Week 9 lecture examples 2018 - student PDF

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Week 9 Lecture examples Lecture example 1 Wonder Ltd obtained control of Bat Ltd by purchasing 100% of its share capital on 30 June 20X7. At the control date, the carrying amounts and fair values of Bat Ltd’s assets differed: Carrying amount ($) Equipment (cost $80 000 with nil residual value) Land

50 000 600 000

Fair value ($) 58 000 800 000

Additional information: 

A patent (not recognized by Bat Ltd) was assessed to have a fair value of $40 000 on 30 June 20X7.



The group uses the revaluation model for land and equipment, while Bat Ltd applied the cost model until 30 June 20X8. It was estimated that the fair value of the land was $900 000 on 30 June 20X8.



The equipment had a further 4 years’ useful life at 30 June 20X7. The group and Bat Ltd both apply straight-line depreciation to equipment.



The group policy is to apply straight-line depreciation to its machinery. However, Bat Ltd applied accelerated depreciation to its machinery. Hence, as at the control date, Bat Ltd’s depreciation for machinery was overstated by $1 500 at the control date. Bat Ltd changed to straight-line depreciation for its machinery after the control date.

Required: Prepare the journal entries for the required data adjustments as at 30 June 20X8.

1

Answer:

2

Lecture example 2 (built on Week 8 lecture example 1) Daddy Ltd acquired all the shares of Son Ltd for $470 to get control. Fair values for Son Ltd’s Accounts receivable, inventory and other PPE assets (property, plant and equipment) were, respectively, $75, $65 and $385. The subsidiary (Son Ltd) used the cost model for PPE and continued to do so after the control date. Assume the PPE assets (in other assets (net)) are not depreciable. After one year, goodwill was found to be impaired by $25. The worksheet below shows the position of the two companies one year after the control date. Required: Complete the columns of Eliminations and Group in the worksheet below. Combined consolidation worksheet: 1 year after control date Daddy Net profit

Son

Adjustments DR CR

Sum

25

35

Group net profit SOP retained profits Less: Dividends Retained profits Share capital Reserves Owners' equity Accounts payable Estimated bad debts

30 55 400 200 655 420 -

120 155 200 70 425 115 -

Total equity, liabilities,

____

____

____

and provisions

1075

_540

1655

65 150 105 470

20 80 90 -

85 230 200 470

Cash Accounts receivable Inventory Investment in Son

Total assets

Group

60

10 1

2/3

1

140

110 1

40

600 310

200 1 110 1

10

535 10

5 2

____

1

470

50 1

Consolidation goodwill

Other assets (net)

Eliminations DR CR

285

350

____

____

1075

_540

35 3 ___ _ 50

670 ___ _ 50

____

___

___

____

1655

3

Lecture example 3 Jackie Ltd purchased all the equity of Kyle Ltd on 1 July 20X3 for $257 000. At control date, fair value of Kyle’s net assets was $54 000 higher than their carrying amount. Kyle uses the revaluation model for PPE but as of control date the fair value was not accurately recorded. During the year ended 30 June 20X4, Kyle:  made profit of $37 000.  paid a dividend of $30 000 from its current profits;  restated its net asset to their fair value at the control date. Jackie’s profit (other than from dividends) for the year to 30 June 20X4 was $23 000. Required: Complete the following worksheets (1 July 20X3 and 30 June 20X4). Consolidation worksheet at 1 July 20X3 — Balance sheet Jackie

Kyle

Adjustments Dr Cr

Paid-up capital Reserves Retained profits

650 000 145 000 76 000 – 34 000 38 000

Owners’ equity

760 000 183 000

Investment in Kyle

257 000

Other net assets

503 000 183 000

Net assets

760 000 183 000

–

Sum

Eliminations Dr Cr

Group

1 257 000

4

–

Combined consolidation worksheet at 30 June 20X4—extracts Jackie

Kyle

Adjustments Dr Cr

Sum

Eliminations Dr Cr

Group

Revenue less expenses Retained profits (opening) Less: Dividends Retained profits Reserves Paid-up capital

53 000 34 000 -87 000 76 000 650 000

37 000 38 000 30 000 45 000 54 000 145 000

Owners’ equity

813 000

244 000

1 057 000

Investment in Kyle Consolidation goodwill Other assets (net)

257 000

–

257 000

556 000

244 000

800 000

– 20000 800 000

Net assets

813 000

244 000

1 057 000

820 000

90 000 72 000 38000 1 30 000 132 000 130 000 54 000 1 795 000 145 000 1

60 000 34 000 --94000 76000 650 000 820 000

1 20000 1

257 000

Explanations: 

Jackie retained profits of $87 000 is the SOP/opening balance + (profit of the period + dividends from Kyle), that is, $87 000 = $34 000 + ($23 000 + 30 000).



No adjustment is now needed because the Kyle’s carrying amounts have been revised to include the control date fair values for its net assets.



Elimination 1: Substitution including recognition of consolidation goodwill.



Elimination 2: Elimination of dividend.

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