200109 Corporate Accounting Systems: Consolidation Project

This project analyzes the acquisition of a subsidiary and the subsequent consolidation process, including journal entries and explanations. Part A details the acquisition of Sunnybank Hills Ltd by Sunnybank Ltd, including the initial investment, fair value adjustments, and goodwill calculation. It presents the consolidation entries, eliminating intercompany transactions such as the sale of a plant item, property, and intercompany fees. The project also covers the elimination of intercompany inventory sales, dividends, and loans. Part B discusses the offset of tax losses incurred by Sunnybank Hill, referencing relevant legislation and academic sources. The project provides a complete overview of consolidation procedures in corporate accounting, offering practical application and theoretical understanding, including a discussion on tax implications.

CONSOLIDATION
NAME OF STUDENT
NAME OF UNIVERSITY

Acquisition analysis
1.a
Narration Journal entry Amount
1.a On investment in Sunny bank hill Ltd
Dr Investment In
SunnyBank Hill 700 000,00
Cr Cash 700 000,00
1.b Adjustment for fair value of the asset
Tabulation
Cost 75 000,00
less; Accumulated deprecation 25 000,00
Carrying amount 50 000,00
Add; adjusted difference of carrying amount 20 000,00
Adjusted carrying amount 70 000,00
The adjustment required is to adjust the fair
value
Dr Asset in
Sunnybank hill 20 000,00
Cr Revaluation
surplus 20 000,00
Acquisition analysis
A Investment in Sunnybank hill 700 000,00
Share capital 300 000,00
Retained earnings 200 000,00
Revaluation surplus 36 000,00
B Net Assets 536 000,00
A-B Goodwill on acquisition 164 000,00
Consolidation entries
Elimination
Consolidation as at 1st
July 2019 Sunnybank
Sunnybank
hill Dr Cr Consolidation
Assets -

Investment in Sunnybank
hill 700 000,00 700 000,00 -
Cash 700 000,00 700 000,00 -
Goodwill 164 000,00 164 000,00
Net assets 536 000,00 536 000,00
Differential 164 000,00 164 000,00 -
Totals 328 000,00 1 564 000,00 700 000,00
Equity
Share capital 300 000,00 300 000,00 -
Retained earnings 200 000,00 200 000,00 -
Revaluation surplus 36 000,00 36 000,00 -
Differential 700 000,00 700 000,00
Totals 1 236 000,00 - 700 000,00
Totals 1 564 000,00 1 564 000,00
2.
Sale of plant item
Sale of plant item to Sunnybank 55 000,00
Carrying cost 40 000,00
Surplus of carrying cost 15 000,00
Original cost 90 000,00
Estimated life 9 years
Depreciation per year(90,000/9 10 000,00
As item has depreciatied for 50,000 ,then it has been depreciated for for 60 months
and was bought in 1 Jan 2022.If we less 5 years which means it was bought in Jan
2017.
and will be fully depreciated in 1 Jan 2026 and has a useful life of four more years
Journal entries
on sale of asset by SunnyBank Hill
Dr Cash 55 000,00
Cr Plant 40 000,00
Cr Gain in sale of plant 15 000,00
on purchase of asset by Sunnyhill
Dr Plant 55 000,00
Cr Cash 55 000,00
Elimination of the gain from the books
Dr Gain in sale of plant 15 000,00
Cr Revaluation surplus 15 000,00

Adjustment of depreciation
A Accrued depreciation 50 000,00
Adjusted depreciation per year(55/4 13 750,00
B
Adjusted accumulated depreciation for the
five years 68 750,00
C b-a. Depreciation to be adjusted 18 750,00
Dr Retained earnings 18 750,00
Cr Accumulated depreciation 18 750,00
Sale of property
Journal entries
on sale of asset by
Dr Cash 400 000,00
Dr Loss in sale of property 20 000,00
Cr Property 420 000,00
on purchase of asset
Dr Plant 400 000,00
Cr Cash 400 000,00
Elimination of the loss from the books
Dr Revaluation surplus 20 000,00
Cr Loss in sale of property 20 000,00
Adjustment of depreciation
a Annual depreciation(400000/20) 20 000,00
Dr Retained earnings 20 000,00
Cr Accumulated depreciation 20 000,00
To eliminate the intercompany fee
The fee is 5,000 and adjusted for tax @ 30% is 3,500
Dr Retained earnings 3 500,00
Cr Cost of sales 3 500,00
Essentially this will only reduce income by that amount .However it will be a DR CR entry in
retained earnings
Consolidation entries
Consolidation as at 30th Sunnybank Sunnybank Dr Cr Consolidation

June 2024 hill
Assets -
Plant 55 000,00 40 000,00 15 000,00
Property 400 000,00 420 000,00 - 20 000,00
Cash 455 000,00 455 000,00 -
Goodwill -
Net assets -
Cost of sales -
Totals 910 000,00 915 000,00 - 5 000,00
Equity
Share capital -
Loss on sale of property 20 000,00 20 000,00 -
Retained earnings/Gain in
sale 57 250,00 18 500,00 - 38 750,00
Revaluation surplus 20 000,00 15 000,00 - 5 000,00
Accumulated depreciation 38 750,00 38 750,00
Totals 97 250,00 92 250,00 - 5 000,00
Totals 1 007 250,00 1 007 250,00
3.
3.
a Intercompany inventory sales
Value
Sales to Sunnyhill 250 000,00
Sales to SunnyBank Hill 200 000,00
Total sales 450 000,00
50% of 450k 225 000,00
Journal entries
Dr Sales 450 000,00
Cr Cost of sales 225 000,00
Cr Inventory 225 000,00
b I will take the total sales and then recognise only 50% as inventory
Since intra group policy has been applied, we will only deal the elimination of the inventory
from the books
Value
Inventory Sunnyhill intra 90 000,00
Inventory Sunnybank hill intra 150 000,00
Total inventory 240 000,00
Journal entries
Dr Sales 240 000,00
Cr Inventory Sunnybank hill 240 000,00

c Opening inventory
The opening inventory will have to be adjusted by eliminating the same from the book
Value
Inventory Sunnyhill intra 140 000,00
Inventory Sunnybank hill intra 160 000,00
Total inventory 300 000,00
Journal entries
Dr Sales 300 000,00
Cr Cost of goods sold 300 000,00
d Paid dividends
the total of the dividend must be eliminated by derecognising it in income net of tax
Value
Sunnybank 50 000,00
Sunny bank hill 75 000,00
Total dividend 125 000,00
Dividend after tax@30% 87 500,00
Journal entries
Dr Dividend received 87 500,00
Cr Dividend paid out 125 000,00
Dr Deferred tax 37 500,00
E Intercompany loan will be eliminated by simply reversing the initial transaction
Journal entries
Dr Loan Sunnybank 50 000,00
Cr Receivable Sunnybank hill 50 000,00
Consolidation as at 30th
June 2025 Sunnybank
Sunnybank
hill Dr Cr
Consolidatio
n
Assets -
Sales 990 000,00 990 000,00
Cost of sales 225 000,00 - 225 000,00
Inventory 765 000,00 - 765 000,00
Dividend received 87 500,00 87 500,00
Dividend paid out 125 000,00 - 125 000,00
Deferred tax 37 500,00 37 500,00
Loan 50 000,00 50 000,00
Receivable 50 000,00 - 50 000,00
-
Totals
1 165
000,00
1 165
000,00 -

PART B,
Sunnybank Ltd can offset the tax loss incurred by Sunnybank Hill.
This is expressly provided in Subdivision 707-A of the ITAA 1997. The section
defines the tests that the tax loss should be subjected to determine if the tax loss can
be claimed by Sunnybank or Sunnybank Hill. According to (Morgan, 2004),the tests
are;
a) The tax loss could have been claimed by the subsidiary if the subsidiary was
claiming the tax on its own. This then means that Sunnybank Hill could have
been able to utilize the losses if it were on its own. It could also have carried
forward the losses to subsequent financial years as applicable.
b) However, since in our case the Sunnybank Hill was owned by Sunnybank,
then the loss can be transferred to the acquiring company as there was
continuity in ownership during the years the loss was realized and claimed.
c) The Sunnybank Hill has continued with the same line of business when the
loss occurred and when the claim was made.
If we apply these two rules on this case, the conclusion is;
a. The tax loss has been deemed to be eligible for tax offset.
b. Then, Sunnybank Hill could have claimed the tax credit if it were on its own
and not acquired by Sunnybank Ltd.
c. The subsidiary was part of the group when the tax loss happened.
d. The tax loss is current as it relates to the current year for taxation purposes.

Reference list
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