HA2032 Corporate Accounting: Takeover Decision Making & Consolidation

This report delves into the consolidation methods employed when JKY Ltd. aims to acquire FAB Ltd., focusing on the accounting treatments required. It elucidates the equity and consolidation methods of accounting, highlighting their principles and applications. The report addresses intra-company transactions, specifically inventory purchases, and the handling of unrealized profits, emphasizing the importance of their elimination for accurate financial reporting. Furthermore, it discusses the disclosure requirements for non-controlling interests (NCI) in consolidated financial statements and the adjustments needed to ensure accurate representation, including the elimination of intercompany investments and equity portions. The report uses examples to illustrate key concepts such as unrealized profit calculation and the necessary journal entries for consolidation. Desklib provides access to this and many other solved assignments.

Running head: Corporate Accounting
Corporate Accounting
Name of the Student
Name of the University
Author Note

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Corporate Accounting
Executive Summary
The report show about the consolidated statement and show about the JKY Ltd
which want to take over the FAB Ltd so it show the method which can adopted for
the consolidation. It even show about the intra transaction and how the unrealised
profit is to be deal with and it even show about the disclosure which is been required
in regards of the non-controlling interest.

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Corporate Accounting
Table of Contents
Introduction...................................................................................................................3
Part A............................................................................................................................3
Part B............................................................................................................................5
Part C............................................................................................................................6
Conclusion....................................................................................................................7
Reference.....................................................................................................................8

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Corporate Accounting
Introduction
Consolidation is the method from which one company acquire the another
company so it can be say that one is the parent company and other one is the
subsidiary company so as per this report is been based (Albu, Albu and Alexander
2014). The report show about the company JKY Limited which wanted to take FAB
Limited as their subsidiary company so it show about the method which was used by
them and also show about the intra sale of the transaction and also how the
company should disclose the non-controlling interest in the financial statement of the
company.
Part A
Consolidation is been done by the company so that it can able to get more
amount of the share in the market and this the reason why JKY Ltd want to takeover
FAB Ltd. as consolidation is very big and complex concept so it also required a
different level of accounting so the company have to select among the accounting
which are been used by the company in regards of the consolidation as they can
able to go for the equity accounting method or the consolidation method of
accounting. So as per the need and preference of the company they should select
the method of accounting as both methods have their different principle and it should
be followed by the company while doing the accounts of the consolidation. So an
explanation of the both accounting method is been shown below:
Equity Method of Accounting
Equity means investment so this method suggest that in regards of the
consolidation the company should the profit amount only as they have in the from of
investment in the subsidiary company so this say that each parent company holds
some sort of the investment so it should only record the amount of profit which it able
to get from the part of the investment (Gillis, Petty and Suddaby 2014). The company
should always record the value of the investment which is been there in the
subsidiary company as per cost. So it say that the company should record the value
upon the amount which is been spend by them on the acquisitions of the investment.
The changes which occur in the value of the investment should be directly charged
to the income statement of the company and should be record as per the nature of
the changes which have take place in the investment.
Let take an example for the above equity of accounting as JKY Limited holds
45% share in the FAB Limited and it have got the share for 100000. The company
FAB Limited able to earn a sum of $50000 as revenue and offered the dividend as
$20000. As JKY Limited has the shares so the entry in the books of JKY Limited will
be as:
The entry in regards of the Dividend

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Corporate Accounting
The entry in regards of the net profit
Consolidation Method of Accounting
Consolidation means the combination of the asset and liability so as per this
method it say only recording which the company have to do is related to the interest
the company have in the joint venture as it will only record the amount of asset and
liability as compare to the interest it won in the joint venture. For example if the
parent company holds 70% in the joint venture than it should record the asset and
liabilities for the proportion of 70% only (Gong et al., 2015). So this the recording is
directly based upon the proportioned interest which the company have in joint
venture. As per the consolidation statement is to be concerned its should record all
the items of the parent and the subsidiary company but it does not included the
amount of the investment which is been done by the company in their subsidiary
company as it should record any amount related to the investment and should
eliminate the same from the financial statement and it also does not take into
consideration about the equity portion which is been hold by the subsidiary in the
parent company so this method say that the company should record any amount of
the equity which is been hold in the subsidiary company and should be eliminated by
the subsidiary company so that it can able to eliminate both the investment and the
equity portion and then it will able to make the consolidated financial statement. It
also says that when the company is able to carry the value of the asset and liability
than it should also show the amount of the expenses and the income which is been
done in regards of the joint venture so that it can be record in the income statement
of the company (Gray 2014). The standard also show about the valuation of the
method which the company have to used in regards of the goodwill and should do
the same and record it in the financial statement of the company.
Example in related to the Consolidated Method of Accounting as let assume
that the company JKY Limited have started is business with an investment of $50
million so the entry will be
In 2019 in invested in the FAB Limited by $30 million so the entry will be
The entry in the book of FAB Limited will be

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Corporate Accounting
Part B
Company can only be able to make a proper consolidation statement only
when it able to remove all the details of the transaction from the company as there
should be no entry in the account related to the parent company and the subsidiary
company as there is some entry it will directly affect the same and company will not
able to make the consolidation statement (Hoyle, Schaefer and Doupnik 2015). So it
is the primary duty of the organization to remove all the transaction as is should not
show any portion of the equity which is been hold by the company in their subsidiary
company. There can be some sort if intra transaction so it should also be removed
by the company as the intra transaction are the type of the transaction which happen
between the two company so the company should remove all these type of
transaction and also should not take part of any transaction in future with the
subsidiary company. So to remove all the transaction company have to reverse the
entry which it have passed in regards of the same so that it will able to make all the
entry reversed and there will be no amount of the intra transactions in the company
balance sheet.
JKY Limited have enter into the agreement of purchase of the inventory from
the subsidiary company so this show that it is an intra transaction. Subsidiary
company must have sale the inventory by adding some sort of margin to JKY Ltd
and recorded the same in their balance sheet. It can be seen that the company JKY
Limited have not able to record the inventory as their revenue as they were unable to
sale the same in the current year so it can be said that the portion of the inventory
which lies in the financial statement of JKY Limited have cost + margin so as the
company should not record the margin which can be termed as unrealized profit so it
should not be recorded by the company as it should removed the same from the
financial statement of the company (Hsu, Jung and Pourjalali 2015). As per the
standard on accounting it suggest that the company should record the same as non-
current and it should be eliminated from the inventory value so it can be said that the
company should able to remove the unrealized profit which is been there in the
inventory of the company.
Group profit of the company will also be affected as it includes all the profit
which the company earns from the subsidiary or the parent company. As the
subsidiary company have sold the goods to the parent company so the part of the
unrealized profit is still there in the profit of the subsidiary company and as the profit
is been carried forward in the group so as a result it also increase the group profit of
the company so as per the standard it should removed the part of unrealized profit
which is there in the group profit and can only be done with the help of the
adjustment entry so an example which can help to know what entry the company
have to do in regards of the removal of the unrealized profit (Aasb.gov.au 2019).
For example the company have purchased the goods for $10000 and the
subsidiary company have a margin of 10% so the amount of the unrealized profit will
be (10/110)* 10000 = 909. So the amount of unrealized profit wills $909 so it should
be removed and the entry will be
Consolidated Profit Account Dr 909
To Consolidated Inventory Account 909
So this will removed all the unrealized profit which is there in the group account and
will show a fair amount of profit which is been earned by them.

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Corporate Accounting
Part C
Effects of NCI disclosure requirement in regards to the separate item in the
process of consolidation
To make a better presentation the company have to separately present the
non-controlling which it had in the equity of the parent company. So it should
disclose all the matter properly so that the company can able to know how to deal
with them in the financial statement. As non-controlling interest is been made so this
asset help the user to know how it is been implemented and also this standard help
to develop more easy accounting for the purpose (Aasb.gov.au 2019). The
consolidated statement is a bit different with regards of the non-controlling interest so
it should all the detail of the equity and non-controlling asset properly in the
consolidated statement. The standard help the company to do the accounting in a
more simple way so that the financial user can able to collect the information
properly and also able to analysis the same and able to take proper decision in
regards of the same.
Each parent company have some kind of holding in the financial statement of
the subsidiary company so that if the company is losing the interest upon the
business of the subsidiary so it should report it properly in the financial statement as
it is the most important p[art and each person should able to know the reason for
such happening of the event. It should also able to know the amount of non-
controlling interest which should be record by the company in the financial
statement.
Changes in order to ensure the accurate representation of the consolidated
financial statement
As per the consolidated statement is there company should record all the
adjusted amount of the asset and liabilities of both the company. It should not record
any amount which is in related to the investments which are been done by the
company in their subsidiary company and also it should not record the portion of the
equity which the company holds in the parent company (Aasb.gov.au 2019). If the
company have any kind of the loss so that should be reported and should be
recorded in the consolidation statement. The company should able to follow all the
regulation and the norms which are there in the standard related to the consolidation.
It should do proper estimation of the policy while preparing the consolidated financial
statement of the company. All the items so the both company should be there in the
consolidated statement and should also show the valuation of the goodwill.
The company can do the adjustment of the dividend in regards of the
preference share so that it can able to clear all its obligation before making the
consolidated statement.
Effects of the changes upon the disclosure in the annual report
The company should give all the necessary disclosure of the method and the
assumption which are been used by the company in regards of the consolidation of
the financial statement (Aasb.gov.au 2019). As it should record the amount of the
investment in the cost which is been done by the company in the joint venture. It
should show all the adjustment entry which they have passed to remove the intra
sale from the company transaction.

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Corporate Accounting
The both company should have same date of reporting the financial statement
so if the date is been different than the company should give proper explanation
about why the date are different and the reason should be clearly mention in the
financial statement of the company. It is necessary for the company to hold at least
50% upon the subsidiary company so if the company is not able to hold the
prescribed amount that it should properly disclose it in the financial statement so
that the user can able to know that it any happen the company may lose its control
over the subsidiary company. So all these matters should be properly disclosed by
the company in their notes on account.
Conclusion
On a conclusive note, the above discussion concludes as the how the consolidation
is done between the two company and what are the methods which can be used by
the company in regards of the consolidation as it show about the equity and
consolidation method of accounting. It even shows the details of the accounting in
regards of the intra sale and how the company can able to remove the unrealized
profit from the same. It even shows about the disclosure which should be made by
the company in regards of the non-controlling interest.

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Corporate Accounting
Reference
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 31
May2019].
Aasb.gov.au., 2019. [online] Available at:
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31 May2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 31
May2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-
11_COMPjan15_07-15.pdf [Accessed 31 May2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed
31 May2019].
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Gillis, P., Petty, R. and Suddaby, R., 2014. The transnational regulation of
accounting: insights, gaps and an agenda for future research. Accounting, Auditing &
Accountability Journal, 27(6), pp.894-902.
Gong, Q., Li, O.Z., Lin, Y. and Wu, L., 2015. On the benefits of audit market
consolidation: Evidence from merged audit firms. The Accounting Review, 91(2),
pp.463-488.
Gray, S.J. ed., 2014. International accounting and transnational decisions.
Butterworth-Heinemann.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Hsu, A.W.H., Jung, B. and Pourjalali, H., 2015. Does international accounting
standard no. 27 improve investment efficiency?. Journal of Accounting, Auditing &
Finance, 30(4), pp.484-508.