University Finance: ABC Ltd and XYZ Ltd Consolidation Case Study

This case study analyzes the takeover bid of ABC Ltd for XYZ Ltd, focusing on the consolidation of financial statements and the treatment of goodwill. The assignment provides a comprehensive overview of the financial data, including balance sheets and income statements for both companies. It examines the impact of the acquisition on the consolidated financial statements, considering the share capital, reserves, and retained earnings of XYZ Ltd. The analysis includes detailed calculations and journal entries related to the business combination, such as the acquisition analysis, valuation of identifiable assets and liabilities, and the recognition of non-controlling interest and goodwill. Furthermore, the case study explores the partial and full goodwill methods, highlighting their advantages and disadvantages under IFRS and US GAAP. The document presents consolidated financial statements for the group, including income statements and balance sheets, demonstrating the combined financial performance and position of ABC Ltd and its subsidiary, XYZ Ltd. The case study helps students to understand the practical application of consolidation accounting and the complexities associated with business combinations.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
Name of the Student:
Name of the University
Author’s Note

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ADVANCE FINANCIAL ACCOUNTING
Table of Contents
Requirement a:.................................................................................................................................2
Requirement b:.................................................................................................................................3
Requirement c:.................................................................................................................................8
Partial Goodwill Method.............................................................................................................8
Advantages and Disadvantages of Partial Goodwill Method......................................................8
Full Goodwill Method.................................................................................................................9
Advantages and Disadvantages of Full Goodwill Method..........................................................9
Reference.......................................................................................................................................11

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ADVANCE FINANCIAL ACCOUNTING
Requirement a:
Dr. Cr.
Date Amount Amount
a.i Share Capital 180
General Reserve 270
Retained Earnings 135
Goodwill 153
Business Combination
Valuation Reserve 126
Invetsments 864
a.ii Cash 117
Dividend Revenue 117
a.iii Cash 135
Interim Dividend Revenue 135
Particulars

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ADVANCE FINANCIAL ACCOUNTING
Requirement b:
Particulars Amount Amount
Consideration Transferred 864
Less:
Share Capital 200
General Reserve 300
Reatined Earnings 150
Land 140
Net Fair Value of Identifable Assets
& Liabilities -790
Add: Non-Controlling Interest @10% 79
Goodwill 153
Acqusition Analysis:

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ADVANCE FINANCIAL ACCOUNTING
Dr. Cr.
Date Amount Amount
b.i Property,Plant & Equipment 200
Business Combination Valuation
Reserve 140
Deferred Tax Liability 60
b.ii Share Capital 20
General Reserve 30
Retained Earnings 15
Business Combination
Valuation Reserve 14
Non-Controlling Interest 79
b.iii Loss on Impairment- Goodwill 10
Accum. Impairment Loss-Goodwill 10
b.iv Sales 350
Cost of Goods Sold 275
Inventory 75
b.v Deferred Tax Assets 22.5
Income Tax Expense 22.5
b.vi Non-Controlling Interest 5.25
NCI Share of Profit 5.25
b.vii Retained Earnings (1/1/x8) 49
Income Tax Expenses 21
Cost of Goods Sold 70
b.viii NCI Share of Profit 4.9
Retained Earnings (1/1/x8) 4.9
b.ix Sales 500
Cost of Goods Sold 500
b.x Dividend Revenue 135
NCI 15
Interim Dividend Paid 150
Particulars

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ADVANCE FINANCIAL ACCOUNTING
Particulars ABC Ltd. XYZ Ltd. Debit Credit Group Debit Credit Parent
Sales 5000 2000 850 6150 6150
Cost of Sales 2570 1025 845 2750 2750
Gross Profit 2430 975 3400 3400
Dividend Revenue 252 0 135 117 117
2682 975 3517 3517
Expenses 2057 300 10 2367 2367
Operating Profit before tax 625 675 1150 1150
Income Tax Expenses 280 260 21 22.5 538.5 538.5
Operating Profit after Tax 345 415 611.5 4.9 5.25 611.85
Retained Earnings (1/1/X8) 294 200 184 310 15 4.9 299.9
Interim Dividend paid -100 -150 -135 -115 -15 -100
Final Dividend Declared -160 -200 -360 -360
Retained Earnings (31/12/x8) 379 265 446.5 451.75
Share Capital 1200 200 180 1220 20 1200
General Reserve 300 270 30 30 0
BCVR 126 140 14 14 0
NCI 0 20.25 79 58.75
Total Equity 1579 765 1710.5 1710.5
Liabilities:
Trade & Other Payables 60 180 240 240
Provision for Final Dividend 160 200 360 360
Deferred Tax Liabilities 60 60 60
Total Liabilities 220 380 660 660
Total Liabilities & Equity 1799 1145 2370.5 2370.5
Assets:
Other Current Assets 385 395 75 705 705
Deferred Tax Assets 22.5 22.5 22.5
Property, Plant & equipment 550 750 200 1500 1500
Investment 864 864 0 0
Goodwill 153 153 153
Accum. Impairment Loss-Goodwill -10 -10 -10
Total Assets 1799 1145 2370.5 2370.5
Adjustment NCI

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ADVANCE FINANCIAL ACCOUNTING
Particulars Group Parent
Sales 6150 6150
Cost of Sales 2750 2750
Gross Profit 3400 3400
Dividend Revenue 117 117
TOTAL REVENUE 3517 3517
Expenses 2367 2367
Operating Profit before tax 1150 1150
Income Tax Expenses 538.5 538.5
Operating Profit after Tax 611.5 611.5
Less: Non-Controlling Interest -0.35
Net Profit attributable to Share holders 611.5 611.85
In the books of ABC Ltd.
Consolidated Income Statement
for the period ended 31/12/X8

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ADVANCE FINANCIAL ACCOUNTING
Particulars Group Parent
ASSETS:
Current Assets:
Other Current Assets 705 705
Deferred Tax Assets 22.5 22.5
Total Current Assets 727.5 727.5
Non-Current Assets:
Property, Plant & Equipment 1500 1500
Goodwill 153 153
Accum.Impairment Loss -10 -10
Total Non-Current Assets 1643 1643
TOTAL ASSETS 2370.5 2370.5
LIABILITIES:
Current Liabilities:
Trade & Other Payables 240 240
Provision for Final Dividend 360 360
Deferred Tax Liabilities 60 60
Total Current Liabilities 660 660
Non-Current Liabilities 0 0
TOTAL LIABILITIES 660 660
NET ASSETS 1710.5 1710.5
EQUITY:
Share Capital 1220 1200
General Reserve 30 0
Retained Earnings 446.5 451.75
BCVR 14
NCI 0 58.75
TOTAL EQUITY 1710.5 1710.5
In the books of ABC Ltd.
Consolidated Income Statement
for the period ended 31/12/X8

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ADVANCE FINANCIAL ACCOUNTING
Requirement c:
Partial Goodwill Method
The measurement of Goodwill under Partial Goodwill Method is done by considering the
difference between the purchase consideration of the business and the share value of net
identifiable assets which is to be acquired by the business. Partial Goodwill Method is preferred
as the same is a bit simple and considers only the controlling interest of the business in Goodwill
measurement (Matemilola and Ahmad 2015). The method is allowable under IFRS framework
and thus companies following the framework can use partial Goodwill Method for measurement
purposes. However, the method is not approved by US GAAP framework. The method considers
all the assets and liabilities of the business for the purpose of measuring the goodwill of the
business. In addition to this, the method also recognizes the acquirer share of Goodwill in the
measurement of Goodwill.
Advantages and Disadvantages of Partial Goodwill Method
The advantages of applying Partial Goodwill method in the measurement of Goodwill are
listed below:
a. The method considers the controlling interest of the business for the purpose of
measuring the Goodwill of the business.
b. The method is applicable in businesses which follows the IFRS framework for the
purpose of measuring the goodwill of the business.
The disadvantages of applying Partial Goodwill Method in the measurement of Goodwill are
listed below in details:

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ADVANCE FINANCIAL ACCOUNTING
a. The method does not consider the non-controlling interest of the business for the purpose
of measuring the goodwill of the business.
b. The method is not approved in US GAAP framework and therefore the companies which
follow US GAAP framework are not able to use this method.
Full Goodwill Method
The measurement of Goodwill under Full Goodwill Method considers both controlling
and non-controlling interest of the business. The method analyzes the difference between the
total fair value of the targeted company and the fair value of the net identifiable assets of
acquirer company. The US GAAP method requires companies to mandatorily follow the Full
goodwill method in measurement of goodwill and the method is also allowable under the IFRS
framework (Welc 2015). Thus, the applicability of this method under both frameworks are
regular which is a basic advantage of the method.
Advantages and Disadvantages of Full Goodwill Method
The advantages which is associated with application of Full Goodwill Method are shown
below:
a. The method considers both controlling interest and non-controlling interest of the
business for the purpose of measuring the goodwill of the business.
b. The applicability of the method is universal in both the IFRS framework and US
GAAP framework of accounting for measurement of goodwill of a business.
The disadvantages which are associated with the application of Full Goodwill method are
shown below:

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ADVANCE FINANCIAL ACCOUNTING
a. The method is considered to be complex in nature as it considers a variety of
elements in the measurement of goodwill.
b. The method is also vulnerable to various manipulations in the overall accounting
process under this method and the financial position might not be appropriately be
shown.

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ADVANCE FINANCIAL ACCOUNTING
Reference
Matemilola, B.T. and Ahmad, R., 2015. Debt financing and importance of fixed assets and
goodwill assets as collateral: dynamic panel evidence. Journal of Business economics and
Management, 16(2), pp.407-421.
Welc, J., 2015. Full-Goodwill Method of Accounting for Business Combinations and Quality of
Financial Statements.