|
Detailed reconciliation of opening |
Parem Ltd ($) |
Sublit Ltd ($) |
|
and closing retained earnings |
||
|
Sales revenue |
98,000 |
95,000 |
|
Cost of goods sold |
55,000 |
85,000 |
|
Gross profit |
43,000 |
10,000 |
|
Other revenue |
2,000 |
- |
|
Gain on sale of land |
15,000 |
|
|
Depreciation expense |
3,000 |
3,000 |
|
Other expenses |
5,000 |
2,000 |
|
Profit before tax |
37,000 |
20,000 |
|
Tax expense |
11,100 |
6,000 |
|
Profit for the year |
25,900 |
14,000 |
|
Retained earnings – 30 June 2016 |
120,000 |
45,000 |
|
Retained earnings – 30 June 2017 |
145,900 |
59,000 |
|
Statement of financial position |
Parem Ltd ($) |
Sublit Ltd ($) |
|
Shareholders’ equity |
||
|
Retained earnings |
145,900 |
59,000 |
|
Share capital |
40,000 |
40,000 |
|
Other reserves |
50,000 |
|
|
Current liabilities |
||
|
Accounts payable |
50,000 |
80,000 |
|
Deferred tax liability |
30,000 |
40,000 |
|
Total liabilities and equity |
315,900 |
219,000 |
|
Current assets |
||
|
Cash |
60,900 |
79,000 |
|
Inventory |
100,000 |
100,000 |
|
Non-current assets |
||
|
Land |
30,000 |
- |
|
Machinery-at cost |
80,000 |
15,000 |
|
Accumulated depreciation |
-20,000 |
-10,000 |
|
Investment in Sublit Ltd |
60,000 |
|
|
Deferred tax asset |
5,000 |
35,000 |
|
Total assets |
315,900 |
219,000 |
Parem Ltd acquired its 60% interest in Sublit Ltd on 1 July 2015 for $60,000. At that date the capital and reserves of Sublit Ltd were: Share capital $40,000 Retained earnings $20,000 Total $60,000
The management of Parem Ltd measures the non-controlling interest in Sublit Ltd at fair value.
At the date of acquisition, all assets of Sublit Ltd were stated at fair value except for machinery. The fair value of machinery was greater than the carrying value by $3,000. The cost of machinery was $15,000 and accumulated depreciation was $5,000, with a remaining useful life of 3 years.
The opening inventory (Brickplaster) of Parem Ltd as at 1 July 2016 included inventory acquired from Sublit Ltd for $60,000, which had cost $40,000 to produce. This inventory was sold outside the group during the current period.
During the year ending 30 June 2017, Sublit Ltd sold Cement to Parem Ltd for $50,000. The closing inventory in Parem Ltd includes Cement inventory acquired from Sublit at a cost of $5,000.
During the year ending 30 June 2017, Sublit Ltd paid $5,000 management fees to Parem Ltd
The income tax rate is 30%. Each entity pays its own tax.
The current year is considered as year ending 30 June 2017.
Required: Prepare and show:
(a) Consolidation journal entries for the elimination of Parem Ltd’s investment in Sublit Ltd for the year ending 30 June 2017. Show detailed workings for each answer in a format that includes a description of each entry. (5 marks)
(b) Consolidation journal entry on the pre-tax sale of brickplaster inventory sold by Sublit Ltd Parem Ltd in the previous period and its associated tax effect in the current period which was sold outside the group in the year ending 30 June 2017. (4 marks)
(c) Consolidation journal entries for the fair value adjustment of the machinery in Sublit Ltd to be done at the date of acquisition to prepare group accounts for the ending 30 June 2017. (6 marks)
(d) Consolidation journal entries relating to depreciation resulting because of fair value adjustment of the machinery to prepare group accounts for the ending 30 June 2017. (3 marks)
(e) Consolidation journal entries relating to tax effect result from the depreciation entry resulting because of fair value adjustment of the machinery to prepare group accounts for the ending 30 June 2017. (3 marks)
(f) Consolidation journal entries Parem Ltd sold Cement to Sublit during the year ending 30 June 2017, the closing inventory, and the tax effect because of the closing inventory of Cement. (6 marks)
(g) Consolidation entry for Sublit Ltd paying management fees to Parem Ltd during the year ending 30 June 2017. (2 marks)
(h) Itemise and show the non-controlling interest including goodwill assigned on the acquisition date (i.e. 1 July 2015). (4 marks)
(i) Itemise and show the non-controlling interest in the movements in share capital and reserves between the date of Parem Ltd’s acquisition of Sublit Ltd (1 July 2015) and the beginning of the current reporting period (1 July 2016). (5 marks)
(j) Itemise and show the non-controlling interests in equity item for the year ending 30 June 2017. (7 marks)
(k) If we assume that Parem Ltd acquired its 100% interest in Sublit Ltd on 1 July 2015 for $60,000. At that date the capital and reserves of Sublit Ltd were: Share capital $40,000; Retained earnings $20,000. It is also assumed that there were no fair value adjustments necessary for assets in Sublit Ltd at the date of acquisition. Consolidation journal entries for the elimination of Parem Ltd’s investment in Sublit Ltd for the year ending 30 June 2017.
