Case study of Paris Ltd and Sandy Ltd
Paris Ltd and Sandy Ltd are companies involved with the food manufacturing industry in Western Australia.
Balance sheet information for the two companies at 30 June 2016 is as follows:
| Paris Ltd | Sandy Ltd | |
| Retained earnings at 30 June 2016 | 54 400 | 38 400 |
| Share capital | 240 000 | 80 000 |
| General reserve | 37 600 | 8 000 |
| Other components of equity | 10 400 | 8 000 |
| Debentures | 160 000 | 80 000 |
| Current tax liability | 20 000 | 13 600 |
| Dividend payable | 8 000 | 4 000 |
| Deferred tax liabilities | 12 000 | 5 600 |
| Other current liabilities | 60 000 | 9 600 |
| Total equity and liabilities | $602 400 | $247 200 |
| Shares in Sandy Ltd | $115 000 | — |
| Debentures in Sandy Ltd | 80 000 | — |
| Plant | 96 000 | $81 600 |
| Accumulated depreciation | (52 000) | (44 000) |
| Intangibles | 60 800 | 44 000 |
| Accumulated amortisation | (32 000) | (20 000) |
| Deferred tax assets | 58 600 | 24 000 |
| Financial assets | 40 000 | 48 000 |
| Land | 120 000 | 45 600 |
| Inventory | 72 000 | 44 000 |
| Receivables | 44 000 | 24 000 |
| Total assets | $602 400 | $247 200 |
Income statement information for the two companies at 30 June 2016 is as follows:
| Paris Ltd | Sandy Ltd | |
| Sales revenue | $252 800 | $176 000 |
| Debenture interest | 4 000 | — |
| Management and consultation fees | 4 000 | — |
| Dividends | 9 600 | — |
| Total revenue | 270 400 | 176 000 |
| Cost of sales | (104 000) | (68 000) |
| Manufacturing expenses | (82 000) | (53 000) |
| Depreciation on plant | (12 000) | (12 000) |
| Administrative expenses | (12 000) | (6 400) |
| Financial expenses | (8 800) | (4 000) |
| Other expenses | (11 200) | (9 600) |
| Total expenses | 230 000 | 153 000 |
| Profit from trading | 40 400 | 23 000 |
| Gains on sale of non-current assets | 10 000 | 5 000 |
| Profit before income tax | 50 400 | 28 000 |
| Income tax expense | (20 000) | (13 600) |
| Profit for the year | 30 400 | 14 400 |
| Retained earnings at 1 July 2015 | 40 000 | 36 000 |
| 70 400 | 50 400 | |
| Dividend paid | (8 000) | (8 000) |
| Dividend declared | (8 000) | (4 000) |
| (16 000) | (12 000) |
Background:
Paris Ltd acquired 80% of the shares of Sandy Ltd on 1 July 2013 for $115 000. At this date the equity of Sandy Ltd consisted of:
| Share capital (100 000 shares)
General reserve Retained earnings |
$ 80 000
2 400 29 600 |
All the identifiable assets and liabilities of Sandy Ltd were recorded at amounts equal to their fair values except for:
| Carrying amount | Fair value | |
| Plant (cost $65 000) | $52 000 | $56 000 |
| Land | 40 000 | 45 000 |
| Inventory | 25 000 | 28 000 |
The plant was expected to have a further useful life of 10 years. The land was sold on 1 January 2016. The inventory was all sold by 30 June 2014. Paris Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2013 was $28 000. At 1 July 2013, Sandy Ltd had unrecorded brands that had a fair value of $18 000. These had an indefinite life.
Further information
- Management and consultation fees derived by Paris Ltd are all from Sandy Ltd and represent charges for administration $1 760 and technical services for the manufacturing section $2 240.
- All debentures issued by Sandy Ltd are held by Paris Ltd.
- Other components of equity relate to movements in the fair values of financial assets held by the entities. Gains and losses on these financial assets are recognised in other comprehensive income. The balance of the other components of equity account at 1 July 2015 was $8 000 (Paris Ltd) and $6 400 (Sandy Ltd).
- Sandy Ltd had inventory on hand at 30 June 2015 that included inventory at cost of $8 000 that had been sold to it by Paris Ltd. This inventory had cost Paris Ltd $6 000. It was all sold by Sandy Ltd by 30 June 2016.
- During the 2015–16 year, Sandy Ltd sold inventory to Paris Ltd for $48 000. At 30 June 2016, Paris Ltd still had some of this inventory on hand. This inventory had been sold to it by Sandy Ltd at a profit of $4 000.
- On 1 January 2015, Sandy Ltd sold plant to Paris Ltd for $16 000. This had a carrying amount in Sandy Ltd at time of sale of $12 000. Plant of this class is depreciated at 20% p.a.
Required:
- a) Prepare the consolidated financial statements of Paris Ltd and its subsidiary as at 30 June 2016 (Consolidated Statement of Profit or Loss and Other Comprehensive Income, Consolidated Statement of Financial Position and Consolidated Statement of Changes in Equity).
Show all workings including the following:
- Acquisition analysis
- Business combination valuation entries (including narrations)
- Worksheet and
- Calculation of the non-controlling interest (NCI).
(30 marks)
- b)
- i) Explain what the partial and full goodwill methods are used for and the main differences between the methods. (5 marks)
- ii) Explain the main steps taken by the parent company’s group accountant when he/she wishes to produce consolidated accounts. E.g. What will he/she do first? What next? What documents does he/she need? You need to explain the main steps – not the detail on how to do the step. (5 marks)
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