Accounting Theory Contemporary Issues PDF

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
The report has been prepared on the acquisition made by Tuna Ltd. of the tarhet company Brim
Limited. Various inputs have been given and purchase consideration and acquisition analysis has
been made using the given data. Furthermore, the consolidation entries for the company Tuna
Limited has been shown in the given assignment. Finally, the consolidated set of financial
statements has been prepared for the group considering the format and the inputs given in the
question for Tuna and Brim Limited.
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Contents
Executive Summary.....................................................................................................................................2
ACQUISITION ANALYSIS OF TUNA LTD.........................................................................................................4
CONSOLIDATION JOURNAL ENTRIES OF TUNA LTD.....................................................................................5
CONSOLIDATED SET OF FINANCIAL STATEMENTS.......................................................................................8
References.................................................................................................................................................12
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ACQUISITION ANALYSIS OF TUNA LTD
Consolidation of the financial statemenst mainly deal with integration of the financial statements
of both the parent as well as the subsidiary company. Here the parent company (Tuna Limited)
means the acquiring company and the subsidiary company is the target company (Brim Limited).
Various accounting adjustments are being done while doing the acquisition of the company
(Sithole, et al., 2017). Further, business integration valuation entries are needed to make
adjustments in carrying amount of assets and liabilities of subsidiaries to fair value. The pre-
acquisitions entries generally reduce the carrying amount of the parent investments in every
subsidiary (Dichev, 2017).
Fair value of only the identifieable assets and the liabilities are being recognised when the entity
is being taken over as the contingent liabilities are generally not seen as materialised on the date
of acquisition and hence not valued at fair value (Goldmann, 2016). They are just given for the
disclosure purposes. According to AASB3, companies are required to recognize these by another
business on the date of acquisition. Companies identify the FVINA with relation to the
subsidiary’s equity balances, instead of the balances of individual assets and liability.
Table 1: Statement showing acquisition analysis of Tuna Ltd
Calculation of Goodwill on acquisition as on July 1, 2015
Particulars Amount Amount
Net fair value of identifiable assets and liabilities of Brim Ltd
Equity =66000+6000 72,000
Inventory =4500 (1 – 30%) 3,150
Patents =15 000 (1 – 30%) 10,500
Plant =3 000 (1 – 30%) 2,100
87,750
Purchase Consideration given 90,000
Goodwill 2,250
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CONSOLIDATION JOURNAL ENTRIES OF TUNA LTD
Below mentioned are the consolidation entries in the books of Tuna Limited.
In the books of Tuna Limited
Journal entries
1. Business combination valuation entries
Date Particulars Dr./Cr. Amount ($) Amount ($)
Accumulated depreciation Dr. 30,000
Plant Cr. 27,000
Deferred tax liability Cr. 900
Business combination valuation reserve Cr. 2,100
Depreciation expense Dr. 600
Retained earnings (1/7/16) Dr. 600 1,200
Accumulated depreciation Cr.
(1/5 x $3000 p.a. for 2 years)
Deferred tax liability Dr. 360
Income tax expense Cr. 180
Retained earnings (1/7/16) Cr. 180
Goodwill Dr. 2,250
Business combination valuation reserve Cr. 2,250
2. Pre-acquisition entries
Date Particulars
Dr./
Cr. Amount ($) Amount ($)
1/7/2015 Retained earnings Dr. 6,000
Share capital Dr. 66,000
Business combination valuation reserve Dr. 18,000
Shares in Brim Ltd Cr. 90,000
30/06/2015 Retained earnings (1/7/16)* Dr. 19,650
Share capital Dr. 66,000
Business combination valuation reserve Dr. 4,350
Shares in Tuna Ltd Cr. 90,000
(* = $6000 + $3 150 + $10 500)
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3. Sales and profit in closing inventory
Date Particulars
Dr./
Cr. Amount ($) Amount ($)
Sales revenue Dr. 21,000
Cost of sales Cr. 21,000
Sales revenue Dr. 4,500
Cost of sales Cr. 4,200
Inventory Cr. 300
Deferred tax asset Dr. 90
Income tax expense Cr. 90
4. Profit in opening inventory of Brim Ltd.
Date Particulars
Dr./
Cr. Amount ($) Amount ($)
1/7/2016 Retained earnings Dr. 420
Income tax expense Dr 180 Dr. 180
Cost of sales Cr 600 Cr. 600
5. Sale of Plant - current period
Date Particulars
Dr./
Cr. Amount ($) Amount ($)
Proceeds on sale of plant Dr. 15,000
Carrying amount of plant sold Cr. 14,000
Plant Cr. 1,000
Deferred tax asset Dr. 300
Income tax expense Cr. 300
Accumulated depreciation - plant Dr. 100
Depreciation expense Cr. 100
(10% x $1000)
Income tax expense Dr. 30
Deferred tax asset Cr. 30
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6. Sale of Inventory classified as Plant : prior period
Date Particulars
Dr./
Cr. Amount ($) Amount ($)
1/7/2016 Retained earnings Dr. 1,400
Deferred tax asset Dr. 600
Plant Cr. 2,000
Accumulated depreciation Dr. 1,000
Depreciation expense Cr. 400
1/7/2016 Retained earnings Cr. 600
(20% x $2000 p.a. for 1.5 years)
Income tax expense Dr. 120
1/7/2016 Retained earnings Dr. 180
Deferred tax asset Cr. 300
7. Sale of Plant classified as Inventory: current period
Date Particulars
Dr./
Cr. Amount ($) Amount ($)
Proceeds on sale of plant Dr. 9,000
Carrying amount of plant sold Cr. 7,500
Cost of sales Cr. 1,500
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CONSOLIDATED SET OF FINANCIAL STATEMENTS
Below mentioned is the set of financial information beuing provided by both the companies as
on 30th June 2017:
Tuna Ltd Brim Ltd
Dr Cr Dr Cr
Sales revenue 64 500 78 000
Cost of sales 30 900 46 350
Trading expenses 4 800 9 000
Office expenses 7 950 4 050
Depreciation expenses 1 800 3 900
Proceeds on sale of plant 9 000 15 000
Carrying amount of plant sold 7 500 14 000
Income tax expense 11 100 7 300
Share capital 96 000 66 000
Retained earnings (1/7/16) 48 000 31 500
Current liabilities 21 100 10 500
Deferred tax liability 11 000 15 000
Plant 57 000 107 250
Accumulated depreciation – plant 18 300 33 450
Intangibles 12 000 11 100
Deferred tax assets 8 100 9 450
Shares in Brim Ltd 90 000 0
Inventory 28 500 24 600
Receivables 8 250 12 450
267 900 267 900 249 450 249 450
On the basis of the above mentioned financial information and the journal entries being passed
above, the consolidated set of financial statements for the group is shown below in the given
format.
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Tuna
Ltd
Brim
Ltd
Journal
number
Adjustments
Journal Group
Dr Cr
numbe
r
Sales revenue 64 500 78 000
3
3
21000
4500
117700
Cost of sales 30 900 46 350 21000
4200
600
1500
3
3
4
7
49950
Gross profit 33 600 31 650 67050
Trading expenses 4 800 9 000 13800
Office expenses 7 950 4 050 12000
Depreciation 1 800 3 900
1 600 100
400
5
6
5800
14 550 16 950 31600
Profit from trading 19 050 14 700 35450
Proceeds from sale of plant 9 000 15 000
5
7
15000
9000
0
Carrying amount of plant sold 7 500 14 000 14000
7500
5
7
0
Gain/loss on sale of machinery 1 500 1 000 0
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Profit before tax 20 550 15 700 35450
Tax expense 11 100 7 300
4
5
6
180
30
120
180
90
300
1
3
5
18160
Profit 9 450 8 400 17290
Retained earnings (1/7/16) 48 000 31 500
1
2
4
6
6
600
19650
420
1400
60
180
200
1
6
57750
Retained earnings (30/6/17) 57 450 39 900 75040
Share capital 96 000 66 000
2 66000 96000
BCVR -- --
2 4350 2100
2250
1
1
0
Total equity 153
450
105 900 171040
Current liabilities 21 100 10 500 31600
Deferred tax liability 11 000 15 000
1 360 900
1 26540Total liabilities 32 100 25 500 58140
Total equity and liabilities 185
550
131 400 229180
Dr Cr Group
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Plant 57 000 107 250 27000
1000
2000
1
5
6
134250
Accumulated
depreciation
(18 300) (33 450)
1
5
6
30000
100
600
1200
1 (22250)
Intangibles 12 000 11 100 23100
Shares in Brim Ltd 90 000 - 90000
2 0
Deferred tax asset 8 100 9 450
3
5
6
90
300
600
30
180
5
6
18330
Inventory 28 500 24 600 300
3 52800
Receivables 8 250 12 450 20700
Goodwill 0 0
1 2250 2250
Total assets 185 550 131 400 177210 177210 229180
Notes on Accounts:
1. The total equity of the group is the sum total of the equity shares share capital), the
retained earnings, the net profit and the general reserves. It is the total capital formulation
of the company over the years put together. In short, it is equal to the net assets of the
company and the thereby both the sides of the balance sheet will be equal (Alexander,
2016).
2. Profit is generally the difference between the incomes and expenses for the year on which
the tax is being paid at 30% and the remainder is profit after tax. This is then being added
to the retained earnings and shown as part of the equity.
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3. For the current assets like accounts receivables and inventory, the line by line item
consolidation takes place and the book value is added for both the entities while doing
consolidation (Das, 2017).
4. Similarly, for the current liabilities as well like the payables, the line by line item
consolidation takes place (Boccia & Leonardi, 2016).
5. Deferred tax asset or liability is created due to the timing differences. There are some line
items on which the tax is being paid as per taxation laws and the tax as per accounting
laws might need to be paid in the later years, thereby giving rise to the deffered tax asset
or liabilities.
References
Alexander, F., 2016. The Changing Face of Accountability.
The Journal of Higher Education, 71(4), pp.
411-431.
Boccia, F. & Leonardi, R., 2016.
The Challenge of the Digital Economy: Markets, Taxation and
Appropriate Economic Models. s.l.:Springer.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study.
Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting.
Accounting and Business
Research, 47(6), pp. 617-632.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.Financial Environment and Business Development, Volume 4, pp. 103-112.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting.
Journal of Educational Psychology, 109(2), p. 220.
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