Advanced Financial Accounting Reporting | Desklib

This article covers topics like subsidiary features, partial goodwill method, NCI, inter-group transactions, and equity method. It explains the difference between a subsidiary and an associate, and why inter-group transactions must be eliminated. It also discusses whether NCI is better considered as equity or debt. The article provides solved examples and working notes for better understanding.

Advanced financial
accounting reporting

Contents
QUESTION 1.............................................................................................................................3
QUESTION 2.............................................................................................................................4
QUESTION 3.............................................................................................................................4
QUESTION 4.............................................................................................................................5
a. Explain NCI is better considered as equity or debt............................................................5
b. Explain why inter-group transactions must be eliminated.................................................6
QUESTION 5.............................................................................................................................6

QUESTION 1
Subsidiary features are the elements over which the parent company controls, such as
the ability to monitor monetary and work matters and derive benefits from their exercise. To
do this, parents need to have more than half the level of ownership in the holding
organization. Also, the parent company should be organized as a free business element to
obtain subsidiary companies
Employees are mentioned as a substance that parents can exert key influence but cannot
control. If the parent company acquires 20%-half ownership in the holding organization, the
parent company can choose the currency, function, and different options that affect the
employees.
Organizations can hold fluctuating levels of interest in different organizations by
acquiring equity. The shareholding section summarizes the powers and different freedoms an
organization has over a holding organization. There are two important structures that these
types of holding organizations can adopt, namely specific subsidiaries or associates. An
organization that is interested in another organization is called a "parent organization". An
important contrast between a subsidiary and a partner is that while an auxiliary is an
organization in which the parent is the larger investor, the parent is a firm minority among the
partners.
Basis Associate Subsidiary
Meaning The parent is a minority
shareholder in Associate
(significant influence).
The parent is a majority
shareholder in the
Subsidiary (control).
Ownership If the parent owns a share
between 20%-50%, an
Associate can be accounted
for.
Parent need to purchase a
share that exceeds 50% in
the Subsidiary.
Value technology is a bookkeeping strategy by which a business is first thought of as
cost. Due to changes in the share of financial backers in the investee's net resources after
acquisition. The gain or misfortune of the financial supporter includes its part in the gain or
misfortune of the investee and other parts of the financial supporter Full compensation
includes a portion of the investee's other broad compensation. A joint game plan is one in

which at least two rallies have joint control. Joint control is the legally agreed sharing of
control throughout the action that exists only in
The selection of related exercises requires unanimous consent of the party’s shared
control.
A joint effort is a joint game plan through which collective control of the course of
action is possible. Freedom to net resources in the course of action. The joint venture in
which the joint ventures participate has joint control over the joint venture.
QUESTION 2
Particulars Debit Credit
Retained Earnings of Morrison Ltd
Retained Earnings of Scarlett Ltd
1000
1000
Retained Earnings of Scarlett Ltd
Patent of Morrison Ltd
8000
8000
Retained Earnings of Scarlett Ltd
Machine
2000
2000
Allowance for Depreciation on Machine
Depreciation on Machine
200
200
Retained Earnings of Morrison Ltd
Inventory of Scarlett Ltd
3000
3000
QUESTION 3
Particulars Debit Credit
Share Capital
General Reserve
Retained Earnings
Investment in Car Ltd
Non – controlling Interest
100000
8000
20000
83200
44800
Vehicle
Patent
Goodwill
Non – controlling interest
Investment in Car Ltd
50000
20000
521300
24500
566800

Working Notes:
In the partial goodwill method, goodwill is measured as the difference between the
purchasing consideration paid by the parent and the parent's share of the fair value of the net
identifiable assets. In the partial goodwill process, only the parent's share of the goodwill is
recognized. Under the partial goodwill method, the non-controlling interest is based on the
proportionate share in the net identifiable assets.
Book value of net assets and adjust it to their fair values.
Share Capital = $100,000
General Reserve = $8,000
Retained Earnings = $20,000
So, total Book Value of Net assets = $128,000
Increase in Vehicles = ($500,000-450,000) = $50,000
Increase in patent = ($90,000-70,000) = $20,000
So, total Fair value of net assets = $198,000
Non-controlling Interest = 35% of book value of net assets
Non-controlling interest $69,300
Goodwill:
Acquisition cost = $650,000
Add: Non-controlling interest = $69,300
Total Consideration paid = $719,300
Less: Fair value of net assets = $198,000
Goodwill = $521,300
QUESTION 4
a. Explain NCI is better considered as equity or debt.
Non-Controlling Income (NCI) is less than half of the sole proprietorship in an
organization, and the value stake held has little influence on financial backers' decisions
about how the organization operates. The range of voting rights is used to determine whether

or not a financial backer owns an NCI. Another name for this speculation is minority
ownership.
A non-controlling interest (minority interest) occurs when an ownership stake is less
than 50% of the outstanding voting shares. However, sometimes the threshold is lower, as a
shareholder may hold only 49% of a company, but by controlling the board of directors, can
direct decisions of the company.
For the majority of publicly traded companies, most shareholders would be classified as
holding non-controlling interests, as most have a wide shareholder base. It is generally not
until an investor holds 5%-10% of the total outstanding shares that they can push for a seat on
the board, or significantly drive changes at shareholders’ meetings by publicly lobbying for
them.
b. Explain why inter-group transactions must be eliminated.
Inter-company communications can be difficult to identify, so controls need to be in
place to ensure that each of these things is properly differentiated and taken into account by
company bookkeepers. This issue is especially worrying when the acquisition has recently
been completed because the new acquiree has not yet set up detailed controls. If an Effort
Asset Arrangement (ERP) framework is established throughout the organization, these
exchanges can be distinguished regularly by complimenting them, as it resembles an
intercompany thing.
When an intercompany exchange is distinguished at one period, it is not beyond the
realm of possibility that a similar exchange will occur later. Again, a sensible control would
be to have company bookkeepers roll up all previously confirmed intercompany transactions
and check if they are managed again in the current time frame.
QUESTION 5
Date Particulars Debit Credit
July 1, 2017 Investment in Associate
Cash
180000
180000
June 30,
2018
Investment in Associate
Income in Investment
63000
63000
June 30,
2018
Cash
Income in Associate
27000
27000

June 30,
2019
Investment in Associate
Income in Investment
33000
33000
June 30,
2019
Cash
Income in Associate
9000
9000
If an entity has a sizable amount of influence over another entity, the investment in
the associate is documented using the equity method. If the issue is silent, it is assumed that
the acquisition of 20% to 50% of the interest will have a major interest.
Shares of dividends will result in a loss in investment in an associate, whereas shares
of net income will result in a rise.