Consolidation of Financial Statements: Group Financial Accounting - Assignment Example

Consolidation of Financial Statements: Group Financial Accounting Students Name 28th September 2012 Acquisition Analysis: as at 1 July 2008, Net fair value of identifiable assets, Liabilities and contingent liabilities Delphi Ltd = (180,000+20,000+30,000+ 72,000) (equity)- 12,000(goodwill) + (25,000) (1-30%) (BCVR-Land) + (2,000) (1-30%) (BCVR-Buildings) + (20,000) (1-30%) (BCVR-Inventory) + (8,000) (1-30%) (BCVR-Plant) + (2,000) (1-30%) (BCVR-Delivery Truck) + (45,000) (1-30%) (BCVR-Patent) - (30,000) (1-30%) (BCVR-Contingent Liability) = $ 311,600 Cost of Combination = 302,000 Goodwill Acquired = (311,600-302,000) = $ 9,600 Unrecorded Goodwill = 12,000-9,600 = $ 2,400 Workings 1: 1. The BCVR & pre-acquisition worksheet journal entries ONLY at 30 June 2011: The BCVR as at 30 June 2011, With the inventory, it has been sold by 30 June 2009 and there will be no need to prepare a business combination valuation journal entry for the aforesaid asset. The calculated valuation for the asset is likely to have been to have been posted to retained earnings of the period ending 30 June 2009. With the building, it is still held by the group. The initial adjustment entry is similar to the one of the acquisition date. An accumulated depreciation of $ 20,000[$ 75,000- $ 55,000] is scrapped-off and the building reduced from $ 75,000 to a fair value reflecting $ 57,000, which translates to $ 18,000. The $ 2,000 difference is shared between deferred tax liability (30%) and business valuation reserve (70 %). The entry is reflected continuously for the period the asset is held by the Company at hand. This procedure is applied for plant which has an accumulated depreciation of $ 78,000[being $ 260,000- $ 182,000] and the cost is reduced to $ 190,000 which is deduced from $ 260,000,[ $ 260,000- $ 190,000], a figure of $ 70,000. The difference between $ 78,000 and $ 70,000, $ 8,000 is shared between deferred tax liability (30 %) and business combination valuation reserve (70 %). For delivery truck, $ [90,000-36,000] = $54,000, [$ 90,000- $ 38,000] = $ 52,000. The difference, $ 2,000 being $ [54,000-52,000] is apportioned between deferred tax liability (30 %) and business combination reserve entry (70 %). For Office Furniture, the difference results to a zero amount. There will be no need to account for delivery truck since it was already sold before the reporting took place. In this valuation entry though, the plant is depreciated on a straight line basis for a 5 year period. The acquisition date was 1 July 2008 and the reporting date is 30 June 2011. This translates to a 3 year period between the two aforementioned dates. The BCVR entry for plant needs to reflect relevant adjustments for the period under consideration and 2 year prior financial period depreciation. The adjustment to the plant is valued at $ 8,000. Using a 20 % depreciation rate [20 % * $ 8,000] we derive the depreciation per annum to be $ 1,600, for Buildings, the adjustment to it is valued at $ 2,000. Taking the depreciation rate at 20 %, we deduce that an amount of $ 4, 00 per annum [20 % * 2000] is termed adjustable. At this point, it is notably clear that the sitting period depreciation is altered at the depreciation expense while for the prior two periods, it is expected that the depreciation affect the retained earnings. The total depreciation amount is altered against the resultant accumulated depreciation amount. The amount of deferred tax liability= adjustment to accumulated depreciation multiplied by tax rate, in this assignment it is: $, 4, 800 for plant and $ 1,200 for building, deriving, $ 4,800 * 30 % = $ 1,440 for plant and $ 1,200 * 30 % = $360 for buildings. The BCVR entries as at 30 June 2011 is as follows: Accumulated depreciation — Building Building Deferred tax liability Business combination valuation reserve Accumulated depreciation-Plant Plant Deferred Tax Liability Business combination valuation reserve Dr Cr Cr Cr Dr Cr Cr Cr 20 000 78,000 18 000 6,00 1,200 70,000 2,400 5,600 Depreciation expense-Plant Retained earnings (1/7/08) Accumulated depreciation-Plant (20%  $8000 p.a. for three years) Depreciation expense-Building Retained earnings (1/7/08) Accumulated depreciation-Building (20%  $2,000 p.a. for three years) Dr Dr Cr Dr Dr Cr 2,400 2,400 6,00 6,00 4,800 1,200 Deferred tax liability( Plant plus building) Income tax expense Retained earnings (1/7/08) Dr Cr Cr 1,800 900 900 Goodwill Business combination valuation reserve Dr Cr 2,400 2,400 Pre – acquisition Entries as at 30 June 2011 As at 1 July 2008 the entry is as follows: Retained earnings (1/7/08) Share capital General reserve Plant Maintenance Reserve Business combination valuation reserve Shares in Delphi Ltd Dr Dr Dr Dr Dr Cr 72 000 180 000 20 000 30 000 - 302 000 As at 30 June 2011, the Pre-acquisition entries changes due to: Changes in inventory status: [30 % *(15,000)] + [30 % * $ (27,000-25,000)] = $ 5,100 As at 1 July 2008 the entry is as follows: Retained earnings (1/7/08) Share capital General reserve Plant Maintenance Reserve Business combination valuation reserve Shares in Delphi Ltd Dr Dr Dr Dr Dr Cr 77 100 180 000 20 000 30 000 (5,100) 302,000 An extra entry is needed due to the transfer made to general reserve of a figure $ 10,000 from retained earnings which was reduced by the same amount: the entry is, General reserve Transfer to general reserve Dr Cr 10 000 10 000 The Consolidation Worksheet Journal Entries at 30 June 2012: The entries to be effected at this stage are conducted for the 4th financial period since the date of acquisition and cover a period of 4 years. 1. Business combination valuation entries: The effect on the entries on both Plant and Buildings is that there would be further entries which will be needed for adjusting the 4 years depreciation between the carrying amount and fair value of the subsidiary: for Buildings, (4 * 20 % * $ 2,000)= $ 1,600 and ( 4 * 20 % * $ 8,000)= $ 6,400 A. First Journal entry for Building and Plant: Buildings Dr 2,000 Deferred tax liability Cr 600 Business combination valuation reserve Cr 1 400 Plant Dr 8,000 Deferred tax liability Cr 2,400 Business combination valuation reserve Cr 5,600 Depreciation expense-Buildings Dr 1,600 Accumulated depreciation-Buildings Cr 1,600 (4 x 20 % x $2 000) Depreciation expense-Plant Dr 6,400 Accumulated depreciation-Plant Cr 6,400 (4 x 20 % x $8 000) Deferred tax liability-Buildings Dr 480 Income tax expense-Buildings Cr 480 Deferred tax liability-Plant Dr 1,920 Income tax expense-Plant Cr 1,920 Value of inventory as at 30 June 2012: 1. (1.2*54,000)= $ 64,000 (0.2 * 64,000)= $ 12, 800, being value of inventory on hold 2 (27,000- 18,000)= $ 9,000 (2/3* 27,000)= $ 18,000 (21,600-18,000)= 3,600 (9,000-3,600)(1-30%) = $ 3,780 being the value for combination of business B. The entry for inventory is: Cost of sales Dr 3,780 Income tax expense Cr 1,134 Transfer from business combination Cr 2,646 Valuation reserve C. The entry for Contingent liability: Business combination valuation reserve Dr 1 400 Deferred tax asset Dr 600 Contingent liability – provision for Damages Cr 2 000 D. The entry for goodwill is: Goodwill Dr 2 400 Business combination valuation reserve Cr 2 400 Question no 4. The consolidation worksheet at 30 June 2012 Financial statements Olympus Ltd Delphi Ltd Adjustments Consolidation Dr Cr $ $ $ $ $ Revenues 1,966,400 1,580,200 3,546,600 Expenses 63 000 190 400 1 1 000 252,400 Profit before tax 1,903,400 1,389,800 3,294,200 Income tax expense 68 100 79 860 6,000 1 141,960 Profit for the period 1,835,300 1,309,940 3,152,240 Retained Earnings (1/7/11) 89 500 165 340 1 2 1 000 77 100 6000 1 249840 1,924,800 1,475,280 3,402,080 Transfer to General Reserve 10 000 - 10 000 2 20 000 Dividend paid 12 000 10 000 12 000 22,000 10 000 32 000 Share capital 450 000 180 000 2 180 000 450 000 Business combination valuation reserve — — 2 10 000 10 000 1 — General reserve 80 000 30 000 2 4 10 000 12 000 88 000 530 000 210 000 538 000 Available for sale financial assets reserve (1/7/08) 40 000 5 000 45 000 Gain on available-for sale financial assets 4 500 11 000 15 500 44 500 16 000 50 500 Total equity 574 500 226 000 800 500 Tax liabilities 19 250 26 040 1 1 000 1 000 1 45 290 Other liabilities 65 200 89 000 154 000 Total liabilities 84 450 115 040 97 900 Total equity and liabilities 658 450 341 040 1 091 900 Cash 90 620 96 145 186 765 Inventory 72 000 97 800 169 800 Financial assets 145 130 164 105 309 235 Land 125 000 50 000 175 000 Buildings 120 000 75 000 200 000 Plant 450 000 320 000 55 000 1 825 000 Delivery Truck 75 000 120 000 195 000 Office Furniture 15 000 26 000 41 000 Accumulated depreciation(plant ,building, office furniture, delivery truck) (342 300) ( 216 800) 1 60 000 2 000 1 (182 000) Goodwill 28 000 12 000 1 2 400 37 600 Accumulated depreciation _ 5000 Total assets 658 450 341 040 354 500 90 000 1 094 800 Olympus Ltd Consolidated Balance Sheet As at 30th June 2012 Assets Non-current Assets Land 175 000 Buildings 200 000 (Accumulated depreciation) (20 000) 180 000 Plant 825 000 (Accumulated depreciation) (55 000) 770 000 Delivery Truck 195 000 (Accumulated depreciation) (43 100) 151 900 Office furniture 41 000 (Accumulated depreciation) (20 000) 19 000 1 295 900 Current Assets: Cash 186 765 Inventory 169 800 Other financial assets 309 235 Total Current Assets 665 800 Liabilities: Tax liabilities 45 290 Other liabilities 154 000 (199 200) (605 110) 1 901 010 Equity: Share Capital 450 000 General reserve 88 000 Total Retained earnings 1 363 010 1,901,010 Read More