and 2017 financial statements will need to berevised as a result of the change.
In June 2018, the accounts payable officer discovered that aninvoice for repairs to equipment, with an amount due of $20,000,incurred in June 2017, had not been paid or provided for in the2017 financial statements. The invoice was paid on 12 July 2018.The repairs are deductible for tax purposes. The accountantresponsible for preparing the companyâs income tax returns willamend the 2017 tax return, and the company will receive a taxrefund of $6,000 as a result (30% x $20,000). No journal entrieshave been done as yet in the accounting records of Superstore Ltd,as the directors are unsure how to account for this situation, andwhat period adjustments need to be made in.
Superstore Ltd holds shares in a listed public company, ABC Ltd,which are valued in the draft financial statements on 30 June 2018at their market value on that date - $600,000. A major fall in thestock market occurred on 10 July 2018, and the value ofSuperstoreâs shares in ABC Ltd declined to $250,000.
On 21 July 2018, you discovered a cheque dated 20 April 2018 of$32,000 authorised by the companyâs previous accountant, Max. Thepayment was for the purchase of a swimming pool at Maxâs house. Thepayment had been recorded in the accounting system as anadvertising expense. You advise the directors of this fraudulentactivity, and they will investigate.
Assume that each event is material. Required:
i) State the appropriate accounting treatment for eachsituation. Provide explanations and references to relevantparagraphs in the accounting standards to support your answers.Where adjustments to Superstore Ltdâs financial statements arerequired, explain which financial statements need to be adjusted(ie. 2016, 2017, 2018 or 2019).
ii) Prepare any note disclosures and adjusting journal entriesthat are needed in the 2018 financial statements for eachsituation.
Related questions
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.
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.
