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Faculty of Business/ Accounting DG Page 1 of 15PRACTICE Main Exam STUDENT NUMBER: (FAMILY NAME) SURNAME: OTHER NAMES: This paper and all materials issued must be returned at the end of the They are not to be removed from the exam centre. examination.Examination Conditions:22320 ACCOUNTINGCOMBINATION...

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PRACTICE Main Exam

STUDENT NUMBER:

SURNAME: (FAMILY NAME)

OTHER NAMES:

This paper and all materials issued must be returned at the end of the examination. They are not to be removed from the exam centre. Examination Conditions:

22320 ACCOUNTING FOR BUSINESS COMBINATIONS Time Allowed: 2 hours and 10 mins Includes 10 minutes of reading time. Reading time is for reading only. You are not permitted to write, calculate or mark your paper in any way during reading time.

This is a Closed Book exam Permitted materials for this exam: •

Calculators (non-programmable only)

Materials provided for this exam: •

This examination paper

Do not open your exam paper until instructed. Faculty of Business/ Accounting DG

Page 1 of 15

22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

PART A: MULTIPLE CHOICE QUESTIONS

(5 marks)

5 MCQs (1 mark each). See last lecture MCQs for practice.

END OF PART A

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22320 ACCOUNTING FOR BUSINESS COMBINATIONS

PART B: NON-CONTROLLING INTEREST AND CONSOLIDATION

(15 marks)

On 1 July 2012, Ninja Ltd acquired 70% of the share capital of Baby Ltd for $2,650,000 paid in cash. At the date of acquisition, the accounts of Baby Ltd include the following: Share Capital General reserve Retained earnings

$2,400,000 580,000 600,000

All the identifiable assets and liabilities of Baby Ltd were recorded at fair value except for the following: Carrying amount Fair value Inventory $250,000 $280,000 The inventory was sold outside the group for $240,000 by 30 June 2016. Additional information: a) The inventory of Ninja Ltd on 1 July 2016 included inventory purchased from Baby Ltd for $104,500. The original cost of the inventory was $69,500. The inventory was sold outside the group in January 2017. b) On 1 July 2016, Ninja Ltd borrowed $160,000 from Baby Ltd. This amount is to be repaid in full on 1 June 2019. The interest expense on the borrowing is $16,000 per annum. Ninja Ltd has paid $5,000 of the interest expense during the year ended 30 June 2017. c) On 1 August 2012, Ninja Ltd sold land to Baby Ltd for $1,350,000. The land originally cost Ninja Ltd $1,210,000. The land was sold outside the group by 30 June 2017. d) Ninja Ltd uses the proportionate interest goodwill method. The goodwill is not considered impaired. The financial statements of Baby Ltd for the year ended 30 June 2017 showed: Profit before tax Income tax expense Profit after tax Retained profits – opening bal Dividend paid Retained profits – closing bal Share capital General reserve

$470,000 141,000 $329,000 705,000 (70,000) $964,000 2,400,000 580,000

The applicable tax rate is 30%.

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22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

The completed acquisition analysis and consolidation entries are as follows.

Acquisition analysis Purchase price Less: FVINA Share capital General reserve Retained earnings FVA (280,000 - 250,000) x 70% Interest acquired Goodwill

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$2,650,000 $2,400,000 580,000 600,000 21,000 $3,601,000 x 70%

2,520,700 $129,300

22320 ACCOUNTING FOR BUSINESS COMBINATIONS

Consolidation entries at 30 June 2017: Elimination entry Share capital General reserve Retained earnings FVA Goodwill Investment in Sub

$ 1,680,000 406,000 420,000 14,700 129,300

2,650,000

Sale of revalued inventory Retained earnings FVA (280,000 - 250,000) x 70%

21,000

Intra group sale of inventory (upstream) Retained earnings COGS (104500 - 69500)

35,000

Income tax expense Retained earnings Intra group borrowing Accounts payable Accounts receivable Interest revenue Interest expense Interest payable Interest receivable Intra group sale of land (downstream) Retained earnings (1,350,000 - 1,210,000) Gain on sale Income tax expense Retained earnings Intra group dividend Dividend revenue Dividend paid

$

21,000

35,000 10,500 10,500

160,000 160,000 16,000 16,000 11,000 11,000

140,000 140,000 42,000 42,000

49,000 49,000

Page 5 of 15

22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

Required: i) Prepare a memorandum for the NCI share of profits for the year ended 30 June 2017 Account name Subsidiary $ NCI $

ii) Prepare a memorandum for the NCI share of shareholders’ equity as at 30 June 2017. Account name Subsidiary $ NCI $

END OF PART B

Page 6 of 15

22320 ACCOUNTING FOR BUSINESS COMBINATIONS

PART C: ACCOUNTING FOR ASSOCIATES

(20 marks)

A parent company, Reggae Ltd, acquired on 1 July 2015 a 25% voting interest (and significant interest) in Shark Ltd for $285,000 cash. At the date of acquisition, the accounts of Shark Ltd include the following: Issued capital Retained earnings General reserve Total equity

$1,500,000 300,000 100,000 $1,900,000

All the identifiable assets and liabilities of Shark Ltd were recorded at fair value except for the following: Carrying amount Fair value Equipment $65,000 $215,000 The remaining useful life of the equipment is 8 years. Additional information: (a) At 1 June 2016, Reggae Ltd sold inventory to Shark Ltd for $277,000. This inventory originally cost Reggae Ltd $202,000. By 30 June 2016, Shark Ltd has sold 40% of the inventory to third parties. The remaining inventory is sold during the year ended 30 June 2017. (b) On 1 January 2017, Shark Ltd sold equipment to Reggae Ltd for $780,000. The equipment originally cost Shark Ltd $900,000. The carrying amount at the date of sale was $750,000 and the remaining useful life of the equipment is 4 years. (c) Shark Ltd transferred $20,000 from retained earnings to general reserve in the financial year ending 30 June 2017. (d) The company tax rate is 30%.

The financial statements of Shark Ltd for the year ended 30 June 2017 showed: Profit before income tax Income tax expense Profit for the year Opening retained earnings Dividend paid Closing retained earnings

$300,000 (100,000) $200,000 400,000 (100,000) $500,000

Page 7 of 15

22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

Required: Prepare the equity accounting journal entries for Reggae Ltd to apply the equity method to account for its investment in Shark Ltd for the year ended 30 June 2017. 30 June 2017

Page 8 of 15

DEBIT

CREDIT

22320 ACCOUNTING FOR BUSINESS COMBINATIONS

30 June 2017

DEBIT

CREDIT

END OF PART C Page 9 of 15

22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

PART D: ACCOUNTING FOR JOINT ARRANGEMENTS

(15 marks)

On 1 July 2016, Beauty Ltd entered into a 50:50 joint operation with Beast Ltd to produce hair conditioner. It was agreed that each operator would share output and costs equally. Beauty Ltd’s contribution: Fair value Cash $20 million Beast Ltd’s contribution Fair value Land $3 million (carrying amount is $4 million) Plant $17 million (cost $30 million, accumulated depreciation $18 million)

For the year ended 30 June 2017, the following financial statements were prepared by the joint operation manager. Balance sheet as at 30 June 2017 Assets: $’000 Cash 2,400 Inventory-WIP 1,000 Plant 20,000 Land 16,000 Total assets 39,400 Liabilities: Creditors

600

Net assets

38,800

Operators’ capital

38,800

Costs incurred for the year ended 30 June 2017 Wages Materials Management fees Utilities Less: Hair conditioner distributed to operators Inventory-WIP

Page 10 of 15

$’000 1,000 400 600 200 2,200 1,200 1,000

22320 ACCOUNTING FOR BUSINESS COMBINATIONS

Additional information: a) Beast Ltd uses a depreciation rate of 20% for plant. b) Beast Ltd has sold 60% of the hair conditioner it received from the joint operation for a total of $1,500,000. c) Beauty Ltd was appointed manager of the joint operation. d) The tax rate is 30%.

Required (i) Beast Ltd elects NOT to adopt the fair value basis for its remaining interest in the plant and land contributed to the joint operation. Prepare all journal entries required to record the initial investment by Beast Ltd.

DEBIT

CREDIT

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22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

(ii) Prepare all journal entries recorded by Beast Ltd on 30 June 2017 to comply with AASB 11 “Joint arrangements”, including the sale of the hair conditioner. 30 June 2017

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DEBIT

CREDIT

22320 ACCOUNTING FOR BUSINESS COMBINATIONS

30 June 2017

DEBIT

CREDIT

END OF PART D Page 13 of 15

22320 ACCOUNTING FOR BUSINESS COMBINATIONS (practice main exam)

PART E: DISCUSSION QUESTION

(10 marks)

(i) Outline the arguments for the use of the management approach to segment reporting as employed by AASB 8. __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________

(ii) List three items that form part of the reconciliations required by AASB 8. _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________

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22320 ACCOUNTING FOR BUSINESS COMBINATIONS

_________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________

(iii) What is the rationale behind the disclosure of executive pay in the annual report?

__________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________

END OF PART E END OF EXAM

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