AASB 116 requires each class (a category of non-current assets having a similar nature or function) of property, plant and equipment to be measured at either cost or revaluation model (fair value). Under the revaluation model, equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Entities may switch from fair value to cost for justifiable reasons and provided adequate disclosures are made (AASB 116).
Using no more than 2,000 words (including introduction and conclusion, but excluding references), you are required to write an essay to answer the following questions. Support your answer by citing creditable references such as newspapers and articles from practitioner (professional) journals and scholarly journal articles.
Questions:
- What are the pros and cons of choosing fair value method? Provide at least three for each pros and cons and explain in (Suggested no. of words: 600-800)
- Name two types of companies that are more likely to choose to revalue non-current Why? Provide examples. (Suggested no. of words: 300 – 400)
- Discuss any managerial discretions available to the firms when revaluing/devaluing non-current assets? (Suggested of words: 300 – 400)
- What are the economic consequences of asset revaluations? (Suggested words: 300 – 400)
Part B – Group Accounting – Consolidation (100 Marks in total, 60% of assignment)
On 1 July 2011, East Limited purchased 70% of West Limited’s shares for $600,000 cash. On that day, the equity of West Ltd was:
| Share capital | $520,000 |
| Retained earnings | 220,000 |
| $740,000 |
At the time of acquisition, West Ltd recorded all its assets at their fair values except for an item of plant and some land. East Ltd considered that an item of plant shown in the accounts of West Ltd was less than the fair value. The fair value should be 84,000 not 60,000 as shown in West Ltd’s accounts. The plant was assessed to have a remaining useful life of 6 years and was to be depreciated on a straight-line basis. The land was recorded in the accounts of West Ltd of $50,000 and East Ltd considered its fair value to be $60,000. On 25 May 2016, the land was sold to an unrelated party of East Ltd and West Ltd. On 30 June 2016, the financial statements of East Ltd and West Ltd are as follows:
Statements of Financial Position of East Ltd and West Ltd as at 30 June 2016
| East Ltd | West Ltd | |||
| Assets | ||||
| Cash | 435,700 | 451,460 | ||
| Accounts Receivable | 216,000 | 95,800 | ||
| Less: Allowance for doubtful accounts | (19,500) | 196,500 | (8,590) | 87,210 |
| Dividend Receivable | 67,500 | 0 | ||
| Inventory | 279,000 | 51,210 | ||
| Total Current Assets | 978,700 | 589,880 | ||
| Non-current assets | ||||
| Deferred Tax assets | 72,000 | 37,000 | ||
| Investment in West Ltd | 600,000 | 0 | ||
| Land | 235,000 | 160,000 | ||
| Property, Plant and Equipment (PPE) | 1,600,000 | 1,200,000 | ||
| Less: Accumulated depreciation of PPE | (400,000) | 1,200,000 | (450,000) | 750,000 |
| Total non-current assets | 2,107,000 | 947,000 | ||
| Total Assets | 3,085,700 | 1,536,880 | ||
| Liabilities and Equity | ||||
| Current Liabilities | ||||
| Accounts Payable | 48,600 | 42,580 | ||
| Dividend Payable | 150,000 | 100,000 | ||
| Income tax payable | 378,000 | 73,000 | ||
| Other payable | 10,900 | 13,500 | ||
| Total current liabilities | 587,500 | 229,080 | ||
| Non-Current Liabilities | ||||
| Bank Loan | 250,000 | 0 | ||
| Total Liabilities | 837,500 | 229,080 | ||
| Shareholders’ Equity | ||||
| Share capital | 1,080,000 | 585,000 | ||
| Retained earnings | 945,000 | 692,000 | ||
| Revaluation Reserve | 223,200 | 30,800 | ||
| Total shareholders’ equity | 2,248,200 | 1,370,800 | ||
| Total Equity and Liabilities | 3,085,700 | 1,536,880 | ||
Statements of Comprehensive Income of East Ltd and West Ltd for the year ended 30 June 2016
| East Ltd | West Ltd | |
| Sales revenue | $4,410,600 | $2,769,930 |
| Cost of goods sold | (1,708,600) | -1,659,400 |
| Gross profit | 2,702,000 | 1,110,530 |
| Other income (expense) | -245,650 | 22,500 |
| Operating income | 2,456,350 | 1,133,030 |
| Expenses | (1,757,640) | (860,200) |
| Net profit before tax | 698,710 | 272,830 |
| Income tax expenses | (209,613) | (81,849) |
| Net profit after tax (NPAT) | $489,097 | $190,981 |
| Retained earnings at 1 July 2015 | 605,903 | 601,019 |
| Dividend declared and approved, but not yet paid | (150,000) | (100,000) |
| Retained earnings at 30 June 2016 | $945,000 | $692,000 |
The following information is available at 30 June 2016:
- During the financial year ending 30 June 2016, West Ltd sold inventory to East Ltd for $250,000. The inventory cost West Ltd $200,000 to 60% of this inventory was sold to other entities outside the group at the end of the financial year. Both East Ltd and West Ltd use the perpetual inventory system.
- During the financial year ending 30 June 2015, West Ltd had sold inventory to East Ltd at a price of
$140,000. The cost of the inventory was $60,000. For the financial year ended 30 June 2015, only 25% of this inventory had been sold by East Ltd to its customers. During the financial year ending 30 June 2016, a further 70% of the opening balance of this inventory was sold by East Ltd to its customers.
- West Ltd sold an item of plant to East Ltd for $160,000 on 1 July The original cost of this plant was
$200,000 and the carrying amount was $140,000 as at 1 July 2014. East Ltd estimated this item of plant had a remaining useful life of four years with no residual value.
- East Ltd sold an item of equipment to West Ltd for $35,000 on 31 January The carrying amount recorded in East Ltd’s account was $40,000 as at 31 January 2016. The equipment has an estimated remaining useful life of five years with no residual value.
- The recoverable amount of goodwill as at 30 June 2016 was determined to be $75,000. As at 30 June 2015, goodwill has been impaired for $10,000. Prior to 30 June 2015, no impairment loss was recorded because the carrying amount of goodwill was lower than its recoverable
- Dividend was declared and approved by West Ltd on 1 June No other dividend had been paid by West Ltd during the financial year.
- Income tax rate is 30%
Required:
- Prepare acquisition analysis on 1 July 2011, and journal entries to record the acquisition of 70% interest in West Ltd in East Ltd’s records. (10 marks)
- Prepare the consolidated adjustments for East Ltd and its controlled entity on 30 June 2016, and offset deferred tax liabilities as at 30 June 2016 (if any) with deferred tax assets arose from the consolidation (45 marks)
- Calculate non-controlling interest (NCI) in the profit for the financial year ended 30 June 2016, the opening retained earnings as at 1 July 2015, and the reserves and share capital as at 30 June Prepare the consolidated entries for NCI for the financial year ended 30 June 2016. (15 marks)
- Using the format of the template provided, complete a consolidation worksheet and post all consolidation journal entries into the (30 marks)
