Exam Revision - Consolidation Self-Study Q2 Solutions PDF

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Topic 2 Tutorial Questions - Student SolutionsTopic 2 Tutorial Questions - Student SolutionsTopic 2 Tutorial Questions - Student Solutions...

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Suggested Solution to Self-Study Consolidation Worksheet Question 2 Acquisition Analysis: Carrying Amount of Net Assets + Land (7,000 x 0.7) + Inventory (4,000 x 0.7) less Liability (12,000 x 0.7) Consideration Paid Goodwill

$99,000 4,900 2,800 (8,400) 98,300 $105,000 $6,700

BCVR at acquisition = $6,000. During 2014 the BCVR on inventory is transferred to retained earnings as a result of the sale of the inventory. The new balance of the BCVR is then $3,200. 2015 Year: (Although entries are provided below, they will only be marked if they are in the spreadsheet). BCVR entries Dr Transfer from BCVR 8,400 Dr Income Tax Expense 3,600 Cr Other Expenses 10,000 Cr Gain on Settlement 2,000 (Settlement of Legal Dispute) Dr Land

7,000 Cr DTL 2,100 Cr BCVR 4,900

Dr Goodwill 6,700 Cr BCVR

6,700

Elimination of Parent’s Investment entries: Dr Share Capital 30,000 Dr General Reserve 15,000 Dr Retained Earnings 56,800 Dr BCVR 3,200 Cr Investment in Achilles 105,000 (Amounts in RE and BCVR reflect post-transfer of BCVR for inventory) Dr BCVR 8,400 Cr Transfer from BCVR 8,400

Item (c) Sale of Equipment Entries: Book Value of equipment was $25,000 – 23,000 cash received = loss on sale of $2,000. Tax effect is $600 DTL. Dr Plant

2,000 Cr Opening R. E.

Dr Opening R. E. Cr DTL

2,000

600 600

Depreciation. ½ in 2014, full year in 2015. $2,000/5 = $400/year. Tax effect = $120/year. Dr Opening R. E. 200 Cr Accum. Depn Dr DTL

60 Cr Opening R. E.

Dr Depn Expense 400 Cr Accum. Depn Dr DTL

200

60

400

120 Cr Income Tax Expense 120

Item (d) Management Fees entry: Dr Other Revenue 8,000 Cr Other Expenses 8,000 Item (e) 2014 profit in ending inventory entries: $16,000 x 0.25 = $4,000. $4,000 x 0.3 = 1,200 tax effect. Dr Opening R. E. 4,000 Cr Cost of Goods Sold 4,000 Dr DTA

1,200 Cr Opening R. E.

Dr Income Tax Expense 1,200 Cr DTA

1,200

1,200

Item (f) 2015 intra group sales with no unrealised profit entry: Dr Sales

12,000 Cr Cost of Goods Sold

12,000

Item (g) 2015 intra-group sales with unrealised profit entries: Dr Sales

Dr DTA

14,000 Cr Cost of Goods Sold Cr Inventory

11,600 2,400

720 Cr Income Tax Expense

720

Intra-group dividend entry: Dr Dividend Revenue Cr Dividend Paid

20,000 20,000

Intra-group loan entry: Dr Borrowing from Ajax Ltd 100,000 Cr Loan to Achilles Ltd 100,000

Intra-company interest entry: Dr Interest Revenue 10,000 Cr Interest Expense 10,000

Ajax Ltd Sales

Achilles Ltd

Dr

Cr

$300,000

$210,000

Less Cost of Goods Sold

140,000

120,000

Gross Profit

160,000

90,000

add Other Revenue

10,000

12,000

8,000

add Dividend Revenue

20,000

-

20,000

add Interest Revenue

10,000

1,000

10,000

-

(2,000)

(20,000)

(14,000)

-

(10,000)

10,000

(115,000)

(55,000)

8,000 + 10,000

65,000

22,000

Income Tax Expense

(19,500)

(6,600)

Net Profit After Tax

$45,500

$15,400

Opening Retained Earnings

67,000

64,000

Less Dividends Paid

(6,000)

(20,000)

(12,000)

-

-

-

$94,500

$59,400

Share Capital

80,000

30,000

30,000

General Reserve

45,000

15,000

15,000

-

-

8,400 + 3,200

$219,500

$104,400

Gain/(Loss) on Sales of Assets or Settlement of Liabilities less Depreciation Expense less Interest Expense less Other Expenses Profit before Tax

Less Dividends Payable Transfer from BCVR Ending Retained Earnings

Business Combination Valuation Reserve Total Net Assets

12,000 + 14,000 4,000 + 12,000 + 11,600

2,000 400

1,200 + 3,600

120 + 720

56,800 + 600 + 200 + 4,000

2,000 + 60 + 1,200 20,000

8,400

8,400

4,900 + 6,700

Ajax Ltd Cash

Achilles Ltd

Dr

Cr

$10,000

$8,000

15,000

6,000

8,000

12,000

-

-

1,200 + 720

Plant and Equipment

100,000

190,000

2,000

less Accumulated Depreciation

(60,000)

(58,000)

40,000

85,000

Investment in Achilles

105,000

-

105,000

Loan to Achilles (10% p.a. interest) Goodwill

100,000

-

100,000

-

-

Total Assets

$318,000

$243,000

Accounts Payable

$(45,000)

$(38,600)

Dividend Payable

(12,000)

-

-

-

-

-

(41,500)

-

-

(100,000)

-

-

219,500

$104,400

Debtors Inventory Deferred Tax Asset

Land

Deferred Tax Liability

Long Term Loan Borrowings from Ajax (10% p.a. interest)

Net Assets

2,400 1,200

200 + 400 7,000

6,700

60 + 120

100,000

600 + 2,100...