Question 21.15 Full goodwill method, consolidated financial statements On 1 July 2014, Mudlark Ltd acquired 80% of the shares of Peewee Ltd on an ex div basis for $305 600. At this date, all the identifiable assets and liabilities of Peewee Ltd were recorded at amounts equal to fair value except for: Carrying amount Fair value Inventory $120 000 $130 000 Machinery (cost $200 000) 160 000 165 000 At 30 June 2014, Peewee Ltd had recorded a dividend payable of $10 000. The inventory on hand at 1 July 2014 was all sold by 30 November 2014. The machinery had a further 5-year life, but was sold on 1 April 2017. At acquisition date, Peewee Ltd reported a contingent liability of $15 000 that Mudlark Ltd considered to have a fair value of $7000. This liability was settled in June 2015 for $10 000. At acquisition date, Peewee Ltd had not recorded an asset relating to equipment design as the asset was still in the research phase. Mudlark Ltd placed a fair value on the asset of $12 000, reflecting expected benefits existing at acquisition date. The asset was considered to have a further 10-year life. On 1 January 2016, the asset met the requirements of IAS 38 Intangible Assets and subsequent expenditure by Peewee Ltd on the asset was capitalised. Mudlark Ltd uses the full goodwill method. At 1 July 2014, the fair value of the non- controlling interest was $75 000. Additional information (a) On 1 July 2015, Peewee Ltd sold an item of plant to Mudlark Ltd at a profit before tax of $4000. Mudlark Ltd depreciates this class of plant at a rate of 10% p.a. on cost while Peewee Ltd applies a rate of 20% p.a. on cost. (b) At 30 June 2016, Mudlark Ltd had on hand some items of inventory purchased from Peewee Ltd in June 2015 at a profit before tax of $500. These were all sold by 30 June 2017. (c) During the 2016–17 period Mudlark Ltd sold $12 000 inventory to Peewee Ltd at a mark- up of 20% on cost. $3000 of this inventory remains unsold by 30 June 2017. (d) The other components of equity relate to financial assets. These assets are measured at fair value with movements in fair value being recognised in other comprehensive income. (e) The parent and the subsidiary are considered to be separate cash generating units. Management have analysed the impairment indicators on an annual basis and conducted an impairment test on the subsidiary cash generating unit in the 2015–16 year, which resulted in the writing down of goodwill in the records of the subsidiary by $4000. There have been no other business combinations involving these entities since 1 July 2014. (f) The tax rate is 30%. (g) Shareholder approval is not required in relation to dividends. (h) On 30 June 2017 the trial balances of Mudlark Ltd and Peewee Ltd were as follows: Debit balances Mudlark Ltd Peewee Ltd Shares in Peewee Ltd $305 600 — Inventory 180 000 $60 000 Financial assets 229 000 215 000 Other current assets 10 000 2 000 Deferred tax assets 15 800 8 000 Plant 452 100 303 000 Land 144 200 42 000 Equipment design — 18 000 Goodwill 20 000 22 000
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Question 21.15 Full goodwill method, consolidated financial statements On 1 July 2014, Mudlark Ltd acquired 80% of the shares of Peewee Ltd on an ex div basis for $305 600. At this date, all the identifiable assets and liabilities of Peewee Ltd were recorded at amounts equal to fair value except for: Carrying amount Fair value Inventory $120 000 $130 000
Machinery (cost $200 000) 160 000 165 000 At 30 June 2014, Peewee Ltd had recorded a dividend payable of $10 000. The inventory on hand at 1 July 2014 was all sold by 30 November 2014. The machinery had a further 5-year life, but was sold on 1 April 2017. At acquisition date, Peewee Ltd reported a contingent liability of $15 000 that Mudlark Ltd considered to have a fair value of $7000. This liability was settled in June 2015 for $10 000. At acquisition date, Peewee Ltd had not recorded an asset relating to equipment design as the asset was still in the research phase. Mudlark Ltd placed a fair value on the asset of $12 000, reflecting expected benefits existing at acquisition date. The asset was considered to have a further 10-year life. On 1 January 2016, the asset met the requirements of IAS 38 Intangible Assets and subsequent expenditure by Peewee Ltd on the asset was capitalised. Mudlark Ltd uses the full goodwill method. At 1 July 2014, the fair value of the non-controlling interest was $75 000. Additional information (a) On 1 July 2015, Peewee Ltd sold an item of plant to Mudlark Ltd at a profit before tax of
$4000. Mudlark Ltd depreciates this class of plant at a rate of 10% p.a. on cost while Peewee Ltd applies a rate of 20% p.a. on cost.
(b) At 30 June 2016, Mudlark Ltd had on hand some items of inventory purchased from Peewee Ltd in June 2015 at a profit before tax of $500. These were all sold by 30 June 2017.
(c) During the 2016–17 period Mudlark Ltd sold $12 000 inventory to Peewee Ltd at a mark-up of 20% on cost. $3000 of this inventory remains unsold by 30 June 2017.
(d) The other components of equity relate to financial assets. These assets are measured at fair value with movements in fair value being recognised in other comprehensive income.
(e) The parent and the subsidiary are considered to be separate cash generating units. Management have analysed the impairment indicators on an annual basis and conducted an impairment test on the subsidiary cash generating unit in the 2015–16 year, which resulted in the writing down of goodwill in the records of the subsidiary by $4000. There have been no other business combinations involving these entities since 1 July 2014.
(f) The tax rate is 30%. (g) Shareholder approval is not required in relation to dividends. (h) On 30 June 2017 the trial balances of Mudlark Ltd and Peewee Ltd were as follows: Debit balances Mudlark
$1 595 700 $800 000 (i) Extracts from the statement of changes in equity for Peewee Ltd were as follows: 2014–15 2015–16 2016–17 Retained earnings (opening balance) $20 000 $19 000 $16 000
Profit for the year 20 000 20 000 50 000Dividends paid (3 000) (6 000) (6 000)
Share capital (closing balance) $300 000 $300 000 $330 000* These items were from equity earned prior to 1 July 2014. Required Prepare the consolidated financial statements of Mudlark Ltd at 30 June 2017.
Depreciation expense Dr 750 Gain on sale of machinery Dr 2 250 Income tax expense Cr 900 Retained earnings (1/7/16) Dr 1 400 Transfer from business combination valuation reserve Cr 3 500 (Depreciation is 1/5 x $5 000 p.a.) Accumulated impairment losses – goodwill Dr 12 000 Goodwill Cr 12 000 Goodwill Dr 1 000 Business combination valuation reserve Cr 1 000 2. Pre-acquisition entries At 1 July 2014: Retained earnings (1/7/14) Dr 16 000 Share capital Dr 240 000 Other reserves (1/7/14) Dr 24 000 Other components of equity (1/7/14) Dr 8 000 Business combination valuation reserve Dr 12 000 Goodwill Dr 5 600 Shares in Peewee Ltd Cr 305 600 At 30 June 2017: Retained earnings (1/7/16) Dr 15 280 Share capital Dr 240 000 Other reserves (1/7/16) Dr 26 400 Other components of equity (1/7/16) Dr 8 000 Business combination valuation reserve Dr 10 320 Goodwill Dr 5 600 Shares in Peewee Ltd Cr 305 600 RE: 80%[$20 000 + $7 000 (BCVR – inv) - $4 900 (BCVR –prov) - $3 000 (transfer to other reserves)] Other reserves: 80% ($30 000 + $3 000) BCVR: 80%($3 500 + $8 400 + $1 000) Share capital Dr 24 000 Other reserves: bonus issue Cr 24 000 (Bonus issue: 80% x $30 000) Transfer from other reserves [RE] Dr 1 600 Transfer to retained earnings [OR] Cr 1 600 (80% x $2 000)
Transfer from business combination valuation reserve Dr 2 800 Business combination valuation reserve Cr 2 800 (80% x $3500) 3. NCI share of equity at acquisition date 1/7/14 Retained earnings (1/7/16) Dr 4 000 Share capital Dr 60 000 Other reserves (1/7/09) Dr 6 000 Other components of equity (1/7/16) Dr 2 000 Business combination valuation reserve * Dr 3 000 NCI Cr 75 000 (20% of balances) * 20% x ($7 000 inv + $3 500 mach - $4 900 liab. + $8 400 eq design + $1000 g’will) 4. NCI share of changes in equity from 1/7/14 to 30/6/16 Other reserves (1/7/16) Dr 600 Other components of equity (1/7/16) Dr 12 400 Retained earnings (1/7/16) Cr 1 416 Business combination valuation reserve Cr 420 NCI Cr 11 164 RE: 20% [$16 000 - $20 000 - $1 400 – ($2 400 - $720)] BCVR: 20% ($7 000 - $4 900) Other reserves: 20% ($33 000 - $30 000) Other components: 20% ($72 000 - $10 000) 5. NCI share of changes in equity from 1/7/16 to 30/6/17 NCI share of profit Dr 9 412 NCI Cr 9 412 (20% [$50 000 – ($1 200 - $360) – ($750 + $2 250 - $900)] NCI Dr 1 200 Dividend paid Cr 1 200 (20% x $6 000) NCI Dr 800 Dividend declared Cr 800 (20% x $4 000) Transfer from other reserves [RE] Dr 400 Transfer to retained earnings [OR] Cr 400 (20% x $2 000) Share capital Dr 6 000 Other reserves: bonus issue Cr 6 000 (20% x $30 000)
12. Profit in opening inventory Retained earnings (1/7/16) Dr 350 Income tax expense Dr 150 Cost of sales Cr 500 13 NCI effect NCI share of profit Dr 70 Retained earnings (1/7/16) Cr 70 14. Sales of inventory: current period Mudlark Ltd to Peewee Ltd Sales Dr 12 000 Cost of sales Cr 11 500 Inventory Cr 500 Deferred tax asset Dr 150 Income tax expense Cr 150
MUDLARK LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the financial year ended 30 June 2017 Revenue: Sales $328 000 Other 57 000 Total revenue 385 000 Expenses: Cost of sales 178 000 Other 61 550 239 550 Profit from trading 145 450 Gains from sale of non-current assets 12 750 Profit before tax 158 200 Income tax expense 73 860 Profit for the period $84 340 Other comprehensive income: Movements in fair value of financial assets 18 000 Comprehensive income for the period $102 340 Profit for the period attributable to: Parent entity interest $74 802 Non-controlling interest $9 538 Comprehensive income for the period attributable to: Parent interest $91 202 Non-controlling interest $11 138
MUDLARK LTD Consolidated Statement of Changes in Equity
for the financial year ended 30 June 2017 Group Parent Comprehensive income for the period $102 340 $91 202 Retained earnings: Balance at 1 July 2016 $39 770 $37 760 Profit for the period 84 340 74 802 Transfer from BCVR 700 0 Transfer from other reserves 400 0 Dividend paid (15 200) (14 000) Dividend declared (20 800) (20 000) Balance at 30 June 2017 $89 210 $78 562 Other reserves: Balance at 1 July 2016 $41 600 $35 000 Transfers to/from retained earnings 14 600 15 000 Bonus issue of shares (6 000) ____0 Balance at 30 June 2017 $50 200 $50 000 Business combination valuation reserve Balance at 1 July 2016 $2 550 0 Balance at 30 June 2017 $1 880 0 Other components of equity: Balance at 1 July 2016 $154 000 $139 600 Gains/Losses 18 000 $16 400 Balance at 30 June 2017 $172 000 $156 000
Question 22.5 Consolidation worksheet, consolidated statement of profit or loss and other comprehensive income Pakistan Ltd acquired 75% of the shares of Peru Ltd on 1 July 2013 for $1 900 000. The identifiable assets and liabilities of Peru Ltd at fair value on the acquisition date were represented by:
Share capital General reserve Retained earnings
$
$
500 000800 000
1 200 0002 500 000
On the same date, Peru Ltd acquired 60% of Philippines Ltd for $1 100 000. The identifiable assets and liabilities of Philippines Ltd at the acquisition date at fair value were represented by:
Share capital General reserve Retained earnings
$
$
660 000500 000
500 0001 660 000
The financial information provided by the three companies for the year ended 30 June 2018 is
shown below. The following additional information was obtained:
(a) All transfers to general reserve were from post-acquisition profits. (b) Included in the plant and machinery of Philippines Ltd was a machine sold by Peru Ltd on
30 June 2015 for $75 000. The asset had originally cost $130 000 and it had been written down to $60 000. Philippines Ltd had depreciated the machine on a straight-line basis over 5 years, with no residual value.
(c) Philippines Ltd had transferred one of its motor vehicles (carrying amount of $15 000) to Pakistan Ltd on 31 March 2017 for $12 000. Pakistan Ltd regarded this vehicle as part of its inventory. The vehicle was sold by Pakistan Ltd on 31 July 2017 for $17 000.
(d) The tax rate is 30%. Pakistan Ltd Peru Ltd Philippines Ltd Sales revenue
Other revenue Total revenues Cost of sales Other expenses Total expenses Profit before income tax Income tax expense Profit Retained earnings (1/7/17) Total available for appropriation Dividend paid Dividend declared Transfer to general reserve Retained earnings (30/6/18)
Required Prepare the consolidated statement of profit or loss and other comprehensive income and statement of changes in equity (not including movements in the general reserve and share capital) for the group for the year ended 30 June 2018.
= $625 000 Aggregate of (a) and (b) = $2 525 000 Goodwill = $25 000
1. Pre-acquisition entry Pakistan Ltd – Peru Ltd At 30 June 2018: Retained earnings (1/7/17)* Dr 900 000 Share capital Dr 375 000 General reserve Dr 600 000 Goodwill Dr 25 000 Shares in Peru Ltd Cr 1 900 000 * (75% x $1 200 000) 2. DNCI share of equity of Peru Ltd at 1/7/13 Retained earnings (1/7/17) Dr 300 000 Share capital Dr 125 000 General reserve Dr 200 000 NCI Cr 625 000 (25% of balances) 3. DNCI share of equity of Peru Ltd: 1/7/13 – 30/6/17 Retained earnings (1/7/17) Dr 275 000 NCI Cr 275 000 (25% ($2 300 000 - $1 200 000))
4. DNCI share of equity of Peru Ltd: 1/7/17 – 30/6/18 NCI share of profit Dr 135 000 NCI Cr 135 000 (25% x $540 000) General reserve Dr 12 500 Transfer to general reserve Cr 12 500 (25% x $50 000) NCI Dr 40 000 Dividend paid Cr 40 000 (25% x $160 000) NCI Dr 50 000 Dividend declared Cr 50 000 (25% x $200 000) NCI Dr 13 500 NCI share of profit Cr 13 500 (25% x 60% x $90 000 – Dividend declared by Philippines Ltd, in current period) NCI Dr 12 000 NCI share of profit Cr 12 000 (25% x 60% x $80 000 – Dividend paid by Philippines Ltd, in current period)
Pre-acquisition analysis: Peru Ltd – Philippines Ltd At 1 July 2013: Net fair value of identifiable assets and liabilities of Philippines Ltd = $1 660 000
PAKISTAN LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2018
Revenue: Sales revenue $4 830 000 Other revenue 308 000 5 138 000 Expenses: Cost of sales 2 313 000 Other expenses 387 000 2 700 000 Profit before income tax 2 438 000 Income tax expense 880 000 Profit for the period $1 558 000 Comprehensive Income for the period $1 558 000 Attributable to: Parent interest $1 278 630 Non-controlling interest 279 370 $1 558 000
PAKISTAN LTD Consolidated Statement of Changes in Equity (extract)
for the year ended 30 June 2018 Consolidated Parent Comprehensive income for the period $1 558 000 $1 278 630 Retained earnings at 1 July 2017 $6 285 800 $5 170 220 Profit for the period 1 558 000 1 278 630 Dividend paid (472 000) (400 000) Dividend declared (486 000) (400 000) Transfer to general reserve (190 000) (155 500) Retained earnings at 30 June 2018 $6 695 800 $5 493 350
Question 22.8 Consolidation worksheet, consolidated statement of profit or loss and other comprehensive income and statement of changes in equity On 1 July 2017, Vanuatu Ltd acquired 80% of the shares in Vietnam Ltd (cum div.) for $44 760. At this date, Vietnam Ltd had not recorded any goodwill and all its identifiable net assets were recorded at fair value except for land and inventory.
Carrying amount
Fair value
Land Inventory
$ 8 00012 000
$ 10 000 15 000
Half of this inventory still remained on hand at 30 June 2018. Immediately after the acquisition date, Vietnam Ltd revalued the land to fair value. The land was still on hand at 30 June 2018.
At 1 July 2017, Vietnam Ltd acquired 75% of the shares in Brunei Ltd for $15 300. Brunei Ltd had not recorded any goodwill and all its identifiable assets and liabilities were recorded at fair value except for the following:
Carrying
amount Fair value
Inventory $ 10 000 $ 14 000
All the inventory was sold by 30 June 2018. When assets are sold or fully consumed, any related valuation surpluses are transferred to retained earnings.
At the acquisition date, the financial statements of the three companies showed the following:
Vanuatu
Ltd Vietnam
Ltd Brunei Ltd
Share capital General reserve Asset revaluation surplus Retained earnings Dividend payable
$ 80 00020 00016 000
6 40012 000
$ 32 0003 2006 4004 8003 200
$ 20 000 — —
(3 200 —
)
The following information was provided for the year ended 30 June 2018: Vanuatu Ltd Vietnam
Ltd Brunei Ltd
Sales revenue Cost of sales Gross profit Less: Distribution and administrative expenses Plus: Interim dividend revenue Profit before income tax Income tax expense Profit Retained earnings (1/7/17)
Additional information (a) Dividends declared for the year ended 30 June 2017 were duly paid. (b) Intragroup purchases (at cost plus 331/3%) were:
Vanuatu Ltd from Vietnam Ltd — $43 200; Vietnam Ltd from Brunei Ltd — $37 800.
(c) Intragroup purchases valued at cost to the purchasing company were included in inventory at 30 June 2018, as follows: Vanuatu Ltd — $5400; Vietnam Ltd — $4500.
(d) The tax rate is 30%. Required A. Prepare the consolidation worksheet entries for the preparation of the consolidated
financial statements of Vanuatu Ltd at 30 June 2018. B. Prepare the consolidated statement of profit or loss and other comprehensive income
and statement of changes in equity (not including movements in share capital and other reserves) at 30 June 2018.
1. Business combination valuation entries The land is revalued in the records of Vietnam Ltd. Cost of sales Dr 1 500 Income tax expense Dr 450 Transfer from business combination valuation reserve Cr 1 050 Inventory Dr 1 500 Deferred tax liability Cr 450 Business combination valuation reserve Cr 1 050 2. Pre-acquisition entry: Vanuatu Ltd – Vietnam Ltd Retained earnings (1/7/17) Dr 3 840 Share capital Dr 25 600 General reserve Dr 2 560 Asset revaluation surplus * Dr 6 240 Business combination valuation reserve Dr 1 680 Goodwill Dr 2 280 Shares in Vietnam Ltd Cr 42 200 * 80%($6 400 + $1 400) Transfer from business combination valuation reserve Dr 840 Business combination valuation reserve Cr 840 3. NCI share of equity in Vietnam Ltd at 1/7/17 Retained earnings (1/7/17) Dr 960 Share capital Dr 6 400 General reserve Dr 640 Asset revaluation surplus Dr 1 560 Business combination valuation reserve Dr 420 NCI Cr 9 980 (20% of balances) 4. NCI share of equity in Vietnam Ltd: 1/7/17 – 30/6/18 NCI share of profit Dr 1 326 NCI Cr 1 326 (20% x [$7 680 – ($1 500 - $450)]) Transfer from business combination valuation reserve Dr 210 Business combination valuation reserve Cr 210 (20% x $1 050) NCI Dr 300 NCI share of profit Cr 300 (20% x 75% x $2 000, being dividend revenue from Brunei Ltd) NCI Dr 320 Dividend declared Cr 320 (20% x $1 600)
Acquisition analysis: Vietnam Ltd – Brunei Ltd At 1 July 2017: Net fair value of identifiable assets and liabilities of Brunei Ltd: = ($20 000 - $3 200) (equity) + $4 000 (1 – 30%) (BCVR - inventory) = $19 600 (a) Consideration transferred = $15 300 (b) Non-controlling interest = 25% x $19 600 = $4 900 Aggregate of (a) and (b) = $20 200 Goodwill = $600 5. Business combination valuation entries Cost of sales Dr 4 000 Income tax expense Cr 1 200 Transfer from business combination valuation reserve Cr 2 800 6. Pre-acquisition entry: Vietnam Ltd – Brunei Ltd The entry at 30 June 2018 is: Retained earnings (1/7/17) Cr 2 400 Business combination valuation reserve Dr 2 100 Share capital Dr 15 000 Goodwill Dr 600 Shares in Brunei Ltd Cr 15 300 Transfer from business combination valuation reserve Dr 2 100 Business combination valuation reserve Cr 2 100 7. 25% DNCI share of equity in Brunei Ltd at 1/7/17 Share capital Dr 5 000 Business combination valuation reserve Dr 700 Retained earnings (1/7/17) Cr 800 NCI Cr 4 900
Statement of Profit or Loss and Other Comprehensive Income for the financial year ended 30 June 2018
Sales revenue $153 000 Expenses: Cost of sales 100 675 Other 14 580 115 255 Profit before income tax 37 745 Income tax expense 10 407 Profit for the period $27 338 Comprehensive Income for the period $27 338 Attributable to: Parent interest $24 668 Non-controlling interest $2 670
VANUATU LTD Consolidated Statement of Changes in Equity (extract)
for the year ended 30 June 2018 Consolidated Parent Comprehensive income for the period $27 338 $24 668 Retained earnings at 1 July 2017 $6 560 $6 400 Profit for the period 27 338 24 668 Transfer from business combination valuation reserve 910 0 Dividend paid (4 250) (4 000) Dividend declared (4 570) (4 000) Retained earnings at 30 June 2018 $25 988 $23 068