Solved Accounting Questions on Consolidation, Foreign Currency Transactions, and Impairment Loss

This article contains solved accounting questions on consolidation, foreign currency transactions, and impairment loss. It includes journal entries, consolidation entries, and eliminations and adjustments. The article also explains the principles and standards used in accounting.

8 Questions

Table of Contents
Part A...............................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................3
Question 3....................................................................................................................................3
Part B...............................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................4
Question 3....................................................................................................................................6
Question 4....................................................................................................................................8
Question 5..................................................................................................................................10

Part A
Question 1
a) Yes, Maggie Ltd controls Luna-Kitty Ltd. Luna-kitty ltd is wholly controlled by Buppie
Ltd whose majority of board of directors are the directors of Maggie Ltd.
b) Yes, Luna-kitty Ltd is directly controlled by Buppie Ltd. Buppie ltd is directly controlled
by Maggie and Cleocat Ltd.
c) Yes, Maggie Ltd. have an interest in Cleocat Ltd. The type of interest that Maggie Ltd.
have in Cleocat Ltd. is non-controlling. The interest is because of the fact that Cleocat
Ltd have stake in Buppie Ltd in which Maggie ltd also have a stake of 75%.
Question 2
The expenses will be more in the initial years firstly because of the interest amount that will be
higher in early years and secondly because of the depreciation amount which will also be higher
during early years and both will be debited to the income statement.
Question 3
The reason for no tax liability for Keperra Ltd for the profits generated as per the income
statement of the company for year will be that the tax assets of the company be equivalent or
higher to its tax liabilities or the profit generated is lesser than the taxable income.
Part B
Question 1
A
Date Particular Debit Credit
1 September 2022 Equity share call a/c Dr
To Share capital
(being call made for the share)
60000
60000
1 November 2022 Bank a/c
Call in arrear a/c
To equity share call a/c
(being call money received)
50000
10000
60000

15 November 2022 Share capital a/c
To share forfeiture a/c
(being share forfeited which have not being paid)
10000
10000
30 November 2022 Bank a/c
To share capital
To capital reserve
(being forfeited share issued at profit)
28000
10000
18000
30 November 2022 Legal fees
Brokerage fees
Feasibility studies
Marketing and promotion
Overtime paid to employees
To bank a/c
(Being expenses paid at time of reissue)
3500
750
1250
2500
1300
9300
30 November 2022 Share forfeiture a/c
To Banks a/c
(being amount of expenses for reissue taken from
share forfeiture)
9300
9300
B
According to the conceptual framework, entity measure the equity within the financial
statement. This recording and recognizing of the equity in the financial statement is according to
the cost principle. This is particularly because of the reason that this principle states that business
must record each and every asset, liability and equity as the original purchase price only. Also,
the equity is the difference between the liability and asset on the balance sheet and because of
this it is being included within the balance sheet. In accordance to another principle that is
accounting equation it is clear that balance sheet can only be prepared on the basis of the
equation that is asset= liabilities + equity.
Question 2
A
Particular Amount

profit before income
tax 235000
Adjustment
add: annual leave
balance 25000
Add: warranty payment 31000
Less: prepaid insurance 13000
profit before tax 278000
B
The deferred tax is the one which arises because of the difference between the taxable
profit and the accounting profit. In the present case of ABC Ltd the accounting profit was
@235000. But after making all the adjustment which were not included the taxable profit came
to $278000. With this it can be seen that there is a difference of $40000 in the actual profit which
company has earned that it current actual profit is 40000 more as compared to earlier. So that
deferred tax is being calculated as following-
Tax in case of accounting profit
Particular Amount
profit before tax 235000
Tax @ 30% 70500
Net profit after tax 164500
Tax in case of taxable profit
Particular Amount
Profit before tax 278000
tax @ 30 % 83400
Net profit 194600
With the above deferred tax, it is clear that in case of accounting profit the net profit is
less as compared to the net profit in case of taxable profits. Further the tax amount in more in
case of taxable profit that is 83400. But in case of accounting profit the tax value is less that is
70500.
C

The temporary difference is being defined as the difference within the carrying amount of
the asset or liability within the balance sheet and the tax base. This temporary difference can
either be taxable temporary difference or the deductible temporary difference. This taxable
temporary difference is the one on which tax is being charged in the future in case the asset or
the liability is being recovered or settled. In the present case of ABC ltd this temporary
difference being created with respect to machinery. This is pertaining to the fact that machinery
is being depreciated over 5 years with respect to accounting purpose. But on the basis of taxation
purpose the machinery is to be depreciated for 4 years. Thus this amount of depreciation is the
temporary difference and this can create an impact over the profit and tax.
D
Date Particular Debit Credit
30 June 2023 Current tax expense
Deferred tax asset
To income tax payable
(being current and deferred tax being paid)
70500
12900
83400
Question 3
Cost of acquisition –
Cash 150,000
Shareholders who took cash option 90,000
(60,000 x $1.50)
Shareholders who took share option 180,000
(120,000 x 2/3 x $2.25)
Legal costs 25,000
Total cost of acquisition $445,000
Items purchased in BDE Limited –
Assets Acquired –
PARTICULAR AMOUNT ( in $)
Inventory 150,000
Accounts receivable 425,000
Prepayments 75,000

Equipment 370,000
Trademarks 375,000
TOTAL 1,395,000
Liabilities Assumed –
PARTICULAR AMOUNT ( in $)
Accounts payable 280,000
Provision for annual leaves – employees 150,000
Loan with NAB (paid by DEF Ltd) 500,000
Provision for doubtful debts 150,000
Accumulated depreciation 120,000
TOTAL 1,200,000
Difference on Acquisition –
PARTICULAR AMOUNT ( in $)
Cost of acquisition 445,000
Less: Net assets acquired
Assets
1,395,000
Less: Liabilities
( 1,200,000)
195,000
Goodwill 250,000
The excess of cost of acquisition over the identifiable net assets acquired shows the amount
paid for the goodwill of the business acquired by the purchaser. Here, DEF Ltd acquired
BDE Ltd and paid $250,000 for the goodwill of the business of BDE Ltd.
Journal entry –
Identifiable net assets a/c Dr. 1,395,000
Goodwill a/c Dr. 250,000

To Liabilities a/c 1,200,000
To cash a/c 265,000
To Equity share capital a/c 80,000
To share security premium 100,000
Liabilities (loan with NAB) 500,000
To cash 500,000
On acquisition, goodwill or gain or bargain purchase has to be calculated and such goodwill shall
be further tested for the impairment at each reporting period. It shall be noted that except for
impairment no other changes can be incorporated in the goodwill. Such a goodwill shall be
measured on the basis of acquisition date fair value of the assets and liabilities of the
acquiree. AASB 136 Impairment of Assets describes the accounting treatment of the
impairment losses if any and AASB 138 describes the accounting treatment of identifiable
intangible assets acquired in the business combination.
Question 4
Journal Entries:
a)
In the books of XYZ Ltd.
Date Particulars J.F. Debit (A$) Credit (A$)
15 March 2022 Purchases A/c Dr
To MNO Ltd. A/c
(being goods purchase)
257400
257400
14 August 2022 MNO Ltd. A/c Dr
Foreign Exchange Fluctuation A/c Dr
To cash A/C
(Being payment made)
257400
6600
264000
14 August 2022 MNO Ltd. A/c Dr
To Foreign Exchange
Fluctuation A/c
(being loss incurred)
6600
6600

30 June 2023 Profit & Loss A/C Dr
To MNO Ltd. A/c
(being loss incurred adjusted)
13200
13200
In the books of MNO Ltd.
Date Particulars J.F. Debit (US$) Credit (US$)
02 July 2022 XYZ Ltd. A/c Dr
To Export Sales A/C
(being goods sold)
273900
273900
14 August 2022 Bank A/C Dr
Foreign Exchange Fluctuation A/c Dr
To XYZ Ltd. A/c
(being payment received)
264000
9900
273900
Year end XYZ Ltd. A/c Dr
To Foreign Exchange
Fluctuation A/c
(being loss incurred adjusted)
9900
9900
b)
In the books of XYZ Ltd.
Date Particulars J.F. Debit (A$) Credit (A$)
15 March 2022 Machinery A/C Dr
To MNO Ltd. A/C
(being fixed asset purchased)
257,400
257,400
15 July 2022 MNO Ltd. A/C Dr
Foreign Exchange Fluctuation A/c Dr
To Bank A/C
(being loss incurred)
257,400
16500
273,900
30 June 2023 MNO Ltd. A/C Dr
To Foreign Exchange
16500
16500

Fluctuation A/c
(being loss debited to supplier)
30 June 2023 Profit & Loss A/C Dr
To MNO Ltd. A/C
(being profit and loss a/c debited for
loss)
16500
16500
c) AASB 121 requires foreign currency transactions to be translated at the closing rate at the end
of the financial reporting period because it works with the objective to translate financial
statements into presentation currency and closing rate is used for this purpose. Closing rate is the
rate of spot exchange at the reporting period end. So AASB 121 requires closing rate. Monetary
items of the foreign currency are translated using the closing rate.
d) Hedging arrangement would have helped the XYZ Ltd to reduce the amount of risk associated
to their investment. This arrangement is a type of insurance cover that can protect the company
against the losses that occurs during the import of foreign raw materials or fixed assets.
e) The business like XYZ while recording the foreign transactions should use the rate that is
higher based on the historic cost concept and prudence principle followed during accounting.
Question 5
a) Consolidation entry –
Identifiable net assets a/c Dr. 900,000
Goodwill a/c Dr. 150,000
To investment in subsidiary a/c 1,000,000
To cash (legal costs) a/c 50,000
b) Journal entries –
Impairment loss a/c Dr. 7,500
To goodwill a/c 7,500
Profit & loss a/c Dr. 7,500
To impairment loss a/c 7,500

Profit & loss a/c Dr. 50,000
To other expenses a/c 50,000
Profit & loss a/c Dr. 50,000
To gain on sale of asset a/c 50,000
Unrealized gain a/c Dr. 10,000
To inventory 10,000

c)
Eliminations and
adjustments
Consolidated
Statement
ABC Ltd XYZ Ltd DR CR
($) ($)
Reconciliation of opening
and closing retained
earnings
Sales revenue
1,350,00
0
825,
000 2,175,000
Less Cost of goods sold
877,50
0
536,
250 1,413,750
Gross Profit
472,50
0
288,
750 761,250
Other revenue
125,00
0 125,000
Management fee revenue
50,0
00 - 50,000
Gain on sale of assets
75,0
00 - 50,000 - 25,000
Less Expenses:
Administration expenses
150,00
0
66,
000 216,000
Management fees -
57,
500 57,500
Rent
150,00
0
35,
000 185,000
Staff wages
75,0
00
26,
250 101,250
Impairment loss 7,500 7500
Other expenses
45,0
00 500 50,000 95,500
Profit before tax
302,50
0
103,
500 298,500
Tax expense
90,7
50
31,
050 89,550
Profit for the year
211,75
0
72,
450 208,950
Opening Retained
earnings - 1 July 2021
3,785,25
0
150,
000
3,997,00
0
222,
450

Less dividends paid
140,00
0
30,
000
Closing Retained
earnings - 30 June 2022
3,857,00
0
192,
450
Statement of financial
position
Shareholders equity
Retained earnings
3,857,00
0
192,
450 3,739,450
Share Capital
1,575,00
0
750,
000 1,575,000
5,432,00
0
942,
450
Liabilities
Accounts payable
590,00
0
175,
000 765,000
Employee provisions
365,00
0
75,
000 440,000
955,00
0
250,
000 1,205,000
Assets
Cash at bank
755,00
0
215,
000 970,000
Accounts receivable
1,536,00
0
602,
950 21,38,950
Prepayments
155,00
0 - 155,000
Inventory
1,453,00
0
695,
000 10,000 2,138,000
Goodwill 150,000
Accumulated impairment
- goodwill 7,500
Plant and equipment
1,250,00
0
350,
000 50,000 1,550,000
Accumulated
depreciation - plant and
equipment
-
500,000
-
75,000 575,000
Deferred tax asset -
Investment in XYZ Ltd
1,000,00
0 - 1,000,000 -
5,649,00
0
1,787,
950

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