QUESTION 1 – Consolidation: Direct non-controlling interest (15 Marks)

On  1 July 2014, Parent Ltd acquired 80% of the issued shares of Sub Ltd, paying $5,200,000 in cash. The separate accounting records of Sub Ltd at 1 July 2014 include the following equity balances:

Issued capital:              $4,000,000

General reserve:           $800,000

Retained earnings:      $1,000,000.

At the date of acquisition, all assets of Sub Ltd were carried in their accounting records at fair value, except for land, which had a carrying amount of $364,000. The land had a fair value of $884,000. Sub Ltd chose to continue to record the asset under the cost model. The tax rate is 30%.

The summarised financial statements of the entities as at 30 June 2017 are as follows:

Required:

(1) Prepare the acquisition analysis as at acquisition date (1/7/2014) showing both the Parent’s equity interest (PEI) and the non-controlling interest (NCI)     (5 marks)

(2) State the amount that would be disclosed in the consolidated financial statements at

30 June 2017 for Investment in Sub Ltd, and explain why.                       (1 mark)

(3) Based on the information provided, and using the proportionate goodwill method, show all the consolidation journal entries, including all related tax effects, and NCI journal entries required upon consolidation as at 30 June 2017. The land has not been sold.                                                                                                 (9 marks)

QUESTION 2 – Consolidation: Direct and Indirect NCI (10 Marks)

On 1 January 20X5, Drum Ltd acquired 80% of the voting shares (and control) of Horn Ltd, and 30% of the voting shares of Guitar Ltd. On the same day, Horn Ltd acquired 60% of the voting shares (and control) of Guitar Ltd.

Profits and dividends paid/declared by group entities for the year ended 31

December 20X6 were as follows:

Additional information:

a)   During the year ended 31 December 20X5, Guitar Ltd sold goods to Drum    Ltd for $450,000. These goods cost Guitar Ltd $300,000. 40% of these goods remained in Drum Ltd’s inventory at 31 December 20X5. The remainder of  these goods were sold externally as at 31 December 20X6.

b)  During the year ended 31 December 20X5, Drum Ltd sold goods to Horn Ltd for $150,000. These goods cost Drum Ltd $100,000. 50% of these goods       remained in Horn Ltd’s inventory at 31 December 20X5. The remainder of   these goods were sold externally as at 31 December 20X6.

c)   During the year ended 31 December 20X6, Guitar Ltd sold goods to Horn Ltd for $90,000. These goods cost Guitar Ltd $40,000. 80% of these goods remained in Horn Ltd’s inventory at 31 December 20X6.

d)  All entities in the group use the perpetual inventory system.

e)   The corporate tax rate is 30%.

f)   All group entities recognise dividend revenue when dividends are declared.

Required:

On the basis of the information provided, calculate the total non-controlling interest in consolidated profit after tax for year ended 31 December 20X6. Show all             working. (Journal entries are not required.)

(10 Marks)

In April 20X7, Green Ltd acquired the patent rights to a new process for recycling single- use plastic bags into durable and attractive floor tiles. On 1 July 20X7, Green Ltd entered into a joint operation agreement with Brown Ltd to jointly recycle bags and manufacture  the tiles. The joint operation agreement states that Green Ltd and Brown Ltd will share     output, contributions and costs equally, and that Green Ltd and Brown Ltd hold the joint  operation assets as tenants in common, with Green Ltd and Brown Ltd each having a 50% interest. The joint operation agreement established the initial contributions as follows:

Both Green Ltd and Brown Ltd used the cost model to recognise non-current assets in their financial statements.

The patent contributed by Green Ltd was recorded in its books at its cost of $2 million. No amortisation has yet been charged by Green Ltd. Both Green Ltd and Brown Ltd will         amortise the patent straight line over its expected economic life of 5 years.

The plant and equipment contributed by Brown Ltd was recorded in its books at a       carrying amount of $5 million (cost $6 million, and accumulated depreciation of $1     million). Both Green Ltd and Brown Ltd depreciate plant and equipment on a straight- line basis at the rate of 10% per annum.

Blue Pty Ltd is the joint operation manager, and is jointly owned by Green Ltd and       Brown Ltd. Blue Pty Ltd manages the day-to-day manufacturing operations, and           distributes the output of those operations to Green Ltd and Brown Ltd. The joint            operators are separately responsible for selling their share of the joint operation product once received.

Blue Pty Ltd reports the following financial information about the joint operation for the year ended 30 June 20X8:

At 30 June 20X8, Green Ltd had sold 100% of its share of the joint operation product received for $6 million, whereas Brown Ltd had sold only 75% of its share of the joint operation product received for $4 million. Cash from sales of the share of the joint      operation product has been received.

Required:

Prepare the general journal entries in the books of Brown Ltd necessary to record    its interest in the joint operation for the year ended 30 June 20X8 in accordance with AASB 11. Show all working.

QUESTION 4 – Equity accounting method (10 Marks)

Pea Ltd, a parent entity, acquired a voting interest of 40% in Pod Ltd on 1 July 20X7 for a cash consideration of $1,600,000. The acquisition gave Pea Ltd significant        influence over Pod Ltd’s operations. Pod Ltd’s shareholders’ equity items at the time of acquisition were as follows:

Additional information:

a)   On 1 July 20X7, the carrying value of Pod Ltd’s property, plant and equipment was $1,100,000, while the fair value was $1,400,000, and the remaining useful life for assets in this class of assets was 4 years. At the date of acquisition, all  other assets and assumed liabilities were recognised at their fair value in Pod   Ltd’s financial statements.

b)  For the year ended 30 June 20X8, Pod Ltd recorded an after-tax profit of      $900,000, out of which dividends of $200,000 were proposed and paid on 30 June 20X8.

c)   For the year ended 30 June 20X9, Pod Ltd had an after-tax profit of $200,000.

d)  Pod Ltd proposed and paid a dividend of $50,000 on 30 June 20X9.

e)   Pod Ltd did not record a profit or loss from discontinuing operations in either 20X8 or 20X9.

f)   During the year ended 30 June 20X9, the following inter-entity inventory transactions occurred:

•   Pod Ltd sold inventory to Pea Ltd. The inventory cost Pod Ltd $40,000 and was sold to Pea Ltd for $50,000; 50% of this inventory was still on hand in Pea Ltd’s closing inventory at 30 June 20X9.

•   Pea Ltd sold inventory to Pod Ltd. The inventory cost Pea Ltd $20,000 and was sold to Pod Ltd for $57,500; 20% of this inventory was still on hand in Pod Ltd’s closing inventory at 30 June 20X9.

g)  Pea Ltd recognises dividends from associates as revenue when they are declared.

h)  Pea Ltd has elected to use the cost method to measure investments in associates and joint ventures in its separate financial statements.

i)   Pea Ltd applies the equity method of accounting for its associates in its consolidated financial statements.

j)   Pea Ltd’s investment in Pod Ltd is subject to an annual impairment test.            Impairment losses are not required to be recognised for each of the years ended

30 June 20X8 and 20X9 in Pea Ltd’s separate financial statements or consolidated financial statements.