Financial Accounting - Consolidation - Asset Essay Example

EBC4074 Financial Accounting Consolidation Wholly owned subsidiaries & Intragroup transactions Seminar 1 – Reka Felleg School of Business and Economics Sharing Success Agenda • • • • Key steps Problem 22 - Financial Accounting - Consolidation introduction. 4 Break (? ) Problem 23. 3 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 2 Key steps

• Acquisition analysis – Identify an/the acquirer – Determine the acquisition date – Recognize and measure FV of identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree – Measure FV of consideration transferred – Recognize and measure goodwill or a gain from bargain purchase Consolidation process – Add up the financial statements of the parent and subsidiaries – Make adjustments for: • Business combination valuation entries – required to adjust the carrying amounts of the subsidiary’s identifiable assets and liabilities to fair value and recognize goodwill • Pre-acquisitions entries – required to eliminate the carrying amount of the parent’s investment in each subsidiary against the pre-acquisition equity of that subsidiary • Intragroup transactions – eliminate transactions between entities within the group subsequent to acquisition date Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 3 • Problem 22. 4: • Consolidation Worksheet, Unrecognized Intangibles and Liabilities Lyngen Ltd gained control of Rila Ltd by acquiring all its shares on 1 July 2010. The equity that date was: Share capital $100 000 Retained earnings $ 35 000 •

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At 1 July 2010, all the identifiable assets and liabilities of Rila Ltd were recorded at fair value CA FV except for: $ Inventory Land Plant (cost $120 000) 18 000 120 000 95 000 22 000 130 000 98 000 • • • • • • • • The inventory was all sold by 30 June 2011. The plant had a further 5-year life but was sold on 1 January 2013 for $50 000. The land was sold in March 2011 for $150 000. BCVR amounts of sold or fully consumed revalued assets are transferred to retained earnings. At 1 July 2010, Rila Ltd had guaranteed a loan taken out by Sierra Ltd. Rila Ltd had not raised a liability in relation to the guarantee, but as Sierra Ltd was not performing well, Lyngen Ltd valued the contingent liability at $5 000. In January 2013, Sierra Ltd repaid the loan. Rila Ltd had also invented a special tool and patented the process.

No asset was raised by Rila Ltd, but Lyngen Ltd valued the patent at $6 000, with an expected useful life of 6 years. The tax rate is 30%. See Financial Statements as at 30 June 2013 in textbook (p892). The transfer to general reserve during the year ended 30 June 2013 was from profits earned before 1 July 2010. Required: Prepare the consolidation adjustment journal entries, consolidation worksheet and the consolidated financial statements as at 30 June 2013. (Only entries at 30 June 2013 are required. ) Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 4 Acquisition analysis Business combination valuation reserve (BCVR) Shares in Rila Ltd IFRS 3. 32

Goodwill is the excess of the consideration transferred over the net fair value of the identifiable assets acquired and liabilities assumed. Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 5 Business Combination Valuation entries at 30 June 2013 Plant at Cost Carrying Amount 120 000 less 95 000 120 000 less 98 000 3 000 x 0. 3 3 000 x 0. 7 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 6 BCV entries at 30 June 2013 (3 000 / 5) / 2 Effect of 2 years of depreciation Total depreciation from 1 July 2010 to 1 Jan 2013: (3 000 / 5 ) x 2 + (3 000 / 5 ) / 2 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions

Slide 7 BCV entries at 30 June 2013 Progressive reversal of DTL of 900 recognized at acquisition date in proportion of depreciation charges 1 500 x 0. 3 300 x 0. 3 1 200 x 0. 3 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 8 BCV entries at 30 June 2013 Group perspective: gain is 1 500 lower Reversal of 22 000 Cr (@ acq) Reversal of 25 000 Dr (@ acq) and 1 500 Cr Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 9 BCV entries at 30 June 2013 Reversal of remaining DTL 1 500 x 0. 3 Reversal Income Tax Expense Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 10 BCV entries at 30 June 2013

If previous adjustments are netted against each other : Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 11 BCV entries at 30 June 2013 Recognition of FV-BV at acquisition 6 000 x 0. 3 6 000 x 0. 7 Effects subsequent to acquisition 6 000 / 6 years (6 000 / 6 ) x 2 Amortisation for last 3 years Depreciation of 3 years 1 000 x 0. 3 2 000 x 0. 3 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 12 BCV entries at 30 June 2013 5 000 x 0. 3 5 000 x 0. 7 FV of L assumed Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 13 BCV entries at 30 June 2013 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 14

BCV entries at 30 June 2013 If provision adjustments are netted against each other: Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 15 BCV entries at 30 June 2013 And the treatment of goodwill: Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 16 Pre-acquisition entries Avoid overstating equity and NAs of Group At 1/7/2010: Retained earnings (1/7/10) Share capital BCVR Shares in Rila Ltd At 30 June 2013: Pre-acquisition equity is affected by: Dr Dr Dr Cr 35 000 100 000 25 000 160 000 1. 2. 3. 4. 5. Sale of land in March 2011 Sale of inventory by 30 June 2011 Affect pre-acquisition equity as at 30 June 2012

Sale of plant in January in current period Settlement of guaranteed loan in current period Transfer to general reserve of $20 000 in current period Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 17 Affect pre-acquisition equity as at 30 June 2013 Pre-acquisition entries Between the acquisition date and the start of the current fiscal year: 1. Sale of Land: Retained Earnings BCVR Details: As if unsold: Land Dr Cr 7 000 7 000 DTL BCVR Sale of Land: Gain on sale Land DTL Income tax expense Transfer to RE BCVR Transfer from BCVR (R/E) Therefore the pre-acquisition elimination entry Transfer from BCVR (R/E) BCVR Dr Cr Cr Dr Cr Dr Cr Dr Cr Dr Cr 10 000 3 000 7 000 10 000 10 000 3 000 3 000 7 000 7 000 7 000 7 000 2. Sale of Inventory:

Retained Earnings BCVR Dr Cr 2 800 2 800 Slide 18 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Pre-acquisition entries At 30/6/2012: Retained earnings (1/7/10) Share capital BCVR Shares in Rila Ltd 1. Sale of land Transfer from BCVR (R/E BCVR 2. Sale of inventory Transfer from BCVR (R/E) BCVR Dr Dr Dr Cr Dr Cr Dr Cr 35 000 100 000 25 000 160 000 7 000 7 000 2 800 2 800 Together these entries give the ‘starting’ entry for current fiscal year: At 1/7/2012: Retained earnings (1/7/12) Share capital BCVR Shares in Rila Ltd Dr Dr Dr Cr 44 800 100 000 11 200 35 000 + 0. 7 x (4 000 + 10 000) 25 000 – 0. 7 x (4 000 + 10 000) 160 000 Slide 19

Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Pre-acquisition entries At 30/6/2013: Retained earnings (1/7/12) Share capital BCVR Shares in Rila Ltd 3. Settlement of loan BCVR Transfer from BCVR (R/E) 4. Settlement of loan Transfer from BCVR (R/E) BCVR 5. Transfer to general reserve General reserve Transfer to general reserve Dr Dr Dr Cr Dr Cr Dr Cr Dr Cr 44 800 100 000 11 200 160 000 3 500 5 000 x 0. 7 3 500 2 100 3 000 x 0. 7 2 100 20 000 20 000 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 20 BREAK – 10 minutes Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 21 Problem 23. 3: • Consolidation Worksheet

General reserve Retained earnings $16 000 $21 000 CA 50 000 15 000 24 000 18 480 FV 56 000 16 000 32 000 24 480 U. Life On 1 July 2008, Columba Ltd acquired all the shares of Sculptor Ltd for $137 200. At acquisition date, the equity of Sculptor Ltd consisted of: Share capital $80 000 • On this date, all the identifiable assets and liabilities of Sculptor Ltd were recorded at fair value except for the following assets: $ Inventory Motor vehicles (cost $180 000) Land 4 years 8 years Furniture and fittings (cost $30 000) • • • • The inventory and land on hand in Sculptor Ltd at 1 July 2008 were sold during the following 12 months. The motor vehicles were sold on 1 January 2010.

Except for land, valuation adjustments are made on consolidation and, on realization of a BCVR, a transfer is made to retained earnings on consolidation. At 1 July 2008, Sculptor Ltd had not recorded any goodwill. See Financial Statements as at 30 June 2010 in textbook (p943). 1/7/08 to 30/6/09 1/7/09 to 30/6/10 Sales from Columba Ltd to Sculptor Ltd Profit in inventory on hand 30/6/09 Sales from Columba Ltd to Sculptor Ltd $12 000 200 15 000 Profit in inventory on hand 30/6/10 (incl. $50 from prev. per. sales) 1 000 • • • On 1 January 2009, Sculptor Ltd sold furniture and fittings to Columba Ltd for $8 000. This had originally cost Sculptor Ltd $12 000 & had a carrying amount at time of sale of $7 000.

Both entities charge 10% depreciation p. a. The tax rate is 30%. Required: Prepare the consolidation worksheet for preparation of the consolidated financial statements as at 30 June 2010. (Only entries for 30 June 2010 are required. ) Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 22 Acquisition analysis Business combination valuation reserve (BCVR) except land! To adjust preacquisition equity Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 23 Revaluation of Land 24 480 less 18 480 6 000 x 0. 3 6 000 x 0. 7 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 24 BCV entries at 1 July 2008 Vehicles at cost Carrying amount

18 000 less 15 000 18 000 less 16 000 30 000 less 24 000 30 000 less 32 000 so debit! 8 000 x 0. 3 8 000 x 0. 7 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 25 BCV entries at 30 June 2010 – Motor Vehicles 1 000 / 4 = 250 per year Half year depreciation (7/09 to 12/09) 1 year depreciation (7/08 to 6/09) 1. 5 years depreciation (07/08 to 12/09) Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 26 BCV entries at 30 June 2010 – Motor Vehicles 300 x 3/8 (3 half years out of 8) or 375 X 0. 3 300 x 1/8 (0. 5 year) or 125 x 0. 3 300 x 1/4 (1 year) or 250 x 0. 3 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 27

BCV entries at 30 June 2010 – Motor Vehicles 1 000 less 375: already realized through depr. 3 000 less 375 300 less 112. 5 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 28 BCV entries at 30 June 2010 – Motor Vehicles If previous adjustments are netted off: Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 29 BCV entries at 30 June 2010 – Furniture & Fittings Recognition of FV-BV at acquisition Subsequent effects Incremental depreciation: 8 000/8 = 1 000 p. a. Depr. 09/10 Depr. 08/09 2 400 / 8 years x 2: reversal for 2 yrs 2 400 / 8 years Seminar 1 – Wholly owned subsidiaries & Intragroup transactions

Slide 30 Pre-acquisition entries Land revaluation 6 000 x 0. 7 Inventory on hand sold Land on hand sold 6 000 x 0. 7 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 31 Pre-acquisition entries RE 1/7/08 Land + Inventory 21 000 + 4 200 + 4 200 16 000 less 4 200: sale of inventory BUT land is not included! Sale of Motor Vehicles on 1 Jan. 2010 (16 000 less 15 000) x 0. 7 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 32 Intragroup transaction eliminations – Current dividend paid Explanation by bookings within Columba and Sculptor Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 33

Intragroup transaction eliminations – Final dividend declared Adjust for effects of entry made by Sculptor Adjust for effects of entry made by Columba Explanation by bookings within Columba and Sculptor Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 34 Intragroup transaction eliminations – Profit in opening inventory Either make the 3 entries above or the one below: Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 35 Intragroup transaction eliminations – Profit in ending inventory Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 36 Intragroup transaction eliminations – Sale of furniture & fittings 8 000 less 7 000

Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 37 Intragroup transaction eliminations – Depreciation of furniture & fittings 100 x 0. 3 50 x 0. 3 150 x 0. 3 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 38 Intragroup transaction eliminations – Advances Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 39 Next • Friday: Lecture #2 – 13. 30 in the Lecture Hall – Chapter 24: Consolidation: Non-controlling interests (NCI) • Tuesday: Seminar #2 – At 8. 30, 11. 00, or 13. 30 (see your personal schedule) in C-1. 03 – Prepare Problems 24. 3 and 24. 4 Seminar 1 – Wholly owned subsidiaries & Intragroup transactions Slide 40

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