Consolidated and Separate Financial Statements - PDF

(1)
Solution - (i)
Computation of tax payable for the year ended 30 June, 2018
Particulars Amount Amount
Profit before tax $320,000
Add:
Depreciation expense $40,000
Amortization of development costs $30,000
Insurance expense $24,000
Entertainment expense $14,220
Fines and penalties $7,200
Legal fees $4,200
Restructuring expenses $25,000
Employee benefits expense $54,000
Doubtful debts expense $12,000
Rent received $27,000 $237,620
Less:
Royalty revenue $3,500
Rent revenue $25,000
Depreciation as per Tax $53,333
Development expense $150,000
Insurance expense paid $29,000
Restructuring expenses paid
Employee expenses paid $58,000
Doubtful debts written off $8,000 $(326,833)
Net taxable income $230,787
Tax payable @ 30% $69,236
Less: taxes paid for year 2018
1st payment for 30 June 2018 $9,570
2nd payment for 30 June 2018 $10,470
3rd payment for 30 June 2018 $7,550 $27,590
Net tax payable $41,646
Solution - (ii)
Deferred tax worksheet for the year ended 30 June, 2018
Particulars Carrying amount Tax
base
Temporary Differences
Deductible Taxable
Allowance for doubtful debts $26,000 $26,000

Prepad insurance $30,000 $30,000
Rent receivable $3,500 $3,500
Development costs $90,000 $90,000
Property, plant and equipment $110,000 $80,000 $30,000
Provision for restructuring $25,000 $25,000
Provision for employee benefits $61,000 $61,000
Total temporary diff. $112,000 $153,500
Deferred tax liability @ 30% $46,050
Deferred tax asset @ 30% $33,600
Opening balances $26,100 $17,150
Change for the year $7,500 $28,900
Journal entry
(a
)
To record deferred tax
expense
Income tax expense Dr. $ 21,400
Deferred tax asset Dr. $ 7,500
To Deferred tax liability Cr. $ 28,900
(b
)
To record income tax
expenses
Current tax expense Dr. $ 69,236
To Current tax lability Cr. $ 69,236
(2)
PART-A
Solution-1
Acquisition analysis as on 1 July, 2018
Particulars Amount Amount
Assets
Accounts receivable $28,840
Inventory $30,000
Buildings $200,000
Fixtures $75,000
Plant and equipment $42,000 $375,840
Liabilities
Guarantees $32,000
Accounts payable $32,600
Loans $74,200
Accrued interest on loans $4,300

Liquidation expenses $5,000 $(148,100)
Fair value of net assets acquired $227,740
Consideration paid in shares (2 shares for every 5 shares held
@ $7 $196,000
Consideration paid in patent $18,000
Gain on bargain purchase (Fair value less consideration
paid) $13,740
Solution-2
Journal entries to record acquisition
Particulars Dr./Cr. Amount
Accounts receivable Dr. $28,840
Inventory Dr. $30,000
Buildings Dr. $200,000
Fixtures Dr. $75,000
Plant and equipment Dr. $42,000
To Guarantees Cr. $32,000
To Accounts payable Cr. $32,600
To Loans Cr. $74,200
To Accrued interest on loans Cr. $4,300
To Liquidation expenses Cr. $5,000
To Gain on bargain purchase Cr. $13,740
To Share capital Cr. $196,000
To Patent Cr. $18,000
(Being purchase of business recorded)
Share capital Dr. $4,000
To Cash Cr. $4,000
(Being cost of issuing shares recorded)
Solution-3
Acquisition analysis as on 1 July, 2018
Particulars Amount Amount
Assets
Accounts receivable $28,840
Inventory $30,000
Buildings $200,000
Fixtures $75,000
Plant and equipment $42,000 $375,840

Liabilities
Guarantees $32,000
Accounts payable $32,600
Loans $74,200
Accrued interest on loans $4,300
Liquidation expenses $5,000 $(148,100)
Fair value of net assets acquired - (a) $227,740
Consideration paid in shares (2 shares for every 5 shares held
@ $10 $280,000
Consideration paid in patent $18,000
Goodwill (Consideration paid less fair value) $70,260
PART-B
The today's environment of business comes with lots of changes and challenges. To survive in
today's environment, business needs to encounter certain problems and have to do certain types of
business combinations. These business combinations are in the form of merging with another
company, purchasing the business of other companies, disinvesting, acquiring and so on.
With these business combinations, the acquisition related costs come. These costs are those costs
which are incurred in the business combination and are mandatory to incur. These acquisition costs
include the following type of expenses (Staff, 2018):
(a) advisor’s fees
(b) legal fees
(c) accounting and valuation fees
(d) professional and consulting services fees
(e) general administration expenses
(f) Costs of maintaining internal acquisitions
(g) costs of registration of debt and equity instruments and so on.
These costs are incurred by the company acquiring the business of another business means they are
incurred by the acquirer of the business.
The accounting treatment of these costs is defines under AASB 3, “Business combinations”.
According to AASB 3 these costs should be expensed off in the period in which they are incurred.
Meaning there by these costs should be charged to profit and loss account ("Business Combinations",
2018).
However, there is one exception to above treatment, that is for debt and equity issuance costs.
According to AASB 3, the debt and equity issuance costs should be capitalized in the period in which
they are incurred, since the benefits from these costs are expected to last for more than a year.
(3)

Part - A
Solution-1
Acquisition analysis as on 1 January, 2018
Particulars Amount Amount
Share capital $10,000
Retained earnings $3,000
Add: Inventories fair value $280
Fair value of net assets acquired - (a) $13,280
Consideration paid net of dividends - (b) $17,000
Goodwill (b-a) $3,720
Solution-2
Consolidation Journal Entries as on 1 July, 2018
Journal No. Particulars
Dr./Cr
. Amount
(a) Inventory Dr. $400
To Deferred tax liability Cr. $120
To Business combination valuation reserve Cr. $280
(Being fair valuation of inventory recorded)
Goodwill Dr. $3,720
To Business combination valuation reserve Cr. $3,720
(Being goodwill on acquisition recorded)
(b) Retained earnings (1/1/18) Dr. $3,000
Share captial Dr. $10,000
Business combination valuation reserve Dr. $4,000
To Shares in Melon Ltd Cr. $17,000
(Being acquisition of Melon Ltd recorded)
Dividend payable Dr. $3,000
To Dividend receivable Cr. $3,000
(Being dividend received from pre acquisition profit recorded)
Solution-3

Consolidation Journal Entries as on 31 December, 2018
Journal No. Particulars Dr./Cr. Amount
(c) Cost of sales Dr. $360
To Income tax expense Cr. $108
To Transfer from business combination valuation reserve Cr. $252
(Being sale of inventory recorded)
Inventories Dr. $40
To Deferred tax liability Cr. $12
To Business combination valuation reserve Cr. $28
(Being fair valuation of closing inventory recorded)
(d) Sales Dr. $5,000
To Cost of sales Cr. $4,000
To Inventory Cr. $1,000
(Being profit eliminated in ending inventory)
(e) Deferred tax asset Dr. $300
To Income tax expense Cr. $300
(Being tax expense recorded on above)
(f) Impairment loss of goodwill Dr. $1,860
To Goodwill Cr. $1,860
(Being goodwill written off)
(g) Other income Dr. $700
To Other expense Cr. $700
(Being elimination of management fee transaction recorded)
(h) Gain on sale of property, plant and equipment Dr. $3,500
To Machinery Cr. $3,500
(Being elimination of profit in sale of machinery recorded)
(i) Deferred tax asset Dr. $1,050
To Income tax expense Cr. $1,050
(Being tax expense on above recorded)
(j) Accumulated Depreciation Dr. $350
To Depreciation expense Cr. $350
(Being reversal of excess depreciation charged recorded)
(k) Income tax expense Dr. $105
To Deferred tax asset Cr. $105
(Being tax expense on above recorded)
(l) Dividend revenue Dr. $1,000
To Interim dividend paid Cr. $1,000

(Being elimination of dividend transaction recorded)
Consolidated Worksheet
Account Water Ltd Melon
Ltd
Journ
al no.
Eliminations Journ
al no. Group
Dr Cr
Sales revenue $25,000 $23,600 d
$5,00
0 $43,600
Dividend revenue $1,000 l
$1,00
0 $-
Gain on sale of property,
plant and equipment $1,000 $3,500 h
$3,50
0 $1,000
Other income $1,000 $2,000 g $700 $2,300
Total income $28,000 $29,100 $46,900
Cost of sales $21,000 $18,000 c $360
$4,00
0 d $35,360
Other expenses $3,000 $1,000 f
$1,86
0
$1,05
0 g,j $4,810
Total expenses $24,000 $19,000 $40,170
Profit before income tax $4,000 $10,100 $6,730
Income tax expense $1,350 $1,950 k $105
$1,45
8 c,e,i $1,947
Profit for the period $2,650 $8,150 $4,783
Retained earnings
(01/01/2018) $6,000 $3,000 b
$3,00
0 $6,000
$8,650 $11,150 $10,783
Interim dividend paid $(2,500) $(1,000)
$1,00
0 l $(2,500)
Retained earnings
(31/12/2018) $6,150 $10,150 $8,283
STATEMENT OF PROFIT & LOSS AND OTHER COMPREHENSIVE INCOME
For the year ended on 31 December, 2018
Particulars Amount Amount
Income:
Sales $43,600
Less: Cost of sales $35,360
Gross Profit $8,240
Add: Other income
Gain on sale of property, plant and equipment $1,000
Other income $2,300 $3,300
Less: Other expenses $4,810

Profit before tax $6,730
Less: Income tax expense $1,947
Profit for the period $4,783
Other comprehensive income (OCI)
Revaluation of PPE $1,650
Income tax relating to above $(495) $1,155
Total comprehensive income $5,938
Profit can be of two types, one is realized profit and other is unrealized profit. The realized profit is that
profit which has been actually earned by the business. On the other hand, the unrelized profit is that
profit which has not been actually earned or realized by the business. In the consolidation, there are
various intra group transactions between the companies in the group. These transactions involves
profit element and this profit element needs to be eliminated from the consolidation. This elimination is
required to be done since the profit has not been actually earned by the business and reflects the
notional income entry. Hence, the impact of such entries needs to be eliminated. This unrealized profit
gets realized when it is sold to the external parties. Until it is sold to the external parties, the gain
involved needs to be removed from the transactions.
These intra group transactions involve the following type of transactions ("Consolidated and Separate
Financial Statements", 2018):
(a) Gain on sale of non-current depreciable assets – The transfer or sale of non-current assets
between the group companies normally involves the profit means this transfer is made at profit. Since,
this profit is an unrealised profit, hence it needs to be eliminated from the books, since the one
company is earning profit and other company is spending extra cost. Along with elimination of gain
entry, the excess depreciation charged due to this gain also needs to be eliminated. Along with the
gain and depreciation reversal entry, the impact of tax on such entries also needs to be taken care off.
(b) Profit in ending and opening entry – Another common transaction between intra group companies
is the sale of inventory at profit. Again this transaction involves unrealised profit in the form of extra
cost of gain earned by one company on sale of inventory to another company. This profit also needs
to be eliminated from inventory and along with profit the intra company sales and cost of sales figures
also needs to be corrected by eliminating the intra group sale and cost of sales involved in these
figures. Further, the depreciation impact on such elimination also needs to be entered in the books.
(c) Gain on sale of non-current non-depreciable assets – Another type of transaction is the intra group
sale of non-depreciable assets (like land) at a profit. And hence, the gain on sale of such non
depreciable assets needs to be eliminated as this profit is an unrealized profit and is not actually
earned by the business. Along with gain elimination, the tax impact also needs to be done.
(4)
Solution-1
Acquisition analysis as on 1 July, 2015
Using partial goodwill method

Particulars Amount Amount
Share Capital $200,000
Retained Earnings $55,000
Asset revaluation surplus $50,000 $305,000
Fair value of Inventories ((67000-60000)*(1-30%)) $4,900
Fair value of Plant & Machinery ((90000-75000)*(1-30%)) $10,500 $15,400
Goodwill already recorded $(20,000)
Fair value of identifiable assets and liabilities of Scotch Ltd $300,400
Equivalent fair value of assets acquired - (a) (300,400*80%) $240,320
Consideration paid (net of dividends of $20,000) - (b) $310,000
Goodwill (b-a) $69,680
Solution-2
Acquisition analysis as on 1 July, 2015
Using full goodwill method
Particulars Amount Amount
Share Capital $200,000
Retained Earnings $55,000
Asset revaluation surplus $50,000 $305,000
Fair value:
- Inventories ((67000-60000)*(1-30%)) $4,900
- Plant & Machinery ((90000-75000)*(1-30%)) $10,500 $15,400
Less: Goodwill $(20,000)
Fair value of identifiable assets and liabilities of Scotch Ltd $300,400
Consideration paid (net of dividends of $20,000) - (a) $310,000
Non controlling interest - (b) $68,000
Aggregate of (a) and (b) $378,000
Goodwill (excess of consideration paid and NCI over fair value) $77,600
Goodwill of Scotch Ltd
Fair value (68000/20%) $340,000
Fair value of identifiable assets and liabilities of Scotch Ltd $300,400
Goodwill of Scotch Ltd $39,600
Recorded goodwill $20,000
Unrecorded goodwill $19,600
Goodwill of Butter Ltd
Goodwill acquired $77,600
Goodwill of Scotch Ltd $39,600
Goodwill of Butter Ltd - Control premium $38,000

Solution-3
Consolidation Worksheet Entries as at 1 July, 2015
Particulars Dr./Cr. Amount
Accumulated Depreciation Dr. $125,000
To Plant Cr. $110,000
To Deferred tax liability Cr. $4,500
To Business Combination Valuation Reserve Cr. $10,500
(Being plant recorded at fair value)
Inventories Dr. $7,000
To Deferred tax liability Cr. $2,100
To Business Combination Valuation Reserve Cr. $4,900
(Being inventories recorded at fair value)
Share Capital Dr. $160,000
Retained Earnings Dr. $44,000
Asset revaluation surplus Dr. $40,000
Goodwill Dr. $38,000
Business combination valuation reserve ( (4900+10500+19600)*80%) Dr. $28,000
To Investment in Scotch Ltd. Cr. $310,000
(Being acquisition of subsidiary recorded)
Share Capital Dr. $40,000
Retained Earnings Dr. $11,000
Asset revaluation surplus Dr. $10,000
Business combination valuation reserve ( (4900+10500+19600)*20%) Dr. $7,000
To NCI Cr. $68,000
(Being NCI share recorded)
Dividend Payable Dr. $20,000
To Dividend Receivable Cr. $16,000
To NCI Cr. $4,000
(Being dividend from pre acquisition profits recorded)
Solution-4
Consolidation Worksheet Entries as at 30 June, 2018
Particulars Dr./Cr. Amount
Accumulated Depreciation Dr. $125,000
To Plant Cr. $110,000
To Deferred tax liability Cr. $4,500
To Business Combination Valuation Reserve Cr. $10,500
(Being plant recorded at fair value)

Depreciation expense (12000/4 + 3000/4/2) Dr. $3,375
Retained earnings (1/7/17) (15000/4*2) Dr. $7,500
To Accumulated depreciation Cr. $10,875
(Being depreciation recorded on above fair valuation of Plant)
Deferred tax asset Dr. $3,263
To Income tax expense Cr. $1,013
To Retained earnings (1/7/17) Cr. $2,250
(Being tax impact on above depreciation recorded)
Share Capital Dr. $160,000
Retained Earnings Dr. $47,920
Asset revaluation surplus Dr. $40,000
Goodwill Dr. $38,000
Business combination valuation reserve ((10500+19600)*80%) Dr. $24,080
To Investment in Scotch Ltd. Cr. $310,000
(Being acquisition of subsidiary recorded)
Share Capital Dr. $40,000
Retained Earnings Dr. $11,980
Asset revaluation surplus Dr. $10,000
Business combination valuation reserve ((10500+19600)*20%) Dr. $6,020
To NCI Cr. $68,000
(Being NCI share recorded)
Profit on sale of machinery Dr. $6,000
To Machinery Cr. $6,000
(Being profit in sale of machinery eliminated)
Deferred tax asset Dr. $1,800
To Income tax expense Cr. $1,800
(Being tax impact on above elimination recorded)
Accumulated Depreciation (6000/4/2) Dr. $750
To Depreciation expense Cr. $750
(Being reversal of excess depreciation charged on above gain recorded)
Income tax expense Dr. $225
To Deferred tax asset Cr. $225
(Being tax impact on above reversal recorded)
Asset revaluation surplus Dr. $10,000
To Retained earnings Cr. $10,000
(Being amount transferred)
Retained earnings Dr. $20,000
To General reserve Cr. $20,000
(Being amount transferred)
Dividend revenue ((7000+4000+3000)*80%) Dr. $11,200
To Dividend paid and declared Cr. $11,200
(Being inter company dividend transaction eliminated)

Retained earnings (1/7/17) Dr. $1,750
Income tax expense Dr. $750
To Cost of sales Cr. $2,500
(Being profit in opening inventory eliminated)
Sales Dr. $7,500
To Cost of sales Cr. $6,250
To Inventory Cr. $1,250
(Being profit in closing inventory eliminated)
Deferred tax asset Dr. $375
To Income tax expense Cr. $375
(Being tax impact on above elimination recorded)
Retained earnings (1/7/17) Dr. $5,000
To Vehicle Cr. $5,000
(Being elimination of profit in sale of vehicle recorded)
Deferred tax asset Dr. $1,500
To Income tax expense Cr. $1,500
(Being tax impact on above elimination recorded)
Accumulated Depreciation (5000*10%*2) Dr. $1,000
To Depreciation expense Cr. $500
To Retained earnings (1/7/17) Cr. $500
(Being reversal of excess depreciation charged recorded)
Income tax expense Dr. $150
Retained earnings (1/7/17) Dr. $150
To Deferred tax asset Cr. $300
(Being tax impact on above depreciation reversal recorded)
NCI ((7000+4000+3000)*20%) Dr. $2,800
To Dividend paid and declared Cr. $2,800
(Being dividend paid to NCI recorded)
NCI share of comprehensive income ((28000)*20%) Dr. $5,600
To NCI Cr. $5,600
(Being NCI share in comprehensive income recorded)
References:
Business Combinations. (2018). Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf
Staff, I. (2018). Acquisition Cost. Retrieved from https://www.investopedia.com/terms/a/acquisition-
cost.asp

Consolidated and Separate Financial Statements. (2018). Retrieved from
http://www.aasb.gov.au/admin/file/content102/c3/AASB127_03-08_ERDRjun10_07-09.pdf