The consolidated financial statements were prepared to account for the Small Ltd interest ad buyout in the Fry Ltd joint venture agreement (Cassar, Ittner and Cavalluzzo 2015). The inter corporate investment was classified as Investment in Associates and the same will be accounted by the company through fair value through profit and loss where the small ltd would report any kind of share of income, share of depreciation or amortization or intergroup sales and transactions under the income statements and the balance sheet of the company will shows and reflect the true and fair market value taking into account the dividends and other forms of balance of the income statement in the company’s financial report (Adcock 2016).
|
Income Statement |
Year 2018 |
Year 2019 |
Year 2020 |
|
Share of Income (30%) |
|||
|
Profit before Tax |
80,000 |
70,000 |
60,000 |
|
Taxation at 30% |
-30,000 |
-25,000 |
-20,000 |
|
Profit After Tax |
50,000 |
45,000 |
40,000 |
|
Share of Income (30%) |
15,000 |
13,500 |
12,000 |
|
Balance Sheet [Investment in Fry Limited] |
Year 2018 |
Year 2019 |
Year 2020 |
|
Beginning Value of Investment |
50,000 |
41,000 |
50,000 |
|
Add: Share of Income (30%) |
15,000 |
13,500 |
12,000 |
|
Subtract: Share of Dividend |
|||
|
Stake at Company |
30% |
30% |
30% |
|
Dividend for the year |
80,000 |
15,000 |
10,000 |
|
Total Share of Dividend |
24000 |
4500 |
3000 |
|
Ending Value of Investment |
41,000 |
50,000 |
59,000 |
|
Consolidated Financial Statements |
|
|
In the Books of Small Ltd/Calculation of Goodwill |
|
|
Particulars |
Amount($) |
|
Purchase Price (30% Stake) |
50,000 |
|
Share Capital |
30,000 |
|
Retained Earnings |
120,000 |
|
Total Share Capital |
150,000 |
|
30% Stake |
45000 |
|
Goodwill (Purchase Price- Fair Market Value) |
5,000 |
|
Journal Entries in the Books of Small Ltd |
|||
|
Date |
Particulars |
Amount($) |
Amount($) |
|
1.07.17 |
Fry Ltd A/c…..Dr |
50,000 |
|
|
To Cash/Bank A/c |
50,000 |
||
|
(Being Investment done in Fry Ltd Company) |
|||
|
30.06.18 |
Bank A/c……Dr |
24,000 |
|
|
To Interest/Dividend A/c |
24,000 |
||
|
(Being Dividend Received from Fry Ltd Company) |
|||
|
30.06.18 |
To Interest/Dividend A/c |
24,000 |
|
|
To Profit/Loss Account |
24,000 |
||
|
Being Interest Transferred to Income Statement Account) |
|||
|
30.06.19 |
Bank A/c……Dr |
4,500 |
|
|
To Interest/Dividend A/c |
4,500 |
||
|
(Being Dividend Received from Fry Ltd Company) |
|||
|
30.06.19 |
To Interest/Dividend A/c |
4,500 |
|
|
To Profit/Loss Account |
4,500 |
||
|
Being Interest Transferred to Income Statement Account) |
|||
|
30.06.20 |
Bank A/c……Dr |
3,000 |
|
|
To Interest/Dividend A/c |
3,000 |
||
|
(Being Dividend Received from Fry Ltd Company) |
|||
|
30.06.20 |
To Interest/Dividend A/c |
3,000 |
|
|
To Profit/Loss Account |
3,000 |
||
|
Being Interest Transferred to Income Statement Account) |
|
Rock Bottom Pvt Ltd |
|||||
|
Assets |
Liabilities |
||||
|
Particulars |
Amount($) |
Particulars |
Amount($) |
Amount($) |
Payable % |
|
Land and Building |
7,500,000 |
Secured Creditors |
9,000,000 |
9,000,000 |
100% |
|
Other Assets |
6,750,000 |
Receiver Costs |
150,000 |
150,000 |
100% |
|
Liquidating Expenses |
600,000 |
600,000 |
100% |
||
|
Staff Wages Payable |
900,000 |
900,000 |
100% |
||
|
Staff Leave Entitlement |
150,000 |
150,000 |
100% |
||
|
Unsecured Bank Overdraft |
750,000 |
750,000 |
100% |
||
|
Director’s Wage Payable |
450,000 |
450,000 |
100% |
||
|
Unsecured Trade Payables |
2,400,000 |
2,250,000 |
93% |
||
|
Local Government Rates |
300,000 |
0 |
0% |
||
|
Taxes Payable |
1,050,000 |
0 |
0% |
||
|
Dividends Payable |
450,000 |
0 |
0% |
||
|
Total Assets Market Value |
14,250,000 |
Total Liabilities Market Value |
16,200,000 |
14,250,000 |
|
The total amount of value recognized from the company Rock Bottom Ply ltd when the company was declared insolvent was around 14.25 million dollars however the total liabilities of the company were around 16.20 million dollars the deficit amount was around 1.95 million dollars in order to settle off and clear all the liabilities of the company (Giang and Hai 2017). The liabilities of the companies were ranked according to the nature of account and the percentage or the extent of the amount till which the liability will be paid off (Gary et al. 2016).
The use of partial goodwill was used in the case of this sum and since the company Blake Ltd acquired around 80% of the investment in Seven Ltd the same was recorded in the company’s balance sheet at the amount which is around 306,160 (He, Lu and Ongena 2016). The amount and the method of accounting used for accounting of the inter corporate investment was the use of Business Combination method under which the income and the total value of the group company acquired is reported in the consolidated financial statement and in the balance sheet of the parent company minority interest if any is shown in the balance sheet (Goyal et al. 2018).
|
Partial Goodwill Method (In the books of Blake Ltd) |
||
|
Particulars |
Amount($) |
Amount($) |
|
|
306160 |
|
|
Total Fair Market Value |
||
|
Share Capital |
172,000 |
|
|
Retained Earnings |
146,200 |
|
|
Fair Market Value of Seven Ltd |
318,200 |
|
|
Total Stake at Seven Ltd |
80% |
|
|
Fair Value of Acquisition |
254560 |
|
|
Total Goodwill |
51600 |
|
|
Minority Interest |
20% |
|
|
Total Minority Interest |
63640 |
|
Workings of Blake Ltd |
Amount($) |
|
Intra Group Sales Evaluation |
|
|
Total Sales Made to Seven Ltd from Black Ltd |
55,900 |
|
Sales done by Seven Ltd |
44,720 |
|
Percentage of Goods Unsold |
25% |
|
Share of Unrealized Profit |
|
|
[25% of 55,900] |
13,975 |
|
Closing Inventory Evaluation |
Amount($) |
|
Closing Inventory of Seven Ltd from Black Ltd |
10,320 |
|
Costs for Blake Ltd |
8,256 |
|
Profit from the Transaction |
2,064 |
|
Tax Rate |
30% |
|
Net Profit from the Transaction |
1444.8 |
|
Goodwill Calculation |
Amount($) |
|
Carrying Value of the Asset |
306,160 |
|
less: Goodwill Impairment Charges |
19350 |
|
Total Carrying Value of Goodwill |
286,810 |
|
Impairment Charges Recognized in Income Statement |
2,580 |
|
Plant and Machinery |
Amount($) |
|
Purchase Consideration Paid by Seven Ltd |
99,760 |
|
Cost Price |
116,100 |
|
Accumulated Depreciation |
46,440 |
|
Carrying Value in Blake Ltd |
69,660 |
|
Profit in the Books of Blake Ltd |
30,100 |
|
Taxation Rate |
30% |
|
Net Profit on sale of Assets |
21070 |
|
Journal Entries in the Books of Black Ltd |
|||
|
Date |
Particulars |
Amount($) |
Amount($) |
|
1.07.17 |
Seven Ltd A/c…..Dr |
3,06,160 |
|
|
To Cash/Bank A/c |
3,06,160 |
||
|
(Being Investment done in Seven Ltd Company) |
|
Income Statement |
Amount($) |
|
Income from Seven Ltd |
86,688 |
|
Impairment of Goodwill |
-2,580 |
|
Share of Unrealised Profits |
-13,975 |
|
Profit from sale of Inventory |
1,445 |
|
Profit from sale of Assets |
21,070 |
|
Total Income |
92,648 |
|
Balance Sheet |
Amount($) |
|
Beginning Value of Assets |
3,06,160 |
|
Add: Income |
92,648 |
|
Subtract: Share of division |
79,980 |
|
Ending Value |
3,18,828 |
|
Less: Minority Interest @20% |
63765.6 |
|
Total Net Value |
2,55,062 |
|
Reconciliation of opening and closing retained earnings |
Blake Ltd ($) |
Seven Ltd ($) |
|
Sales revenue |
5,93,400 |
4,98,800 |
|
Cost of goods sold |
-3,99,040 |
-2,04,680 |
|
Gross profit |
1,94,360 |
2,94,120 |
|
Dividends revenue from Seven Ltd |
63,984 |
— |
|
Management fee revenue |
22,790 |
— |
|
Profit on sale of plant |
30,100 |
— |
|
Expenses |
||
|
Administrative expenses |
-26,488 |
-33,282 |
|
Depreciation |
-21,070 |
-48,848 |
|
Management fee expense |
— |
-22,790 |
|
Other expenses |
-86,946 |
-66,220 |
|
Profit before tax |
1,76,730 |
1,22,980 |
|
Tax expense |
-52,890 |
-36,292 |
|
Profit for the year |
1,23,840 |
86,688 |
|
Retained earnings-30 June 2017 |
2,74,684 |
2,05,712 |
|
Dividends paid |
-1,18,164 |
-79,980 |
|
Retained earnings-30 June 2018 |
2,80,360 |
2,12,420 |
|
Statements of financial position |
||
|
Shareholders’ equity |
||
|
Retained earnings |
2,80,360 |
2,12,420 |
|
Share capital |
3,01,000 |
1,72,000 |
|
Current liabilities |
||
|
Accounts payable |
47,042 |
39,818 |
|
Tax payable |
35,518 |
21,500 |
|
Non-current liabilities |
||
|
Loans |
1,49,210 |
99,760 |
|
8,13,130 |
5,45,498 |
|
|
Current assets |
||
|
Accounts receivable |
51,084 |
53,578 |
|
Inventory |
79,120 |
24,940 |
|
Non-current assets |
||
|
Land and buildings |
1,92,640 |
2,80,360 |
|
Plant -at cost |
2,57,871 |
3,05,988 |
|
Accumulated depreciation |
-73,745 |
-1,19,368 |
|
Investment in Seven Ltd |
3,06,160 |
|
|
8,13,130 |
5,45,498 |
Case Study (A)
The Finance director of Northern Australia Global Investment (NAGIL), Mr. Bill Handy should record the transactions in accordance with the AASB 10 standards where the company should report the consolidated financial statements with the group or acquired company that is Struggle Ltd (Lestari and Riyadi 2018).
The loan given to the Struggle Ltd could not be recovered and henceforth the company classified its existing debt holders as equity stakeholders of the company. The consolidated net profit/loss of the Struggle Company then should be reported in the balance sheet of the company and the arising profit and loss from the company should be reported in the income statement of the company (Libby 2017).
The reasons for the decisions of the investment is based on the fact that the company will have to classify the investment as Minority Passive and the reconciliation will e done through the use of the fair value through profit and loss account. The reporting elements under the same would be as if the items in the balance sheet would be reported as fair market value and the interest income or the realized gain or unrealized gain or loss will be reported in the income statement as per the IFRS.
Case Study (B)
The Northern Australia Global Investment should report the investment with the Very Big Company Ltd (VBCL) as a perspective from the minority active perspective in this case of Interoperate Investment.
The investment in associate will be the case where the investor can extent influence on the nature of the operations of the company but cannot show any significant influence but there will be no control over the company (Nguyen and Nguyen 2018).
The reason for such an investment decision and divisions was due to the nature and the type of operations conducted and the type of transactions that were similar to the above justified base of classifications (Paugam, Astolfi and Ramond 2015).
Case Study (C)
The Case study will be reported as the case where the company will report the investment in a consolidated basis as the company enjoys a considerable amount and the amount should be consolidated with the parent company. The consolidated net profit will be shown in the income statement of the company and the balance sheet will shows a minority interest (Su and Wells 2018).
Case Study (D)
The Northern Australia Global Investments Ltd should the investment on a joint venture basis where the control is shared by two or more entities and the valuation method for the same is either equity or the proportionate consolidated method.
The reason for such an investment decision and divisions was due to the nature and the type of operations conducted and the type of transactions that were similar to the above justified base of classifications (Torkkeli and Kukkonen 2017).
Reference
Adcock, K., 2016. Healthways: A Financial Analysis and Recommendations (Doctoral dissertation, University of Mississippi).
Cassar, G., Ittner, C.D. and Cavalluzzo, K.S., 2015. Alternative information sources and information asymmetry reduction: Evidence from small business debt. Journal of Accounting and Economics, 59(2-3), pp.242-263.
Gary, R.F., Moore, J.A., Sisneros, C.A. and Terando, W.D., 2016. The impact of tax rate changes on intercorporate investment. Advances in accounting, 34, pp.55-63.
Giang, N.D. and Hai, N.X., 2017. Agency conflicts in inter-corporate asset sales.
Goyal, A., Muckley, C.B., Qian, J. and Tehranian, H., 2018. Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups.
He, Q., Lu, L. and Ongena, S., 2016. Who gains from credit granted between firms? Evidence from inter-corporate loan announcements made in China.
Lestari, S.D. and Riyadi, S., 2018. The Effect of Firm Size, Financial Leverage, and Profitability on Investment Opportunities Set Policy and Its Implications on Accounting Policy. Advanced Science Letters, 24(4), pp.2342-2346.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.
Nguyen, G. and Nguyen, H., 2018. Does Seller Status Matter in Inter-Corporate Asset Sales.
Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do purchase price allocations matter?. Journal of Accounting and Public Policy, 34(4), pp.362-391.
Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre and post IFRS adoption. Accounting Research Journal, (just-accepted), pp.00-00.
Torkkeli, A. and Kukkonen, M., 2017. Reforming capital gains taxation of intercorporate share realizations: a law and economics approach from a Nordic perspective. Nordic Tax Journal, 2017(1), pp.47-58.
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