Consolidation: Solutions for Accounting, Liquidation, and Investment in Joint Venture

This document provides solutions for accounting, liquidation, and investment in joint venture. It includes journal entries, calculations for allocation of funds, goodwill, and acquisition analysis. The document also explains the process of accounting for investment in joint venture and liquidation of a company.

Consolidation
Consolidation
1 | P a g e

Consolidation
Table of Contents
Solution: 1(i)................................................................................................................................................3
Solution: 1(ii)...............................................................................................................................................6
Solution: 2...................................................................................................................................................9
Solution: 3.................................................................................................................................................10
Solution: 4.................................................................................................................................................11
Reference:.................................................................................................................................................12
2 | P a g e

Consolidation
Solution: 1(i)
Accounting for investment in joint venture is done as per regulated standards. According to
which investment value is increased by the amount of share in profit (Murray, 2018). Dividend
received from investment will reduce the investment value (CFI, no date).
Sr. No. Date
50,000.00
50,000.00
15,000.00
15,000.00
24,000.00
24,000.00
13,500.00
13,500.00
4,500.00
4,500.00
12,000.00
12,000.00
3,000.00
3,000.00
4 30/06/2019
30/06/20195
6 30/06/2020
2 30/06/2018
(Being profit share transferred to investment
3 30/06/2018
(Being dividend received)
Cash A/c Dr.
To Investment in Fry Ltd. A/c
(Being dividend received)
To Share in income of Fry Ltd. A/c
7 30/06/2020
(Being profit share transferred to investment
(Being profit share transferred to investment
Cash A/c Dr.
To Investment in Fry Ltd. A/c
(Being dividend received)
Investment in Fry Ltd. A/c Dr.
Amount ($)
1 01/07/2017
Investment in Fry Ltd. A/c Dr.
To Cash A/c
(Being investment made in Fry Ltd.)
Investment in Fry Ltd. A/c Dr.
To Share in income of Fry Ltd. A/c
Cash A/c Dr.
To Investment in Fry Ltd. A/c
Entries
Investment in Fry Ltd. A/c Dr.
To Share in income of Fry Ltd. A/c
Value of Investment as on 01.07.2017 50,000.00
Add: Share in profit 15,000.00
Less: Dividend Received (30%) -24,000.00
Value of Investment as on 30.06.2018 41,000.00
Add: Share in profit 13,500.00
Less: Dividend Received (30%) -4,500.00
Value of Investment as on 30.06.2019 50,000.00
Add: Share in profit 12,000.00
Less: Dividend Received (30%) -3,000.00
Value of Investment as on 30.06.2020 59,000.00
Calculation of Value of Investment (Amount $)
3 | P a g e

Consolidation
Year 2018
Profit before tax 80,000.00
Less: Income Tax 30,000.00
Profit after tax 50,000.00
Share in Profit @ 30% 15,000.00
Year 2019
Profit before tax 70,000.00
Less: Income Tax 25,000.00
Profit after tax 45,000.00
Share in Profit @ 30% 13,500.00
Year 2020
Profit before tax 60,000.00
Less: Income Tax 20,000.00
Profit after tax 40,000.00
Share in Profit @ 30% 12,000.00
Calculation of Share in Profit (Amount $)
4 | P a g e

Consolidation
5 | P a g e

Consolidation
Solution: 1(ii)
Sr. No. Date
45,000.00
5,000.00
50,000.00
24,000.00
24,000.00
9,000.00
27,000.00
36,000.00
Share Capital of Fry Ltd. A/c Dr. 21,000.00
63,000.00
84,000.00
4,500.00
4,500.00
9,000.00
36,000.00
45,000.00
Share Capital of Fry Ltd. A/c Dr. 21,000.00
84,000.00
105,000.00
3,000.00
3,000.00
9,000.00
45,000.00
54,000.00
Share Capital of Fry Ltd. A/c Dr. 21,000.00
105,000.00
126,000.00
9 30/06/2020
10 30/06/2020
Share Capital A/c Dr.
Retained Earnings A/c Dr.
To Share in equity of Fry Ltd. A/c
(Being investment in Fly Ltd. reversed)
To Share in equity of Fry Ltd. A/c
To Minority Interest A/c7 30/06/2019
Retained Earnings of Fry Ltd. A/c Dr.
(Being share capital transferred to minority
interest)
8 30/06/2020
Goodwill A/c Dr.
To Minority Interest A/c
(Being share capital transferred to minority
interest)
Share Capital A/c Dr.
Retained Earnings A/c Dr.
To Share in equity of Fry Ltd. A/c
(Being investment in Fly Ltd. reversed)
Retained Earnings of Fry Ltd. A/c Dr.
(Being divident of Small Ltd. reversed)
To Minority Interest A/c
3 30/06/2018
2 30/06/2018
Dividend Income A/c Dr.
To Dividend Expense A/c
4 30/06/2018
Retained Earnings of Fry Ltd. A/c Dr.
(Being share capital transferred to minority
interest)
Entries
Dividend Income A/c Dr.
To Dividend Expense A/c
(Being divident of Small Ltd. reversed)
5 30/06/2019
Dividend Income A/c Dr.
To Dividend Expense A/c
(Being divident of Small Ltd. reversed)
6 30/06/2019
Share Capital A/c Dr.
Retained Earnings A/c Dr.
(Being investment in Fly Ltd. reversed)
Journal Entries
Amount ($)
1 01/07/2017
Shares in equity of Fry Ltd. A/c Dr.
To Cash A/c
(Being investment in Fly Ltd. recognized)
6 | P a g e

Consolidation
Sales Consideration 50,000.00
Less:
Share in share capital 9,000.00
Share in retained earning 36,000.00
45,000.00
Goodwill 5,000.00
Calculation of Goodwill (Amount $)
7 | P a g e

Consolidation
Calculation of amount of investment to be reversed
Year 2018
Profit before tax 80,000.00
Less: Income Tax 30,000.00
Profit after tax 50,000.00
Add: Retained Earning 120,000.00
Less: Dividend Paid 80,000.00
Retained Earning at year end (A) 90,000.00
Share Capital (B) 30,000.00
Total Equity (A + B) 120,000.00
Shares in equity to be reversed @ 30 % 9,000.00
Year 2019
Profit before tax 70,000.00
Less: Income Tax 25,000.00
Profit after tax 45,000.00
Add: Retained Earning 90,000.00
Less: Dividend Paid 15,000.00
Retained Earning at year end (A) 120,000.00
Share Capital (B) 30,000.00
Total Equity (A + B) 150,000.00
Shares in equity to be reversed @ 30 % 45,000.00
Year 2020
Profit before tax 60,000.00
Less: Income Tax 20,000.00
Profit after tax 40,000.00
Add: Retained Earning 120,000.00
Less: Dividend Paid 10,000.00
Retained Earning at year end (A) 150,000.00
Share Capital (B) 30,000.00
Total Equity (A + B) 180,000.00
Shares in equity to be reversed @ 30 % 54,000.00
8 | P a g e

Consolidation
Solution: 2
At the time liquidation of any company, the realization of the assets is allocated to the secured
creditors, liquidators etc. and the balance shall be distributed proportionately (AccountingTool,
2018). In the liquidation process tax liabilities and government rates are also given priority than
others (Swayamjit, no date).
Realisation from Assets 14,250,000.00
Secured Land and Buildings 7,500,000.00
Other Assets 6,750,000.00
Preferential Allocation of Expenses 11,100,000.00
Liquidator Expenses 600,000.00
Receiver cost on realising secured assets 150,000.00
Secured Creditor 9,000,000.00
Tax Payable 1,050,000.00
Local Government Rates 300,000.00
Net amount available to unsecured
liabilities subject to proportionate
distribution
3,150,000.00
Unsecured bank overdraft 450,000.00
Unsecured trade payables 1,440,000.00
Staff wages payable 540,000.00
Staff leave entitlement 90,000.00
Executive's director wages payable 270,000.00
Executive's director leave entitlement 90,000.00
Dividend Payable 270,000.00
Net available to contributories NIL
Calculation of allocation of fund realised on liquidation (Amount in $)
9 | P a g e

Consolidation
Payable Percentage
Distributable
Amount
Proportionate
Amount
Unsecured bank overdraft 750,000.00 0.142857143 3,150,000.00 450,000.00
Unsecured trade payables 2,400,000.00 0.457142857 3,150,000.00 1,440,000.00
Staff wages payable 900,000.00 0.171428571 3,150,000.00 540,000.00
Staff leave entitlement 150,000.00 0.028571429 3,150,000.00 90,000.00
Executive's director wages payable 450,000.00 0.085714286 3,150,000.00 270,000.00
Executive's director leave entitlement 150,000.00 0.028571429 3,150,000.00 90,000.00
Dividend Payable 450,000.00 0.085714286 3,150,000.00 270,000.00
Total unsecured portion 5,250,000.00 3,150,000.00
Calculation of proportion of unsecured options (Amount in $)
10 | P a g e

Consolidation
Solution: 3
Sr. No. Date
137,600.00
169,936.00
306,160.00
1,376.00
34,400.00
42,484.00
76,884.00
-
63,984.00
63,984.00
11,180.00
11,180.00
6,020.00
6,020.00
4,816.00
4,816.00
2,064.00
2,064.00
30,100.00
30,100.00
22,790.00
22,790.00
4 30/06/2019
Entries Amount ($)
1 30/06/2019
Share Capital A/c Dr.
To BCVR A/c
(Being effect of holding in investment and equity
eliminated)
(Being unrealized profit portion in inventory
Sales A/c Dr.
To Inventory A/c
(Being unrealized profit portion in inventory
Sales A/c Dr.
To Inventory A/c
Sales A/c Dr.
To BCVR A/c
(Being unrealised profit on opening inventory
transferred to BCVR)
To Investment in Seven Ltd. A/c
Retained Earnings A/c Dr.
To Dividend Exp. A/c
(Being adjustment entry passed for dividend)
Seven Ltd. A/c Dr.
To BCVR A/c
(Being difference of $ 55,900 less $ 44,720 has
been recognized in BCVR reserve)
Share Capital A/c Dr.
Retained Earnings A/c Dr.
To Non-Controlling Interest A/c
(Being non controlling interest recognized)
Dividend Income A/c Dr.
9 30/06/2019
Management fees income A/c Dr.
To Management fees expense A/c
(Being unrealised profit on sale of plant reversed)
Consolidated Journal Entries
8 30/06/2019
Gain on Plant A/c Dr.
To Plant A/c
(Being unrealised profit on sale of plant reversed)
5 30/06/2019
6 30/06/2019
7 30/06/2019
2 30/06/2019
3 30/06/2019
11 | P a g e

Consolidation
As on 01 July 2010
Share Capital of Seven Ltd. 172,000.00
Retained Earnings 146,200.00
Net Assets 318,200.00
Less: Value of Investment 306,160.00
Goodwill 12,040.00
1. Acquisition Analysis
2. Calculation of Non Controlling Interest
As on 30 June 2019
Share Capital of Seven Ltd. 172000
Retained Earnings 212420
Net Assets 384420
Non Controlling Interest @ 20% 76884
12 | P a g e

Consolidation
Solution: 4
Business Report
Report To : Bill Handy, Finance Director
Company : Northern Australia Global Investment Ltd (NAGIL)
Subject : Consolidation requirement to the company
Background:
The company has provided its fund to various entities either in terms of loan or equity
investment in these companies. The management of the company has doubt about the
consolidation of the financial statements with the financial statements of the other
entities in which the company has stake. They are required to analyze each facts of
the case from the AASB 10 perspective (ACCA, no date). As a business advisor we
are analyzing each case and suggesting the consolidation requirement of the
company. The detailed discussion is as follows:
Basic Framework:
AASB 10 deals with the consolidation of the financial statements. In organizational
environment each organization is connecting to each other either through the
investment in the equity of each other or through the providing loans or other
facilities. Now there is a concept of the consolidation of the financial statements of
these companies (Deloitte, no date). Generally, consolidation is taken place where
number of the companies is operating under the same group. In a group each
company or single company has good amount of stake in the other company, it make
compulsory consolidation of these financial statement. But, there may number of
cases where one entity holds its interest directly or indirectly in other company. In
this situation, consolidation of the financial statement depends on the facts of the
case. To analyze these facts, there should be common criteria on the basis of which,
consolidation requirement can be justified (Drew, 2017).
In the line of resolving the problem of the consolidation requirement AASB 10
provide the basic rules or procedure which needs to be followed to come at the
decision of consolidation of the financial statements of an entity (Knapp, 2013).
AASB 10 describes some factors like controls in an entity, power to influence the
return etc. In other words, it can be said that where an entity has the control in other
13 | P a g e

Consolidation
entities, its subordinates’ companies then the company should prepare the
consolidated accounts. AASB 10 emphasis the three terms for the decision of the
consolidation these are control, power and return (AASB, no date).
Para 7 of the AASB 10 deals with the control i.e. it describes that there may be
control where an entity has power on other entity, one entity is involved in the other
company’s operations or one company has the power to influence the return of
investor company. Para 10 and 11, deals with the concept of power in other entities. It
describes that when an entity is able to monitor some critical activities of other entity,
which affects the return of the other company, then it will be considered that entity
has power to influence the return of other company (Orpurt, 2016).
Para 15 and 16 of the AASB 10, deals with the return of an entity. It refers to the
return on investment may be vary from the actual position of the investee company
because of the contributing company during its involvement in the investee company
may influence such return. Where the contributing company has dominant position in
the other company, then return from the other company might be fluctuating (PWC,
no date).
As such, AASB 10 has the underlying rules or techniques to analyze the facts of the
case, based on which one can conclude that whether consolidated financial statements
to be prepared or not (Sullivan, no date). Based on the above discussion we are
analyzing the situation persisting in front of the company NAGIL from the
consolidation perspective.
i) In this case, the loan has been given by the NAGIL to Struggle Ltd. Further,
the loan has been converted into equity due to which, NAGIL obtain the 70
percent holdings in Struggle Ltd. Struggle position is not good as it is
accumulating huge amount of losses. There no such limit has been specified in
the AASB 10, fulfilling which consolidation become necessary. As, the
NAGIL has not involve in the operation as well as financial operations of the
Struggle Ltd.
The company NAGIL covers 70 percent equity in the Struggle Ltd., which is a
substantial portion of equity. In this situation, it would not be meaningful to
discuss whether the company has not involved in the operation activities. Para
10 of the AASB 10, applies here and it can be said that NAGIL has by way of
substantial portion in equity, has control over the Struggle Ltd.
As such, it can be concluded that NAGIL can lead to the consolidated
financial statements.
14 | P a g e

Consolidation
ii) In this situation, NAGIL has contributed in the VBCL by way of providing the
loan. VBCL has not been able to repay the loan due to financial crunch. But,
as bailout package, the mutual agreement has been come into exits that the
operating and financial transaction shall be taken place with the approval of
the designated employee of the NAGIL. NAGIL also does not have board
membership in VBCL. Besides that, NAGIL got a critical position in the
VBCL of passing the bills relating to financial transaction.
As per AASB 10, all the consolidation related decisions are not taken
according to the underlying rules. Some of them are taken on the basis of facts
and circumstances of the case. NAGIL is engaged in such activity, which may
influence the return of the investors or investee as well. As such, NAGIL
fulfills the conditions of Para 7 of the AASB 10 and It should prepare the
consolidated financial statements with VBCL.
iii) In such case, there are two entities NAGIL and SPL. These entities has owns
the 50 percent portion of equity of the MSCL. Both these has equal voting
right in MSCL. Apart from that, NAGIL has also provided the loan facility to
the MSCL and it was agreed that, SPL will be engaged in its expertise area of
management fees. For the purpose of consolidation, it is necessary to
understand the control over the other entity. In this case, NAGIL is majorly
involved in the MSCL activity by way of equity portion and debt. Its major
involvement may influence the return to the investors in comparison of the
SPL. From the AASB 10 perspective, NAGIL has control over the MSCL and
it should go for the preparation of consolidated financial statements with
MSCL.
iv) In the instant case, NAGIL has obtained the 40 percent share in equity of
CrocsRUs. The balance 60 percent portion is hold by the two director of the
company CrocsRUs. The power relating to the operational activities has been
sublet to the NAGIL by the directors of the CrocsRUs. As such, NAGIL has
obtained such power in which chances of return influencing is greater. But,
the director of CrocsRUs are monitoring the regular activities of the company
so that, NAGIL cannot try to influence the return of their investment.
Influencing the return on investment is the basic need for the determination of
the control of one entity in another.
As per AASB 10, where an entity is not able to influence the return on
investment, then it cannot be said that the company has control over the other
company. Para 7 has some conditions, which needs to be fulfilled for the
decision of the consolidation. In this case, the condition of influence of return
on investment has not been fulfilled due to which it cannot be said that the
company has control in the other entity. In this situation, NAGIL has no
15 | P a g e

Consolidation
control over the CrocsRUs. Thus, NAGIL should prepare the consolidated
financial statements.
Consol:
XYZ
(Business Advisor)
16 | P a g e

Consolidation
Reference:
AASB (no date), Consolidated Financial Statements [Online] Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Assessed 15 September
2018]
AccountingTool (2018), Liquidation basis of accounting [Online] Available from:
https://www.accountingtools.com/articles/liquidation-basis-of-accounting.html [Assessed 15
September 2018]
ACCA (no date), Preparing simple consolidated financial statements [Online] Available from:
https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-
resources/f3/technical-articles/preparing-simple-consolidated-financial-statements.html
[Assessed 15 September 2018]
CFI (no date), Associates & Joint Venture Accounting [Online] Available from:
https://corporatefinanceinstitute.com/resources/ebooks/investment-banking/jv-joint-venture-
accounting-associates/ [Assessed 15 September 2018]
Deloitte (no date), Interest in Joint Ventures [Online] Available from:
https://www.iasplus.com/en/standards/ias/ias31 [Assessed 15 September 2018]
Drew, J. (2017), FASB issues proposal for consolidation of VIEs [Online] Available from:
https://www.journalofaccountancy.com/news/2017/jun/private-company-accounting-alternative-
for-vie-consolidation-201716931.html [Assessed 15 September 2018]
Knapp, J. (2013), A Reconsideration of Consolidation Accounting Requirements and Pre-
acquisition Dividends [Online] Available from:
https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1835-2561.2012.00190.x [Assessed 15
September 2018]
17 | P a g e

Consolidation
Murray, J. (2018), What is Joint Venture and How Does It Works? [Online] Available from:
https://www.thebalancesmb.com/what-is-a-joint-venture-and-how-does-it-work-397540
[Assessed 15 September 2018]
Orpurt, S. (2016), Why Consolidation Accounting Matters to Reporters [Online] Available from:
https://businessjournalism.org/2016/08/business-basics-consolidation-accounting-matters-
reporters/ [Assessed 15 September 2018]
PWC (no date), Consolidation / Joint Venture Formation Accounting [Online] Available from:
https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/consolidations-joint-
venture-formation-accounting.html [Assessed 15 September 2018]
Swayamjit (no date), Liquidator’s Financial Statement of Account [Online] Available from:
http://www.yourarticlelibrary.com/accounting/liquidation-of-companies/liquidators-final-
statement-of-account-with-format/58525 [Assessed 15 September 2018]
Sullivan, D. (no date), Joint Venture Accounting Methods [Online] Available from:
https://work.chron.com/joint-venture-accounting-methods-28514.html [Assessed 15 September
2018]
18 | P a g e