Consolidated Financial Statements: Purpose, Group, Parent and Subsidiary, Adjustments, and Profit Transfers

This study material explains the purpose of consolidated financial statements, the entities involved in a group, parent and subsidiary, adjustments for intra-group transactions, and profit transfers within the group. It provides a comprehensive understanding of the topic.

ANSWER 1
Memo to Palvidia Limited
To: Members of Executive Team
From : Chief Financial Officer
Date: 03/09/2018
Subject: Issues relating to Purchase of Shares in Soletta Limited
Purpose of Consolidated Financial Statements
The main purpose of the financial statements in the consolidated form is to lay down the
financial performance as well as the financial position of the parent company and all of its
subsidiaries. The second purpose of the consolidated financial statement is to disclose the results
for the benefits of the stakeholders of the company in the manner that the group represents one
single entity even though it has number of subsidiaries (Hove,2016).
Group, Parent and Subsidiary
The entity which controls the management and the functioning of the other entity is known as
parent entity.
The entity which is controlled by the other entity is known as the subsidiary (AASB, 2011).
The group is the broad term and includes the parent entity and the number of subsidiaries in
which the parent entity has the controlling power.
Name of Student, Student ID 1

Number of Parents Group Can have
The group can have only one parent company which will be presenting the financial results of all
the subsidiaries on which it exercises the control in accordance with the provisions of the
Australian Accounting standard. If there is more than one parent in the group then the financial
statements cannot be presented in the defined and consolidated manner. Thus, the group has
only one parent company (IAS Website, 2016).
Necessity of Adjustments for intra group Transactions
Intra group transactions always occur between the subsidiary and the parent entity in the normal
course of business. The adjustments relating to these transactions shall be done on the regular
basis. It is because of the fact that there is the high possibility of having the transactions recorded
in the books of accounts twice till the time it is knock off while preparing the financial
statements (AASB 101; Accounting for Intra group Transactions, 2016).
Realization of Profit transfers within the Group
The profits are realized when the entity outside of the group is involved. It means when the
inventory is sold to the other entity, which is not the part of the group, the profit will be realized.
Best Regards,
Chief Financial Officer
Name of Student, Student ID 2

ANSWER 2
Answer 2
(a) PALDIVIA LIMITED
Acquisition Anlaysis
Cost of Acquisition
Cash
$
1,000,000
Shares in Soletta Limited $ -
$
1,000,000
Book Value of Net Assets
Share Capital
$
650,000
General Reserve
$
20,000
Retained Earnings
$
250,000
Total Book Value of Net Assets
$
920,000
Add:
Fair Value Adjustments
Increase in Equipment
$
30,000
Increase in Contingent Liability
$
(40,000)
$
(10,000)
Fair Value of Net Assets
$
910,000
Goodwill (100% Acquisition)
$
90,000
Name of Student, Student ID 3

Answer 2
(b) General Journal
Date Particulars Debit Amount Credit Amount
PRE ACQUISITION
1-Jul-
19 Retained Earnings $ 250,000
Share Capital $ 650,000
Business Combination Valuation Reserve $ 100,000
Shares in Soletta Limited $ 1,000,000
AT THE TIME OF ACQUISITION
1-Jul-
19 Depreciation - Accumulated $ 80,000
To Equipment $ 80,000
1-Jul-
19 Equipment $ 80,000
Business Combination Valuation Reserve $ 80,000
1-Jul-
19 Goodwill $ 90,000
Business Combination Valuation Reserve $ 90,000
AFTER ACQUISITION
1-Jul-
19 Depreciation $ 40,000
Retained Earnings $ 40,000
Accumulated Depreciation $ 80,000
Consolidation Entries
1 Share Capital $ 1,000,000
Share in Soletta Limited $ 1,000,000
2 Goodwill $ 90,000
Name of Student, Student ID 4

Share in Soletta Limited $ 90,000
ANSWER - 3
Answer 3 General Journal
S.
No. Partiuculars Debit Amount Credit Amount
a) Retained Earnings $ 175
Income Tax Expense $ 75
To Cost of Sales $ 250
b) Retained Earnings $ 2,800
Deferred Tax' $ 1,200
To Tractor $ 4,000
Accumulated Depreciation $ 600
To Depreciation $ 400
To Retained Earnings $ 200
(10% for 1.5 years on $6000)
Income Tax Expense $ 120
Retained Earnings $ 60
To Deferred Tax Asset $ 180
c) Retained Earnings $ 70
Income Tax Expense $ 30
To Cost of Sales $ 100
Inventory $ 300
To Bank $ 300
Inventory $ 100
Name of Student, Student ID 5

To Bank $ 100
d) Management Services Income $ 3,000
To Management Services Expense $ 3,000
`
e) Loan From Salto Limited $ 50,000
To Loan to Patagonia Limited $ 50,000
Interest Revenue $ 1,500
To Interest Expense $ 1,500
Interest Revenue $ 1,500
To Interest Expense $ 1,500
f) Dividend Revenue $ 1,500
To Interim Dividend Paid $ 1,500
g) Dividend Payable $ 3,000
To Final Dividend declared $ 3,000
Dividend Revenue $ 3,000
To Dividend Receivable $ 3,000
REFERENCES
1. Hove M, (2016), “Consolidated Financial Statements – An International Perspective”,
available on https://books.google.co.in/books?
id=BcgtnlDHsXcC&printsec=frontcover&dq=online+free+books+on+consolidation+of+
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financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false accessed on
03/09/2018.
2. AASB official website, (2011), “Consolidated Financial Statements”, available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf accessed on
03/09/2018.
3. AASB official website, (2011), “AASB101 Presentation of Financial Statements”
available on http://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-
04_COMPsep05_01-06.pdf accessed on 03/09/2018.
4. Accounting For Intra Group Transaction, (2016), available on
https://pdfs.semanticscholar.org/8b79/9c267539fb30ee0d77c42ec64350402ba255.pdf
accessed on 03/09/2018.
5. IAS Website, (2016), “IAS 27 Consolidate and Separate Financial Statements”,
available on https://www.iasplus.com/en/standards/ias/ias27 accessed on 03/09/2018.
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