Corporate Accounting Assignment

Questions:

On 1 July 2015, Victoria Ltd acquired 70% of the shares of Melbourne Ltd for $526,000 on a cum div. basis. Victoria Ltd had acquired 30% of the shares of Melbourne Ltd two years earlier for $180,000. This investment, classified as an available-for-sale investment, was recorded at a fair value on 1 July 2015 of $226,000. At 1 July 2015, the equity and liability sections of Melbourne Ltd’s statement of financial position showed the following balances:

Share Capital	460,000
General Reserve	50,000 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Retained Earnings	100,000
Other liabilities	100,000
Dividend payable	30,000

At acquisition date, all the identifiable assets and liabilities of Melbourne Ltd were recorded at amounts equal to fair value except for:

	Carrying Amount	Fair Value
Land	95,000	100,000
Vehicle (@ cost 40,000)	35,000	39,000
Equipment (@ cost 420,000)	294,000	309,000
Inventory	98,000	101,00

The Vehicle, which was estimated to have a further four year life at acquisition date, was sold on 1 January 2018. The equipment had a further five year life at acquisition date and was expected to be used evenly over that time. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation.

Melbourne Ltd had not recorded an internally developed patent. Victoria Ltd valued this patent at $90,000 and was assumed to have a ten year life. In May 2017, Melbourne sold this patent to an external party for $100,000. It also had a contingent liability of $19,000 that Victoria Ltd considered to have a fair value of $15,000. This liability was settled in July 2017.

The dividend liability was paid on 1 September 2015. All inventories on hand at acquisition date were sold by June 2016. The land was sold on 1 June 2018 to Peters Ltd. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed.

On 30 May 2017, Melbourne Ltd transferred $8,000 from the general reserve (pre-acquisition) to retained earnings. A bonus dividend of $10,000 was paid in December 2017 out of pre-acquisition profits.

Goodwill was tested annually for impairment. For the year ended 30 June 2017, an impairment loss on goodwill of $4,000 was recorded.

Additional information:

(i) Melbourne Ltd sold a warehouse with a carrying amount of $82,000 to Victoria Ltd for $100,000. The transaction took place on 1 January 2017. Victoria Ltd charges depreciation at 5% p.a. on a straight-line basis.

(ii) On 31 March 2017, Victoria Ltd sold some land to Melbourne Ltd. The land had originally cost Victoria Ltd $64,000, but was sold to Melbourne Ltd for $63,000. To help Melbourne Ltd pay for the land, Victoria Ltd gave Melbourne Ltd an interest-free loan of $29,000. Melbourne Ltd has as yet made no repayments on the loan.

(iii) In April 2017, Victoria Ltd sold inventory to Melbourne Ltd for $12,000, at a mark-up of 20% on cost. One quarter of this inventory was unsold by Melbourne Ltd at 30 June 2017. The remaining inventory was sold in the following three months.

(iv) On 1 October 2017, Victoria Ltd issued 1,000 15% debentures of $100 at nominal value. Melbourne Ltd acquired 400 of these. Interest is payable half-yearly on 31 March and 30 September. Accruals have been recognised in the legal entities’ accounts.

(v) On 18 February 2018, interim dividend was paid by Melbourne Ltd from profits before acquisition date. The final dividend was from current year profits. Shareholder approval is not required in relation to dividends.

(vi) On 1 April 2018, Melbourne Ltd transferred an item of plant with a carrying amount of $32,000 to Victoria Ltd for $41,000. Victoria Ltd treated this item as inventory. The item was still on hand at the end of the year. Melbourne Ltd applied a 20% depreciation rate to this plant.

(vii) During the year ending 30 June 2018, Melbourne Ltd sold inventory to Victoria Ltd for $60,000, recording a before-tax profit of $16,000. One quarter of this inventory was unsold by Victoria Ltd at 30 June 2018.

(viii) The tax rate is 30%.

On 30 June 2018 the trial balances of Victoria Ltd and Melbourne Ltd were as follows:
	Victoria Ltd	Melbourne Ltd
Cost of sales	338,000	307,000
Other expenses	80,000	72,000
Income tax expense	41,000	40,000
Interim dividend paid	21,000	14,000
Final dividend declared	22,000	15,000
Cash	181,000	105,000
Dividend receivable	20,000	–
Other receivables	206,000	227,000
Inventory	244,000	132,000
Deferred tax assets	35,000	–
Trucks	82,000	72,000
Plant & equipment	648,000	380,000
Land	130,000	123,000
Warehouses	180,000	90,000
Debentures in Victoria Ltd	–	40,000
Shares in Melbourne Ltd	722,000	–
Goodwill	74,000	30,000
Loan to Melbourne Ltd	29,000	–
	3,053,000	1,647,000
Sales	480,000	437,000
Other revenue & income	79,000	56,000
Share capital	874,000	470,000
Share options	80,000	–
General reserve	84,000	72,000
Retained earnings (1/7/2017)	490,000	228,000
Final dividend payable	22,000	15,000
Current tax liabilities	8,000	12,000
Other liabilities	96,000	60,000
Debentures	400,000	–
Loan from Victoria Ltd	–	29,000
Accumulated depreciation – P & E	388,000	228,000
Accumulated depreciation – Trucks	25,000	22,000
Accumulated depreciation – Warehouses	27,000	18,000
	3,053,000	1,647,000

Required

Prepare the acquisition analysis as at 1 July 2015.

Consequential errors will be penalised.

2016.Prepare the BVCR and pre-acquisition worksheet entries ONLY as at 30 June 2016.

Journal entry – 1 tick for each correct line entry – i.e. correct account description AND amount (NO TICK for correct description only or correct amount only.)

Consequential errors will not be penalised.

2018. Prepare full consolidation worksheet entries as at 30 June 2018.

Journal entry – 1 tick for each correct line entry – ie correct account description AND amount (NO TICK for correct description only or correct amount only.)

Consequential errors will not be penalised.

Answers:

1. Acquisition Analysis as on 1^st July,2015 using Partly Goodwill Method:-

Net Fair Value of Identifiable Assets & Liabilities
As on 1st July, 2015
Particulars	Amount	Amount	Amount
Liabilities (A)
Equity Share Capital			460000
General Reserve			50000
Retained Earnings			100000
TOTAL			610000
Difference Of Carrying amount & Fair Value of the Assets (B)	Fair Value	Carrying Amount
Inventory	100000	95000	5000
Vehicles	39000	35000	4000
Equipments	309000	294000	15000
Inventory	101000	98000	3000
TOTAL			27000
Net Fair value of Identifiable Assets & Liabilities (A+B)			637000
Goodwill Estimation as per Partly Goodwill Method :-
Particulars	Amount	Amount
Consideration Transferred ( C ) :
Value of Acquisition	526000
Less:30% of Dividend Payable	9000	517000
Non Controlling Interest ( D )		191100
(30% of Net Fair Value)
TOTAL (C+D)		708100
Less: Net Fair Value		637000
Goodwill of Victoria Ltd.		71100

2. BVCR & Pre-Acquisition Journal Entries:-

In the Books of Victoria Ltd.
Journal Entry
Date	Particulars		Amount	Amount
			Dr.	Cr.
Business Combination Entries :-
	Land A/c. (Fair Value – Carrying Amount)	Dr.	5000
	To,	“Deferred Tax Liability” A/c. (@30%)		1500
	To,	“Business Combination Valuation Reserve” A/c. (Balance)		3500
	Accumulated Depreciation on Vehicles A/c. (Cost – Carrying Amount)	Dr.	5000
	To,	Vehicle A/c. [Acc. Dep. – (Fair Value – Carrying Amount)]		1000
	To,	“Deferred Tax Liability” A/c. (@30% )		1200
	To,	“Business Combination Valuation Reserve” A/c. (Balance)		2800
	Depreciation Expense A/c. [(Fair Value – Carrying Amount)*1/4)	Dr.	1000
	To,	Accumulated Depreciation on Vehicle A/c.		1000
	Deferred Tax Liability A/c. (30% on Dep. On Vehicle)	Dr.	120
	To,	Income Tax Expense A/c.		120
	Accumulated Depreciation on Equipments A/c. (Cost – Carrying Amount)	Dr.	126000
	To,	Equipment A/c. [Acc. Dep. – (Fair Value – Carrying Amount)]		111000
	To,	“Deferred Tax Liability” A/c. (@30% )		4500
	To,	“Business Combination Valuation Reserve” A/c. (Balance)		10500
	Depreciation Expense A/c. [(Fair Value – Carrying Amount)*1/5)	Dr.	3000
	To,	Accumulated Depreciation on Vehicle A/c.		3000
	Deferred Tax Liability A/c. (30% on Dep. On Vehicle)	Dr.	450
	To,	Income Tax Expense A/c.		450
	Patent A/c.	Dr.	90000
	To,	“Deferred Tax Liability” A/c. (@30%)		27000
	To,	“Business Combination Valuation Reserve” A/c. (Balance)		63000
	“Business Combination Valuation Reserve” A/c.	Dr.	10500
	“Deferred Tax” Liability A/c. (@30%)	Dr.	4500
	To	Contingent Liability A/c.		15000
	Cost of Sales A/c. (Fair Value – Carrying Amount)	Dr.	3000
	To	Income Tax Expense A/c. (@30%)		900
	To	“Transfer from Business Combination Valuation Reserve” A/c. (Balance)		2100
	“Transfer from Business Combination Valuation Reserve” A/c.	Dr.	2100
	To,	Business Combination Valuation Reserve A/c.		2100
Pre- Acquistion Entry on 1.07.2016:-
01.07.16	“Retained Earnings” A/c	Dr.	70000
	“Share Capital” A/c	Dr.	322000
	“General Reserve” A/c	Dr.	35000
	Goodwill A/c. (Balance)	Dr.	49020
	Business Combination Valuation Reserve A/c.	Dr.	49980
	To,	Shares in Melbourne Ltd.A/c..		526000

3. Consolidated worksheet Journal Entries

		Amount	Amount
Date	Particulars	Dr	Cr
	Equipment Design	15000
	Deferred ax liability		9400
	Business combination value reserve		5600
	Amortisation expense	1500
	Retained earnings (1/7/2018)	3700
	Accumulated amortisation		5200
	(1/10*13000 )
	Deferred tax liability	1200
	Income tax expenses		800
	Retained Earnings (1/7/2018)		400
	Depreciation expense	850
	Profit on Sale of machinery	2550
	Income tax expenses		1000
	Retained earnings (1/7/2018)	1500
	Transfer from business combination
	Valuation of reserve		4100
	(Depreciation is 1/5*6000 p.a)
	Accumulated impairments losses-goodwill	12000
	Goodwill		12000
	“Goodwill”	30000
	“Business combination valuation reserve”		30000
	“Pre-acquisition entries”
	Retained earnings (1/7/2016)	18000
	“Share capital”	470000
	Other reserves	25000
	Other components of equity (1/7/2016)	10000
	Business combination valuation reserve	6000
	Goodwill	30000
	Shares in Melbourne ltd		559000
	NCI share of changes from equity 1/7/2016 to 30/6/2018
	NCI profit share	9510
	NCI		9510
	NCI dividend	1250
	Dividends Paid		1250
	NCI	1000
	Dividends declared		1000
	Transfer from other reserve funds	500
	Transfer to retained earnings		500
	Share capital	7000
	Other reserves and bonus issues		7000
	Transfer from business combination	1000
	valuation reserve
	Business combination valuation reserve		1000
	Dividends Paid
	Dividends revenue	5000
	Dividends declared		5000
	Dividends payable	3500
	Dividends receivable		3500
	Sale of plant Victoria ltd to Melbourne ltd
	Retained earnings (1/7/2018)	2500
	Deferred tax assets	1500
	Plant		5000
	NCI effect
	NCI	600
	Retained earnings (1/7/2018)		600
	Depreciation
	“Accumulated depreciation”	1200
	“Retained earnings” (1/7/2018)		600
	“”Depreciation expense”		600
	“Income tax expense”	150
	“Retained earnings” (1/7/2018)	150
	“Deferred tax”		3000
	“Profit from opening inventory”
	“Retained earnings”	450
	“Income tax expense”	500
	“Cost of sales”		950
	sale of inventory: current period
	Sales	15000
	Cost of sales		12500
	Inventories		2500
	Deferred tax assets	250
	Income tax expense		250

Reference list

Abuaddous, M., Hanefah, M.M. and Laili, N.H., 2014. Accounting standards, goodwill impairment and earnings management in Malaysia. International Journal of Economics and Finance, 6(12), p.201.

AbuGhazaleh, Naser M., Osama Musa Al-Hares, and Ayman E. Haddad. “The value relevance of goodwill impairments: UK evidence.” International Journal of Economics and Finance 4, no. 4 (2012).

Argyrou, Argyris. “Auditing Journal Entries Using Extreme Value Theory.”Auditing 7 (2013): 1-2013.

Avallone, Francesco, and Alberto Quagli. “Insight into the variables used to manage the goodwill impairment test under IAS 36.” Advances in Accounting31, no. 1 (2015): 107-114.

Jarva, Henry. “Economic consequences of SFAS 142 goodwill writeâ€offs.”Accounting & Finance 54, no. 1 (2014): 211-235.

Kim, Sohyung, Cheol Lee, and Sung Wook Yoon. “Goodwill accounting and asymmetric timeliness of earnings.” Review of Accounting and Finance 12, no. 2 (2013): 112-129.

Matemilola, Bolaji Tunde, and Rubi Ahmad. “Debt financing and importance of fixed assets and goodwill assets as collateral: dynamic panel evidence.”Journal of Business Economics and Management 16, no. 2 (2015): 407-421.

Stallman, Adam Thomas, and Larry William Youngren. “Journaling database changes using minimized journal entries that may be output in human-readable form.” U.S. Patent 8,447,725, issued May 21, 2013.

Answers

Reference list

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