Company Reporting Semester One 2012
Assignment Two
Weighting: 10%
Due date: 5pm Wednesday 9 May (Week 10)
Submission:
A hard copy of the assignment must be submitted in the relevant assignment box by the due date. Electronic submission is not permitted.
Penalties for late lodgement:
A maximum penalty of 10% of the total mark allocated to this assessment will be deducted for each day that it is late (i.e. 10 marks per day for each day late).
Return of marks:
Marks will be made available to students during tutorials approximately two weeks after the due date.
General assignment instructions:
Students must complete both parts A and B.
Plagiarism is prohibited.
For information on where to receive assistance with academic skills such as researching, writing and referencing please refer to student resources on your home campus.
You are required to keep a copy of this assignment until all results are finalised at the end of the semester.
Part A: Case Study (Leo et al., 2012, p.757, adapted)
In each of the following independent situations, discuss with reference to AASB 10 Consolidated Financial Statements (Appendix B, paragraphs B2 and B3) whether a parent-subsidiary relationship exists and which entity, if any, is a parent required to prepare consolidated financial statements.
(a) Albany Ltd and Busselton Ltd each hold 50% of the shares in Dunsborough Ltd, all companies being involved in the computer software industry. Albany Ltd agrees that Busselton Ltd should provide the management of Dunsborough Ltd because of the expertise provided by its managing director, Bob Gates. Busselton Ltd receives a management fee for providing its expertise. (limit 250 words)
Answer : As mentioned in AASB 10 Consolidated Financial Statements a parent-subsidiary relationship exists when investor (parent) controls investee (subsidiary). To determine whether there is a parent-subsidiary relationship in the above case and who controls to whom, we need to refer B2 and B3 paragraph of AASB 10.
According to B2 paragraph for having control of investor over investee ,the investor should have power over the investee , it should also have exposure to the risk and rights to the returns gained by getting involved with the investee , also investor should have the power to use its decision which can influence the other shareholder’s returns.
According to B3 paragraph to have power an investor should be able to direct the relevant activities of the investee and to make the decisions relating to relevant activities.
In the above case Albany Ltd and Busselton Ltd both are holding equal portion of equity shares. But it seems that there is a parent –subsidy relationship. Because Albany Ltd is giving fee to Busselton Ltd for management provided by it. It shows Albany Ltd is having power to direct relevant activities of Dunsborough Ltd. Albany Ltd is having the power to take the decisions which can influence the returns of other shareholders.
As Albany ltd. Is having control over Dunsborough Ltd. It should prepare the consolidated financial statements.
(b) Alice Ltd has recently acquired a 35% interest in Springs Ltd, a company that has discovered large deposits of iron ore. Alice Ltd has extensive experience in the mining industry and, as a result, has been able to have four of its directors elected to the board of Springs Ltd, which has six directors in total. (limit 250 words)
Answer : Alice Ltd. has acquired 35% interest in Spring Ltd. According to paragraph B2 and B3 of AASB 10 , an investor should have control and power over investee to determine whether there is a parent-subsidy relationship.
According to B2 to have the control Alice Ltd. should have power over the Spring Ltd. It should have exposure or rights to the variability of returns from investee, power to use its decision making which can influence other shareholders’ returns.
It is clear that in the above case Alice Ltd. has got power to make the decisions through majority in the board membership of Spring Ltd. The Board members get their share in the profit, hence they are exposed to variability of the returns.
According to B3 to determine the level of power an investee should consider the purpose and design of the investee and also the relevant activities and the decisions of these activities. In the above case the Alice Ltd. makes decisions of relevant activities due to majority in the board.
Hence we can conclude that there is parent-subsidy relationship and Alice is a parent company of Springs Ltd. and it should prepare the consolidated financial statements.
(c) Darwin Ltd holds 30% of the shares issued by Arnhem Ltd. The other shareholders come from mixed backgrounds, but each holds on average 10% of shares in Arnhem Ltd. There are seven directors of Arnhem Ltd. Four of these are appointed by Darwin Ltd. The other three directors are appointed by three of the other shareholders who have an interest in the management of the company. Most of the remaining shareholders live outside Australia and rarely attend board meetings of Arnhem Ltd unless they have business to attend to in Australia around the same time as the board meetings are held. (limit 250 words)
Answer: According to B2 paragraph of AASB 10 to have the control Darwin Ltd should have power over the Arnhem Ltd . It should have exposure or rights to the variability of returns from investee, power to use its decision making which can influence other shareholders’ returns.
In this case Darwin Ltd. has got the maximum number of directors in the board, therefore it can affect the decisions which can have impact on the returns of other shareholders. and maximum shareholding of 30% which exposes it to the variability of returns and risk of Arnhem Ltd.
According to B3 paragraph of AASB 10 to and investor should have the power to make decisions of relevant activities as per the design and purpose of the investee.
In the above case Darwin Ltd can influence the decisions relating to important activities due to majority in the board of the investee Arnhem Ltd. Here we can assert that there is a parent-subsidy relationship and Darwin Ltd. is a parent company of Arnhem Ltd. It should prepare consolidated financial statement.
3 x 15 marks = 45 marks
Part B: Practical Exercise
Taurus Ltd acquired all of the issued shares of Capricorn Ltd on 1 July 2012 for consideration of $137 600. At that date, the equity of Capricorn Ltd consisted of the following:
Share capital $85 000
General reserve 18 000
Retained earnings 12 000
All of the identifiable assets and liabilities of Capricorn Ltd at this date were recorded at fair value, except for:
Carrying amount Fair value
Plant (cost $100 000) $80 000 $82 000
Inventory $5 000 $6 000
Land $150 000 $158 000
The plant had a further eight year life. All of the inventory was sold by Capricorn Ltd by 15 May 2013. Land was sold on 31 October 2015. Valuation adjustments are made on consolidation.
At 1 July 2012, Capricorn Ltd had recorded goodwill of $5 400, and the liabilities of Capricorn Ltd included a dividend payable (cum div) of $6 000.
At 1 July 2012, Capricorn Ltd had incurred development expenditure of $5 000, which it had expensed. Taurus Ltd determined the fair value of these costs to be $2 000. The project was still in progress at 30 June 2016, with Capricorn Ltd capitalising $3 000 in the 2016 financial year.
During the 2016 financial year, Capricorn Ltd makes a transfer of $3 000 from pre-acquisition reserves to retained earnings.
Goodwill was impaired by $1 200 at 30 June 2015, and by a further $600 at 30 June 2016. Impairment has not been recorded by Capricorn Ltd.
Taurus Ltd applies the partial goodwill method.
The tax rate is 30%.
Required
a) Prepare the acquisition analysis as at 1 July 2012. (10 marks)
Answer :
Acquisition Analysis at 1 July 2012
| Assets | Liabilities | ||
| DR | Book value of net assets | $ | $ |
| – Share capital | 85,000 | ||
| – General reserve | 18,000 | ||
| – Retained earnings | 12,000 | ||
| Total book value of net assets | 115,000 | ||
| DR | Good Will | 5,400 | |
| DR | Total fair value adjustments | 11,000 | |
| FVINA | 16,400 | ||
| CR | Dividend payable | 6000 | |
| CR | Cost of acquisition | 137,600 | |
| 143600 |
b) Prepare any necessary journal entries at acquisition date, 1 July 2012, according to AASB 10 Consolidated Financial Statements. All workings, and narrations to explain each entry, must be provided. (13 marks)
Answer : Journal Entries at acquisition date
(i) Revaluation of fair value
| BCVR Entries | ||||
| DR Accumulated .Dep. Plant | 20,000 | |||
| CR Plant-cost | 18000 | |||
| CR Inventory | 1000 | |||
| CR Land | 8000 | |||
| Development Exp | 3000 | |||
| 30,000 | ||||
| CR DTL | 9,000 | |||
| CR BCVR | 11,000 | |||
(ii) Pre acquisition elimination entry
| Assets | Liabilities | ||
| DR | Book value of net assets | $ | $ |
| – Share capital | 85,000 | ||
| – General reserve | 18,000 | ||
| – Retained earnings | 12,000 | ||
| Total book value of net assets | 115,000 | ||
| DR | Good Will | 5,400 | |
| DR | Total fair value adjustments | 11,000 | |
| FVINA | 16,400 | ||
| CR | Dividend payable | 6000 | |
| CR | Cost of acquisition | 137,600 | |
| 143600 |
(iii)Elimination of intra-group dividend
| DR Dividend revenue | 60,00 | |||||
| CR Dividend paid | 60,00 |
It is the amount of the dividend received by the parent
c) Prepare any necessary journal entries for the year ending 30 June 2016, according to AASB 10 Consolidated Financial Statements. All workings, and narrations to explain each entry, must be provided. (27 marks)
Journal entries for the year ending 30 June 2016
- 1. Plant depreciation
DR Depreciation $2250
CR Acc. Depreciation $2250
($18000/8 years)
DR DTL $675
CR I/Tax Expenses $ 675
($5400/8 years)
- 2. Land sold
DR. CASH a/c $ 158000
CR LAND a/c $ 158000
(being land sold at fair value)
- 3. Development Expenses
DR R& D Expenses a/c $ 3000
DR ITE a/c $900
CR Cash a/c $ 3900
(being development expenses capitalised now by $3000)
- 4. Good will imparison
DR Loss on impairment a/c $1800
CR Good will a/c $1800
(Being good will impaired by $ 1200 in 2015 and $ 600 in FY 2016)
10 + 13 + 27 + 5 (workings/narrations) = 55 marks
Total Part A 45 marks + Part B 55 marks = 100 marks
References
www.aasb.gov.au/admin/file/content105/c9/aasb10_08-11.pdf
www.comlaw.gov.au/Series/F2011L01941
www.charteredaccountants.com.au/…/AASB-releases-consolidation-st.
www.aasb.gov.au/admin/file/content105/c9/ACCED224_12-11.pdf
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