Prepare the national journal entry on consolidation to offset the carrying amount of the asset Investment in Subsidiary Ltd

Parent Ltd measures the NCI in Subsidiary Ltd at the NCI’s proportionate share of the acquiree’s INA

 

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QUESTION 1

Parent Ltd acquired equity in Sub Ltd on 1 April 2014. At that date the identifiable net assets of Sub Ltd were considered to be fairly valued and the equity of Sub Ltd comprised:

Share capital                      $100 000

Retained earnings               140 000

 

Parent Ltd is preparing financial statements for the financial year ended 31 March 2015 and has provided you with the following information:

i)The directors of Parent Ltd believe that the total goodwill has become impaired, during this financial year ended 31 March 2015, by $3 800.

 

ii)During March 2015 Sub Ltd sold inventory to Parent Ltd for $8 000; this inventory cost Sub Ltd $6 000. The inventory of Parent Ltd at 31 March 2015 included this purchase.

 

iii)During March 2015 Sub Ltd sold inventory to Parent Ltd for $3 000; this inventory cost Sub Ltd 2 400. Parent Ltd sold this inventory to XYZ Ltd on 28 March 2015 for $3 900.

 

iv)During the financial year ended 31 March 2015 Parent Ltd made sales to Sub Ltd of $4 000 and recorded a profit of $1 200. This purchase remained in the inventory of Sub Ltd as at 31 March 2015.

 

v)In October 2014 Sub Ltd borrowed $5 000 from Parent Ltd.

 

vi)Parent Ltd temporarily (for the month of February 2015) rented space in a building belonging to Sub Ltd and paid a total rental fee of $10 000.

 

vii)The tax rate is 28%.

 

Required:

Assume Parent Ltd acquired 100% of the equity in Sub Ltd for $260 000 on 1 April 2014. Complete the consolidation worksheet in the answer booklet for Parent Ltd for the financial year ended 31 March 2015 in accordance with NZ IFRS 10 Consolidated Financial Statements and NZ IFRS 3 Business Combinations.

 

 

QUESTION 2

Acquirer Ltd acquired all the issued shares of Sub Ltd for $1,400,000 cash

As at the date of acquisition: As per the general ledger

of Sub Ltd

At fair value
Accounts receivable $600,000 $485,000
Inventory 370,000 200,000
Property, plant and equipment 1,800,000 1,950,000
Intangible asset (internally generated) 200,000
Various liabilities 900,560 1,350,000
Contingent liability 3,000

 

Required:

 a)Prepare an acquisition analysis for Acquirer Ltd. Show your workings.

 

b)What does the acquirer need to do with the answer to a) when following the requirements of NZ IFRS 3?

 

QUESTION 3

On 1 April 2009 Parent Ltd acquired 70% of the equity in Subsidiary Ltd.  Parent Ltd has provided you with their incomplete consolidation worksheet for the year ended 31 March 2015.

Consolidation Worksheet for Parent Ltd for the financial year ended 31 March 2015
Parent

Ltd

$

Subsidiary Ltd

$

Notional Adjustments Group

$

Dr Cr
Income Statement and dividend items:          
Sales income 237,900 198,000
less Cost of goods sold 123,000 120,000  

 

Gross profit 114,900 78,000
Dividend income 17,000
Debenture interest income 3,500
Rent income         2,000
Gross profit and other income 135,400 80,000
less Expenses (including interest) 34,600 20,000  

 

Profit before tax 100,800 60,000
less Income tax expense 32,000 20,000
Profit after tax 68,800 40,000
Retained earnings-opening balance 24,000 12,000  

 

 

less Dividends declared 58,000 17,000
Balance sheet items:
Retained earnings–closing balance 34,800 35,000
Share capital 320,000 120,000
Asset revaluation surplus 68,000 22,000
Accounts payable and provisions 39,000 26,000
Other debt 13,000 42,840
Debentures 57,000
Total equity and liabilities $474,800   $302,840 $
Accounts receivable (net) 26,500 11,800
Inventory 69,000 57,040
Property, plant and equipment (net) 162,300 234,000
Debentures in Subsidiary Ltd 57,000            –
Investment in Subsidiary Ltd 160,000           –
Total Assets $474,800 $302,840 $

 

Question 3 continued

Additional information:

i)At the date of acquisition the equity of Subsidiary Ltd comprised:

Share capital                                $120,000

Retained earnings                         4,000

Asset revaluation surplus            6,000

 

ii)During March 2014 Subsidiary Ltd made sales to Parent Ltd and realised a profit of $2,000. This inventory remained in Parent Ltd’s inventory at year end.

 

iii)During March 2015 Subsidiary Ltd made sales to Parent Ltd and realised a profit of $6,000. Parent Ltd had not sold this inventory at year end.

 

iv)During March 2015 Parent Ltd made sales to Subsidiary Ltd and realised a profit of $2 500. The inventory of Subsidiary Ltd at year end contained this purchase from Parent Ltd.

 

v)Total Goodwill arising on acquisition (whatever the amount) has been impaired by the following amounts:

31 March 2015                             $5 000

31 March 2013                               2 000

31 March 2010                               1 200

 

Required:

a) For each of the two independent scenarios described below prepare the national journal entry on consolidation to offset the carrying amount of the asset Investment in Subsidiary Ltd and the parent’s portion of equity in Subsidiary Ltd.

In relation to the identifiable net assets of Subsidiary Ltd as at the date of acquisition:

 

Scenario 1: The identifiable net assets were considered to be fairly valued.

 

Scenario 2:  The identifiable net assets were not considered to be fairly valued.  Property, plant and equipment had a carrying amount of $180 000 but a fair value of $200 000. Subsidiary Ltd also had an unrecognised intangible asset of $10 000 and a contingent liability of $3 000.
b) For each of the two independent scenarios described above prepare the national journal entry to identify the non-controlling interest (NCI) in Subsidiary Ltd to be reported in the group accounts as at 31 March 2015.

For each of the two independent scenarios assume:

i)Parent Ltd measures the NCI in Subsidiary Ltd at fair value, and then assume

 

ii)Parent Ltd measures the NCI in Subsidiary Ltd at the NCI’s proportionate share of the acquiree’s INA.

 

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