Corporate Accounting: Acquisition, Consolidation, and Non-Controlling Interest

This document provides a comprehensive overview of corporate accounting, focusing on topics such as acquisition, consolidation, and non-controlling interest. It includes calculations, journal entries, and explanations for various scenarios. The content covers taxable profit calculation, deferred tax liability or asset determination, necessary journal entries for different transactions, evaluation of intra-group transactions, and disclosure of non-controlling interest.

Corporate
Accounting

INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................2
Question 1........................................................................................................................................2
(a). Calculate the taxable profit...................................................................................................2
(b). Determine the deferred tax liability or deferred tax asset that will result.............................3
(c). Prepare the necessary journal entries on 30 June 2017.........................................................3
Question 2........................................................................................................................................4
(a). Pass necessary journal entries to record acquisition.............................................................4
(b). Determined the amount of goodwill arising out of the acquisition.......................................4
(c). Pass the necessary consolidation entry to eliminate the subsidiary by the parent company.5
(d). Determine the amount of goodwill arising out of the acquisition if the purchase
consideration paid........................................................................................................................5
Question 3........................................................................................................................................6
(a). Provide the necessary Journal entries....................................................................................6
Question 4........................................................................................................................................7
(a). Evaluate the portion of the intra-group transactions between the parent entity and the
subsidiary entity will need to be eliminated on consolidation.....................................................7
(b). Explain, what is a non-controlling interest and how should it be disclosed.........................7
(c). Evaluate the non-controlling interests affected by intra-group transactions.........................8
(d). Identify the three steps which company use to calculate total non-controlling interest.......9
Question 5......................................................................................................................................10
(a). Consolidate adjustment entries............................................................................................10
(b). Pass the journal to eliminate the intra-group transfer of equipment...................................11
Question 6......................................................................................................................................11
(a). Calculate the amount of goodwill at the date of acquisition...............................................11
(b). Prepare the journal entries for the year ending 30 June 2015.............................................12
(c). Prepare the journal entries for the year ending 30 June 2016.............................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14
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INTRODUCTION
Corporate accounting is a distinct accounting for organizations which classify the corporate
accounts and prepares final reports and cash flow report (Chen, Ni and Zhang, 2018). It also
helps in monitoring and measuring corporate financial results and accounting for specific events,
such amalgamation, acquisition and discloser of the financial report. Further corporate
accounting helps the managers to make effective or efficient decisions which attract more
potential investors to invest and disclose their financial position with the help of different
financial reports. This assessment based on the several types of questions and those are all about
the acquisition, share allotment, calculate taxable income, record journal entry of different
transections. In addition, it also includes the overview of non-controlling interest such as how to
calculate, disclose it or affect the intra-group transactions. Along with it, this assessment also
includes the consolidated worksheet
MAIN BODY
Question 1
(a). Calculate the taxable profit
Particulars Amount
Profit Before Tax $ 600,000
Less: Entertainment expenses ($ 60,000)
Salary due ($ 80,000)
$ 460,000
Depreciation @ 64,000 for 4 year by using SLM method ($ 256,000)
Taxable Income $ 204,000
Tax @ 30% $ 61,200
Net profit after tax $ 142,800
Taxable profit of Jaguar Ltd for the period of 2017 is $ 204,000 and total tax payable
amount is $ 61,200. Net profit after tax is $ 142,800 which company earned in the period of
2017.
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(b). Determine the deferred tax liability or deferred tax asset that will result
Deferred tax assets: It is a balance sheet item that arises from extra payment or advance
payment of taxes (Choi and et.al., 2020). That is the inverse of a deferred tax obligation, which
would be the income tax due.
Deferred tax liability: It is generally occurs when capital assets are depreciated, sales are
recognised and inventories are priced. For example, the money owed on the current receivable
account could not be charged until the payment is finally made, but the transaction has to be
recorded within the current period.
Cost of machinery = $ 640,000
Annual Depreciation = $ 640000 / 5
= $ 128,000
ATO allows depreciation for 4 years = $ 640000 / 4
= $ 160,000
Difference among the depreciation = $ 160,000 – $ 128,000
= $ 32,000
Tax @ 30% = $ 9600 ($ 32,000 @ 30%)
Calculated amount considered to be deferred tax assets for the period 2017.
Particular Dr. Cr.
Deferred tax assets $ 9600
To income tax expenses $ 9600
Income tax expenses -
Deferred tax liability -
(c). Prepare the necessary journal entries on 30 June 2017
Date Particular Dr. Cr.
30/June/2017 Jaguar Ltd account $ 6,00,000
To Profit before tax $ 600,000
30/June/2017 Entertainment Expense account $ 60,000
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To Bank account $ 60,000
30/June/2017 Salary Expanses account $ 80,000
To Bank account $ 80,000
30/June/2017 Bank account $ 70,000
To Interest received $ 7,000
30/June/2017 Depreciation account $ 256,000
To Machinery account $ 256,000
30/June/2017 Income tax expanses account $ 61,200
To Bank account $ 61,200
Total $ 1127,200 $ 1127,200
Question 2
(a). Pass necessary journal entries to record acquisition
S. No Particular Dr. Cr.
1 Fair value of Assets $ 2,640,000
Fair value of Retain earning $ 1,120,000
To Fair value of Liabilities $ 720,000
To Cash $ 1,000,000
To Shares holder’s equity $ 800,000
To Shares $ 1200,000
To Goodwill $ 40,000
(b). Determined the amount of goodwill arising out of the acquisition
Purchase Price = $ 2200,000
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Fair value of identifiable assets = $ 2240,000
Goodwill -$ 40,000
*Working Notes:
Purchase Price = Cash + Share value
= $ 1000,000 + $ 1200,000 ($ 800,000 @ 1.50)
= $ 2200,000
Fair value of identifiable assets = Total assets value – liabilities
= (Assets + Retain earning) – (Liabilities + Shareholder’s equity)
= ($ 2,640,000 + $ 1,120,000) – ($ 720,000 + $ 800,000)
= $ 3760,000 – $ 1520,000
= $ 2240,000
(c). Pass the necessary consolidation entry to eliminate the subsidiary by the parent company
S. No Particular Dr. Cr.
1. Cost of Sales $ 1000,000
Profit & loss account $ 120,000
To Retained earning $ 1120,000
(d). Determine the amount of goodwill arising out of the acquisition if the purchase consideration
paid
Purchase Price = $ 1600,000
Fair value of identifiable assets = $ 2240,000
Goodwill -$ 640,000
Amount of goodwill will be negative 640,000 if the purchase consideration paid was $
1,000,000 in cash and 400,000 shares and each valued at $ 1.50.
*Working Notes:
Purchase Price = Cash + Share value
= $ 1000,000 + $ 600,000 ($ 400,000 @ 1.50)
= $ 1600,000
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Fair value of identifiable assets = Total assets value – liabilities
= (Assets + Retain earning) – (Liabilities + Shareholder’s equity)
= ($ 2,640,000 + $ 1,120,000) – ($ 720,000 + $ 800,000)
= $ 3760,000 – $ 1520,000
= $ 2240,000
Question 3
(a). Provide the necessary Journal entries
Date Particular Debit Credit
July 2019 Bank a/c Dr
To Share application a/c
(Application money being
received for 36 million shares @
$1 each)
$ 36000000
$ 36000000
15-08-2019 Share application a/c Dr
To Share capital a/c
To share allotment
(Being transfer of application
money into share capital a/c)
$ 36,000,000
$ 6,000,000
$ 30,000,000
20-09-2019 Share allotment a/c Dr
To Share capital
( Allotment money due already $
6 million received from
application money)
$ 24,000,000
$ 24,000,000
20-09-2019 Cash a/c Dr
Calls in arrears a/c Dr
To share allotment a/c
To Share capital a/c
(Being allotment money received
(24-6=18) and$ 6 million shares
failed to pay allotment money)
$ 18,000,000
$ 6,000,000
$ 6,000,000
$ 18000,000
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30-09-2019 Share capital a/c Dr
To forfeited shares a/c
To Class in arrears a/c
(Being $ 6 million shares get
forfeited)
$ 12,000,000
$ 7,200,000
$ 4,800,000
Question 4
(a). Evaluate the portion of the intra-group transactions between the parent entity and the
subsidiary entity will need to be eliminated on consolidation
When the parent company owns fewer than 100 shares of their subsidiary company, the
consolidated balance sheet should have a different category representing the non-controlling
interests, which applies to the equity interest of shareholders besides the parent corporation
(Hail, Tahoun and Wang, 2018). For example, if a corporation obtains 90 per cent of a subsidiary
company at a book value of $ 450,000, the non-controlling interest is 10 % or $ 50,000 [$
450,000 * (10 / 90)]. In this scenario, the combined balance sheet provides an overview an
investment of $ 450,000 in the subsidiary accounts and a non-controlling interest of $ 50,000.
The consolidated financial statements must also reflect an adjustment for non-controlling
interest. If the parent doesn't even own 100 % of the subsidiary, the non-controlling part must be
subtracted from the net gain or loss.
(b). Explain, what is a non-controlling interest and how should it be disclosed
Non-controlling interest is also known as minority stake which plays role of ownership in
which the shareholder holds less than 50% of the outstanding stock and has no decision making
power (Holzman, Miller and Williams, 2019). Non-controlling interest are determined by the
total asset value of the companies and therefore do not reflect future voting rights.
Today, most of the shareholders in public companies will be listed as owning a non-
controlling interest, with a 5 to 10 per cent shareholding deemed to be a significant owning in a
single corporation. A non-controlling interest can be compared with an ownership stake or a
majority interest in a business where the owner has the right to vote and may therefore have an
effect on the vision of the business.
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Actually, businesses should only report in the primary statements the shows totals of non-
controlling interests. Even so, this disclosure provision does not include any financial details to
allow investors to quantify the value and risks involved with such non-controlling interests. Non-
Controlling Interest is reported in the equity portion of the parent's balance sheet of the company,
separately from the equity of the parent, rather than in the mezzanine among liabilities and
equity.
Consolidation is a collection of financial reports that merge the accounting reports of many
companies under one company's financial statements. These usually involve a parent company,
as that of the major shareholder, a subsidiary or an acquired company, and a non-controlling
interest corporation (Pamungkas and et.al., 2018). Consolidated financial means enable
investors, creditors and company managers to consider the three independent firms as if the three
organisations are one. Consolidation also means that a parent as well as a non-controlling interest
corporation has collectively inherited the shares of a subsidiary. Any transactions between both
the parent and the subsidiary company or between the parent and the non-controlling interest
company shall be removed prior to the development of the consolidated financial statements.
(c). Evaluate the non-controlling interests affected by intra-group transactions
The Non-Controlling Interest (NCI) doesn't really impact consolidation changes for intra-
group transactions, since the overall impact of the intragroup transaction is modified for
consolidation. In complete restructuring, the accounts are put together in complete (100 per cent)
and the elimination rounds / adjustments made in total (100 per cent). However, if a wholly
owned subsidiary reports gain that is unrealized to the company, this influences the estimate of
the NCI. The NCI is now only counted as part of the combined capital and not of the subsidiary
capital (Awolowo and et.al., 2018). Thus, where even the subsidiary has reported unrealized
profits, the NCI share of the group's registered income must be calculated for any of the
unrealized income. In Step 2 & Step 3 calculations of the NCI portion of the capital stock, this is
really the share of the reported capital stock (Patten and Shin, 2019). As modifications are
introduced for intra-group transactions, where these transactions represent changes for unrealized
subsidiary benefit, a change is also made to a Non-Controlling Interest share of profit. The net
outcome is that the NCI obtains a share of the actual capital of the subsidiary company. There are
some examples of transactions that affect the calculation of Non-Controlling Interest, these are as
follow:
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 Unrealised profits in closing inventory after tax that relate to subsidiary sales
Reduce NCI equity balance (Dr)…… XXX
To Reduce NCI share of profit (Cr) …….XXX
 Unrealised profits in opening inventory after tax that relate to subsidiary sales
Increase NCI share of profit (Dr)…… XXX
To Reduce NCI share of opening retained profits (Cr)…. XXX
(No effect on NCI equity balance)
 Unrealised gain after tax from subsidiary transfer of non-current asset
Reduce NCI equity balance (Dr)….. XXX
To Reduce NCI share of profit (Cr)…..XXX
 Excess depreciation after tax for plant transferred by subsidiary
Increase NCI share of profit (Dr)….. XXX
To Increase NCI equity balance (Cr)…… XXX
(d). Identify the three steps which company use to calculate total non-controlling interest
There are major three steps which required calculating total value of non-controlling interest
and these are mentioned below:
Formula:
NCI equity = Beginning NCI equity Fair Value + NCI’s interest in subsidiary income –
NCI’s share of dividends
Initially calculate the fair value of non-controlling interest (equity fair value). This is the
price company would fairly plan to sell that keeping on the market. For eg, if company ABC has
an 80 per cent stake in company XYZ, therefore the remaining 20 per cent is the non-controlling
interest in company XYZ. Let’s assume that the fair value of NCI is $10 million.
Allow any changes of equal value such as goodwill. For example, unless the fair value of non-
controlling shares is 10 million, company would want to add $ 1 million for goodwill and every
other fair value changes, totalling $ 11 million. Add pro-rated profits attributable to non-
controlling equity stake (Warren and Jones, 2018). Only at time of acquisition, if the firm had a
turnover of $ 5 million, the pro-rated share of NCI income would be 20 % of $ 5 million = $1
million. Apply this revenue to the fair value, i.e. $ 11 million + $ 1 million = $ 12 million.
Subtract the pro rata share of the dividends. If the pro-rated share of the dividends is $ 1
million, this would be deducted from overall fair value, i.e. $ 10 million – $ 1 million = $ 11
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million. The ultimate fair value would be reported in the equity portion of the parent company's
consolidated statement of financial position.
Question 5
(a). Consolidate adjustment entries
Correct adjustment entry:
S. No Particular Dr. Cr
1 Sales $ 15,000
Cost of sales $ 12,000
Inventory $ 3,000
2 Deferred Tax Asset $ 600
Income Tax Expense $ 600
Explain the adjustments on a line-by-line basis:
Particular Dr. Cr Explain the adjustment
Sales $ 15,000 Item sold in $ 15,000 that is why it sales
account debit.
Cost of sales $ 12,000 It is already mentioned in the given
information that cost of item is $ 12,000 and
it is credited in the account.
Inventory $ 3,000 Sold inventory mentioned in the credit
column with $ 3000.
Deferred Tax Asset $ 600 Amount of deferred tax assets is $ 600 that
is calculated by using @ 30% tax rate.
Income Tax
Expense
$ 600 Same amount credited as expenses of
income tax.
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(b). Pass the journal to eliminate the intra-group transfer of equipment
In the case of an intra-group move, the tax administration may change the move price paid
between the linked firms in aims to introduce it into line with both the price which would have
been negotiated with the non-related firms. Inter-company transactions occur whenever a unit of
a legal entity seems to have a transaction with some other unit in the same company.
Intercompany transactions could be necessary to optimise the distribution of profits and
deductions. Here are some other examples of inter-company transfers, such as two divisions or
two subsidiaries.
Given information:
Plant sold to Jordan Ltd = $ 450000
Cost of plant = $ 900,000
Total Depreciation = $ 600,000
Tax rate = 30%
S. No Particular Dr. Cr
1 Cash at Bank $ 450,000
Profit & loss account $ 150,000
To machinery $ 600,000
2 Deferred tax assets $ 45,000
To Income tax expenses $ 45,000
Total $ 645,000 $ 645,000
Question 6
(a). Calculate the amount of goodwill at the date of acquisition
Purchase Price (Cash consideration) = $ 360,000
Less: Fair value of identifiable assets = ($ 210,000)
Goodwill = $ 570,000
Amount of goodwill will be negative $ 570,000 if the purchase consideration paid was $
360,000 in cash and fair value of identifiable assets is negative $ 210,000.
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*Working Notes:
Fair value of identifiable assets = Total assets value – liabilities
= $ 240,000 - $ 450,000
= -$ 210,000
(b). Prepare the journal entries for the year ending 30 June 2015
S. No Particular Dr. Cr
1 Retained earning $ 30,000
To Dividend paid $ 30,000
(Paid dividend @ $ 30,000 at the year-end of 30th
June 2015)
$ 30,000 $ 30,000
(c). Prepare the journal entries for the year ending 30 June 2016
S. No Particular Dr. Cr
1 Retained earning $ 150,000
To Dividend paid $ 150,000
(Paid dividend @ $ 150,000 at the year-end of
30th June 2016)
$ 150,000 $ 150,000
CONCLUSION
On the basis of the above discussion has been analysed that companies should consider
corporate accounting to be amongst the key accounts to be implemented to businesses. Various
types of calculations are conducted under the assessment as per the circumstance. Such as
several journal entries pass in order to evaluate the transection and simplify the accounting
adjustment. The acquisition method used to evaluate the fair value of assets and liabilities. In
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addition, also identify the value of goodwill to measure Company’s financial position. Each
question consists of various types of concepts which provide better clarity.
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REFERENCES
Books & Journals
Awolowo, I. F. and et.al., 2018. Accounting scandals: Beyond corporate governance. In 9th
Conference on Financial Markets and Corporate Governance (FMCG).
Chen, S., Ni, S. X. and Zhang, F., 2018. CEO retirement, corporate governance and conditional
accounting conservatism. European Accounting Review, 27(3), pp.437-465.
Choi, D. and et.al., 2020. Does sustainable corporate governance enhance accounting practice?
Evidence from the Korean market. Sustainability, 12(7), p.2585.
Hail, L., Tahoun, A. and Wang, C., 2018. Corporate scandals and regulation. Journal of
Accounting Research, 56(2), pp.617-671.
Holzman, E., Miller, B. P. and Williams, B., 2019. The local spillover effect of corporate
accounting misconduct: evidence from city crime rates. Kelley School of Business
Research Paper, (18-72).
Pamungkas, I. D. and et.al., 2018. Corporate governance mechanisms in preventing accounting
fraud: A study of fraud pentagon model. Journal of Applied Economic Sciences
Quarterly, 8(2), pp.549-560.
Patten, D. M. and Shin, H., 2019. Sustainability Accounting, Management and Policy Journal’s
contributions to corporate social responsibility disclosure research. Sustainability
Accounting, Management and Policy Journal.
Warren, C. S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
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