BCVR entries - Lecture Illustration PDF

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BCVR entries: Example Hitech Ltd acquired all the shares of Lotech Ltd on 1 July 2016. All assets were recorded at fair value, except for the following:

Inventory Land Plant (cost $200,000)

Carrying amount $10,000 $250,000 $150,000

Fair value $12,000 $260,000 $190,000

All inventory was sold in August 2016. Land was sold in May 2018. Plant had a further four-year life with zero residual value. The tax rate is 30%. BCVR entries as at 1 July 2016: Inventory, land and plant are still on hand DR Inventory

2,000 CR BCVR CR DTL

1,400 (70%) 6,000 (30%)

Asset increase  DR, changing its value from the CA to FV Equity increase  CR DTL because CA of the asset is increased to FV, no info about changes in the tax base and therefore we assume that the tax base is constant  CA (FV) > TB  DTL DR Land

10,000 CR DTL CR BCVR

DR Acc Depn

3,000 (30%) 7,000 (70%) 50,000

CR Plant DR Plant

50,000 40,000

CR DTL CR BCVR

12,000 (30%) 28,000 (70%)

Cost = 200k CA = 150k Subsidiary has recorded an acc depn of 50k CA – FV = 150k – 190k = 40k BCVR entries as at 30 June 2017  One year since acquisition date  Inventory was sold in Aug 2016 Subsidiary records: DR Cost of Sales CR Inventory CR Accounts Receivable/Cash CR Sales

10,000 10,000 xx xx

Our concern is the GROUP  in consolidation worksheet: DR Cost of sales 2,000 CR Income tax expense CR Transfer from BCVR (RE)

600 (30%) 1,400 (70%)

Expense increase  Profit decrease  ITE Decrease  CR Land is still on hand  same entry as above DR Land 10,000 CR DTL

3,000 (30%)

CR BCVR

7,000 (70%)

Plant is still on hand  same entry as above DR Acc Depn 50,000 CR Plant DR Plant 40,000 CR DTL CR BCVR

50,000 12,000 (30%) 28,000 (70%)

 Depn recorded by subsidiary: 150,000/4yrs = $37,500  Depn recorded by group: 190,000/4yrs = $47,500 (because the group follows it at FV)  ADJUSTMENT required = $10,000 pa DR Depn Expense

10,000 CR Acc Depn

DR DTL

10,000 3,000

CR ITE

3,000 (30%)

BCVR entries for 30 June 2018:  Inventory sold in the previous year  NO BCVR ENTRY REQUIRED FOR INVENTORY Land is sold in the current year Subsidiary records: DR CA of land sold

250,000 CR Land 250,000 Land is not depreciated and therefore the CA remains the same cf plant which depreciates DR Cash xx CR Proceeds xx For the group  in consolidation worksheet DR CA of land sold (200k – 190k) 10,000 CR Income tax expense CR Transfer from BCVR (RE) Plant is still on hand  same entry as above DR Acc Depn 50,000 CR Plant DR Plant 40,000 CR DTL CR BCVR DR Depreciation expense DR RE (op)

3,000 (30%) 7,000 (70%)

50,000 12,000 (30%) 28,000 (70%)

10,000 10,000 CR Acc depn

DR DTL

20,000 6,000

CR ITE CR RE (op)

3,000 3,000

Account from previous year’s depn – adjusted into this year from last year Depn this year...