On 30 June 2014, P Ltd purchased 100% of the shares of S Ltd for $3,400,000 cash.
At the date of acquisition S Ltd’s Statement of Financial Position was as follows:
Statement of Financial Position of S Ltd as at 30 June 2014
Assets Liabilities
Cash 179,000 Accounts Payable 337,000
Accounts Receivable 473,000 Mortgage Loans 2,153,000
Inventory 348,000 Deferred Tax Liabilities 150,000
Land 1,600,000
Buildings 2,400,000 Equity
(Accumulated Depreciation) (560,000) Share Capital 1,900,000
Plant and Equipment 950,000 Revaluation Surplus 350,000
(Accumulated Depreciation) (190,000) Retained Profits 310,000
Total Assets 5,200,000 Total Equities 5,200,000
Additional Information:
a) On 30 June 2014, all the identifiable net assets of S Ltd were considered to be recorded at fair value in S Ltd’s Statement of Financial Position, except land, which had a fair value of $2,000,000. The land has not been revalued in S Ltd’s accounts.
b) On 30 June 2018, the recoverable amount of goodwill, relating to the purchase of S Ltd by P Ltd, was assessed to be $425,000. On 30 June 2019, the recoverable amount of goodwill, relating to the purchase of S Ltd by P Ltd, was assessed to be $370,000.
c) During the 2018-2019financial year, P Ltd provided management services to S Ltd for $46,000.
d) On 1 December 2018, S Ltd leased surplus office space in its building to P Ltd, at a rental of $17,000 per month. Rent is payable quarterly (three monthly) in advance, on 1 December, 1 March, 1 June and 1 September each year.
e) During 2018-2019 financial year, S Ltd sold goods to P Ltd for $1,210,000. These goods had originally cost S Ltd $850,000. On 30 June 2019, 25% of these goods remained in P Ltd’s closing inventory.
f) On 30 June 2019, P Ltd still owed S Ltd $144,000 for inventory purchases.
g) On 1 July 2018, P Ltd’s opening inventory includes goods purchased from S Ltd for $278,000. These goods had originally cost S Ltd $203,000.
h) On 1 July 2018, P Ltd sold plant and equipment to S Ltd for $980,000. P Ltd had originally purchased the plant and equipment for $1,300,000 on 1 July 2015. The original estimated useful life of the plant and equipment was 10 years.
i) The income tax rate is 30%.
Statements of Profit or Loss of P Ltd and S Ltd for the year ended 30 June 2019
P Ltd S Ltd
Sales 10,820,000 5,710,000
Cost of Goods Sold 7,657,000 3,960,000
Gross Profit 3,163,000 1,750,000
Depreciation Expense 460,000 315,000
Borrowing Cost Expense 621,000 129,000
Administration Expenses 1,243,000 835,000
Management Fee Revenue 46,000 –
Rental Revenue – 119,000
Dividend Revenue 195,000 –
Gain on Sale of Plant and Equipment 70,000 –
Profit before Income Tax Expense 1,150,000 590,000
Income Tax Expense 345,000 177,000
Profit after Income Tax Expense 805,000 413,000
Statements of Changes in Equity of P Ltd and S Ltd for the year ended 30 June 2019 [Extract]
P Ltd S Ltd
Retained Profits 1/7/18 1,145,000 1,032,000
Profit after Income Tax Expense 805,000 413,000
Interim Dividend Paid 165,000 (85,000
Final Dividend Declared 175,000 110,000
Retained Profits 30/6/19 1,610,000 1,250,000
Statements of Financial Position of P Ltd and S Ltd as at 30 June 2019
P Ltd S Ltd
Assets
Cash 436,000 211,000
Accounts Receivable 1,092,000 563,000
Dividends Receivable 110,000 –
Prepaid Rental Expense 34,000 –
Inventory 828,000 461,000
Land 3,120,000 1,600,000
Buildings 7,050,000 2,400,000
(Accumulated Depreciation) (2,820,000) (960,000)
Plant and Equipment 2,250,000 1,930,000
(Accumulated Depreciation) (450,000) (805,000)
Investment in S Ltd 3,400,000 –
Total Assets 15,050,000 5,400,000
Liabilities
Accounts Payable 798,000 412,000
Dividends Payable 175,000 110,000
Unearned Rental Revenue – 34,000
Mortgage Loans 5,697,000 1,194,000
Deferred Tax Liabilities 630,000 150,000
Equity
Share Capital 4,670,000 1,900,000
Revaluation Surplus 1,470,000 350,000
Retained Profits 30/6/19 1,610,000 1,250,000
Total Equities 15,050,000 5,400,000
Required:
Prepare the Consolidation Worksheet Journal entries for the financial year ended 30 June 2019. Show all workings necessary to derive your answer.
Advice:
Remember each year when you consolidate at reporting date, the consolidation commences with the completed financial statements of the parent and its subsidiary at consolidation date. TheConsolidation Worksheet Journal Entries recorded in previous year’s consolidations, are only recorded in the consolidation worksheet. They are never recorded in the accounts of the Parent or its Subsidiary. Therefore, the accounts of the Parent and its Subsidiary at consolidation date do not include any pastConsolidation Worksheet Journal Entries. If theseConsolidation Worksheet Journal Entries are still relevant, they need to be repeated, (in some cases also updated when repeated) in the current year’s consolidation.
During the financial year, each entity in the group maintains separate accounting records, recording all transactions they are involved in. At year end, each entity in the group records reporting date adjustments, in order to complete their financial statements for year.
When consolidating, the objective is to show the group as one economic entity. Therefore, all effects of transactions which occur within the group need to eliminated; balances owing within the group need to be eliminated; unrealised profits (losses) obtained (incurred) within group need to be eliminated, upon consolidation.
Please refer to Lecture Slides for Module 8, slides 17-54, and Lecture Slides for Module 9. The Lecture Slides for Module 10, slides 32 to 39 are also helpful, (which is based on example 27.3 from the textbook. Slides 32 to 39 contain the solution to example 27.3). [Ignore the section on calculation and recording of non-controlling interest in slides 40 to 43, that will be relevant to the Weekly Work for Module 10].
Also see examples in Past ACCT 2178 Exam and Exam Solutions: 2017, Session 2 exam, Q3; 2017, Session 3 exam, Q4; 2018, Session 2 exam, Q4; and 2018, Session 3 exam, Q4, Part B.
