Corporate accounting primarily deals with the management of companies’ accounts. It deals with a wide spectrum of activities ranging from preparation of statements like, income and cash flow, to keeping track of the firm’s taxes. To ensure that students develop a deep understanding of the real-world applications of corporate accounting, universities have been handing out complex corporate accounting assignments. These assignments include tedious tasks which might involve going through a firm’s annual reports, describing its items of equity and assessing its income tax expenses. Owing to the complexity of these assignments, students sometimes struggle to make a submission on time.
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Assignment Question:
200109 Corporate Accounting Systems
Autumn 2017
Practical Project
| Due Date: |
Friday 5 May 2017 (week 11). Submit electronically to vUWS prior to 5:00pm and submit hard copy at start of tutorial. |
| Assessment Value: |
40% |
| Topic: |
Acquisition of a subsidiary and consolidation entries |
| Length: |
1,500 words maximum (comprising calculations and working papers in Part A equivalent to 750 words and a written component of 750 words in Part B) |
The practical project involves two parts:
- Part A is the preparation of a selection of consolidation elimination journals for year ending 30 June 2019, for an economic entity comprising a parent and subsidiaries plus working papers of a professional standard.
- Part B is an explanation of the outcome of the consolidation process undertaken in Part A.
Part A (50%)
The World Retailing Ltd acquires 80 per cent of the shares of Mark Construction Ltd on 30 June 2019 for a consideration of $584 000. The share capital and reserves of Mark Construction Ltd at the date of acquisition are:
| Share capital |
$200 000 |
| Retained earnings |
$100 000 |
| Revaluation surplus |
$150 000 |
There are no transactions between World Retailing Ltd and Mark Construction Ltd at the date of acquisition. All assets of Mark Construction Ltd are fairly valued at the date of acquisition, except for a major plant that had a fair value $25 000 greater than its carrying amount. The cost of the plant was $125 000 and it had accumulated depreciation of $90 000.
In addition, the World Retailing Ltd acquired 100 per cent of the shares of Adelaide Retailing Ltd on 1 July 2017-that is two years earlier. The cost of investment was $500 000. At that date the capital and reserves of Adelaide Retailing Ltd were:
| Share capital |
$255 000 |
| Retained earnings |
$205 000 |
At the date of acquisition all assets of Adelaide Retailing Ltd were considered to be fairly valued. Adelaide Retailing Ltd declared and paid dividend $120 000 on 30 June 2019. World Retailing Ltd incurred the following transactions with Adelaide Retailing Ltd during financialyear 2018-2019:
- During the year World Retailing made total sales to Adelaide Retailing of $71 000, while Adelaide Retailing sold $56 000 in inventory to World Retailing.
- The closing inventory in World Retailing includes inventory acquired from Adelaide Retailing at a cost of $45 000. This cost Adelaide Retailing $38 000 to purchase.
- The opening inventory in World Retailing as at 1 July 2018 included inventory acquired from Adelaide Retailing for $62 500 that cost Adelaide Retailing $53 750.
- Adelaide Retailing paid $55 000 in management fees to World Retailing.
- On 1 July 2018 World Retailing sold an item of plant to Adelaide Retailing for $145 000 when its carrying amount in World Retailing’s accounts was $100 000 (initial cost $168650, accumulated depreciation $68 650). This plant is assessed as having a remaining useful life of nine years.
Part B (50%)
The financial statements for year ending 30 June 2019 for the economic entity have been prepared on the basis of your journals from Part A. These statements have been presented to the Board of Directors.
One of the Board members pointed out that the new business acquired by World Retailing is a construction company. Its financial statements should not be consolidated because it is involved in construction, whereas all of the other companies in the economic entity are involved in retailing industry.
The Board is also alarmed that the economic entity’s balance sheet shows a deferred tax balance, when the accounts for World Retailing Ltd had no deferred tax asset or deferred tax liability.
As the financial accountant you are requested to prepare a response to the following questions:
(a) Should the financial statements of new acquired business, Mark Construction Ltd, be consolidated into the economic entity and why? (250 words maximum)
(b) Why does the economic entity have a deferred tax balance? (500 words maximum) You must make reference to relevant paragraphs of the Accounting Standard and/or AASB Framework and to other sources of material. Harvard Style referencing is expected. For details on the Harvard referencing system go to:
http://library.westernsydney.edu.au/uws_library/guides/referencing-citation (and click on ‘Harvard’ link).
Assignment Sulotion
Part A
World Retailing Ltd acquires 80% shares of Mark Construction Ltd to extend its operation in Australia, and it also has an existing wholly owned subsidiary (Adelaide Retailing Ltd) operating in Adelaide from 1ST July 2017. Furthermore, Mark Construction Ltd has been acquired at the closure of the accounting period as on 30th June 2019. Reporting of the consolidation accounts for the betterment of financial statement of the economic entity and, furthermore to bring uniformity across companies book of accounts for such acquisitions it compulsory for the companies to follow prescribed guidelines as per Australian Accounting Standard Board 1024 for the proper closure of books.(AASB,1992) For the year closing at 30th June 2019 following necessary adjustments are required to be made in the books of World Retailing Ltd in accordance with Australian Accounting Standard Board 1024.
Books of World Retailing Ltd
| 30-Jun-19 |
Investment in Stock of Mark Construction Ltd Dr |
$584,000.00 |
|
|
|
Business Purchase |
|
$584,000.00 |
|
| Lump sum business purchase of $584,000 |
|
|
| 30-Jun-19 |
Business Purchase Account Dr |
$584,000.00 |
|
|
|
Share capital Account |
|
$160,000.00 |
|
|
Retain earnings Account |
|
$80,000.00 |
|
|
Revaluation reserves Account |
|
$120,000.00 |
|
|
Goodwill impaired Account |
|
$5,000.00 |
|
|
Goodwill Account |
|
$219,000.00 |
|
| Working Note 1 |
|
|
| 30-Jun-19 |
Plant Account Dr |
$25,000.00 |
|
|
|
Cost of control account |
|
$20,000.00 |
|
|
Non-controlling interest account |
|
$5,000.00 |
|
| Working Note 2 |
|
|
| 30-Jun-19 |
Investment in Stock of Adelaide Retailing Ltd Dr |
$500,000.00 |
|
|
|
Business Purchase |
|
$500,000.00 |
|
| Lump sum business purchase of $500,000 |
|
|
| 30-Jun-19 |
Business Purchase Account Dr |
$500,000.00 |
|
|
|
Share capital Account |
|
$255,000.00 |
|
|
Retain earnings Account |
|
$205,000.00 |
|
|
Goodwill impaired Account |
|
$15,000.00 |
|
|
Goodwill Account |
|
$25,000.00 |
|
| Working Note 3 |
|
|
| 30-Jun-19 |
Investment in Stock of Adelaide Retailing Ltd Dr |
$120,000.00 |
|
|
|
Dividend Received Account |
|
$120,000.00 |
|
| Dividend Received on Investment in Stock of Adelaide Retailing Ltd |
|
|
| 30-Jun-19 |
Sales Account Dr |
$127,000.00 |
|
|
|
Merchandise Inventory Account |
|
$127,000.00 |
|
| Inter Sale Transaction ($56000+$71000) = $127000 |
|
|
| 30-Jun-19 |
Income Account Dr |
$55,000.00 |
|
|
|
Investment in Stock of Adelaide Retailing Ltd |
|
$55,000.00 |
|
| Adelaide Retailing paid $55 000 in management fees to World Retailing |
|
|
| 30-Jun-19 |
Income Account Dr |
$45,000.00 |
|
|
|
Plant Account |
|
$45,000.00 |
|
| Working Note 4 |
|
|
| 30-Jun-19 |
Plant Account Dr |
$5,000.00 |
|
|
|
Depreciation Account |
|
$5,000.00 |
|
| Working Note 5 |
|
|
| 30-Jun-19 |
Income Account Dr |
$7,000.00 |
|
|
|
Merchandise Inventory Account |
|
$7,000.00 |
|
| Working Note 6 – Closing Inventory |
|
|
| 30-Jun-19 |
Income Account Dr |
$8,750 |
|
|
|
Merchandise Inventory Account |
|
$8,750.00 |
|
| Working Note 6 – Opening Inventory |
|
|
| 30-Jun-19 |
Deferred tax Assets Account Dr |
$2,625 |
|
|
|
Income Tax Account |
|
$2,625.00 |
|
| Working Note 7 |
|
|
| 30-Jun-19 |
Dividend Received AccountDr |
$120,000 |
|
|
|
Income Tax Account |
|
$113,125 |
|
|
Retained Earnings Account |
|
$6,875 |
|
| Transfer the income tax account and dividend income to Retained earnings for the year end. |
|
|
| Working Note 1 |
|
|
| Calculation of Goodwill for World Retailing Ltd |
|
|
| Mark Construction Ltd |
100% |
80% |
| Share capital |
$200,000 |
$160,000 |
| Retain earnings |
$100,000 |
$80,000 |
| Revaluation reserves |
$150,000 |
$120,000 |
|
$450,000 |
|
| Share of World Retailing Ltd @80% |
(A) |
$360,000 |
|
|
|
| Business Purchase |
(B) |
$ 584,000 |
| Goodwill |
(B-A) |
$ 224,000 |
| Goodwill impaired |
|
$ (5,000) |
| Goodwill |
|
$ 219,000 |
| Working Note 2 |
|
| Revaluation of Plant
|
|
| Plant upward Revaluation by $25000 |
|
| Share of World Retailing Ltd @80% of $25000 |
$ 20,000 |
| Share of NCI @20% |
$ 5,000 |
|
$ 25,000 |
| Working Note 3 |
|
|
| Calculation of Goodwill for World Retailing Ltd |
|
|
| Adelaide Retailing Ltd |
100% |
|
| Share capital |
$255,000 |
|
| Retain earnings |
$205,000 |
|
|
$460,000 |
|
| Share of World Retailing Ltd @100% |
(A) |
$460,000 |
|
|
|
| Business Purchase |
(B) |
$ 500,000 |
| Goodwill |
(B-A) |
$ 40,000 |
| Goodwill impaired |
|
$ (15,000) |
| Goodwill |
|
$ 25,000 |
| Working Note 4 |
|
|
| Reversal calculation for Unrealized profit on the sale of non-current assets. |
|
| Sale was made by the parent company, (World Retailing Ltd) to its fully owned subsidy (Adelaide Retailing Ltd) reported unrealized profit. Hence, the amount has to be reversed by making by following amount in the following entries |
| Book value |
$ 168,650 |
|
| Accumulated Depreciation |
$ 68,650 |
|
| Carrying Amount in books |
$ 100,000 |
|
|
|
|
| Sale price for Adelaide Retailing Ltd |
$ 145,000 |
|
| Profit on sales (need to be reversed) |
$ 45,000 |
|
| Working Note 5 |
|
|
| Overcharged of Depreciation by Adelaide Retailing Ltd Calculate: Profit on plant/ Use life Remaining |
|
|
| Profit on plant |
$45,000 |
|
| Use lifeRemaining |
9 years |
|
| Depreciation Method applied |
SLM |
|
| Depreciation overcharged |
$5,000 |
|
|
|
|
| Working Note 6 |
|
|
| Elimination of Unrealized profit on the stock World Retailing acquired inventory from Adelaide Retailing |
|
| Closing Inventory as on 30th June 2019 |
$45,000 |
|
| Cost value of Closing Inventory as on 30th June 2019 |
$38,000 |
|
| Unrealized profit on the closing stocks |
$7,000 |
|
| Opening Inventory as on 30th June 2019 |
$62,500 |
|
| Cost value of Opening Inventory as on 30th June 2019 |
$53,750 |
|
| Unrealized profit on the Opening stocks |
$8,750 |
|
|
|
|
| Working Note 7 |
|
|
| Tax expense with respect to unrealized profit on inventory |
| As per Working Note 6 |
|
|
|
|
|
| Unrealized profit on the Opening stocks |
$8,750 |
|
| Tax Expense @ 30% |
$2,625 |
|
Part B
Consolidation of Financial Statements
According to the Australian Accounting Standard Board 1024 consolidation accounts, parent entity holds an ownership interest in a subsidiary is determined by the understanding of the definition of control which is based on AASB1024.The control is defined when more than half of the voting rights of one entity is in the power of the other entity(AASB,1992). Furthermore, to appoint or remove a majority of the members of the board, to cast the majority of the votes at directors’ meeting.When one entity has such right to make and also design on behalf of the working culture of the organization based on day to day activities or long-term decisions it is termed to be in a controlling position. Thereby maintaining the concepts of consolidation accounts Moreover, it is not necessary that such two entities should be from the same industry. The need to follow combined accounts concept is because the entire firm's book of accounts is maintained with the understanding of a same accounting theory and principal. It also helps for the internal users as well external parties to understand the accounting and financial position of the economic entity more quickly.
Hence, World Retailing Ltd having a prime business as a retailing company acquires 80% of the share of Mark Construction Ltd having a prime business as a construction company gain a controlling right by more than 50%.Therefore comes into the ambit of reporting financial accounts as per consolidation reports. Thus both being from a different industry does not hold good and thereby will be treated one economic entity for consolidation of the financial reporting.
Deferred Tax Balance
The Economic entity is defined as per the entity which reflects the in its financial reports the financial position of not only the main company but along with it is various other subsidiaries and associated company (FRD, n.d).According to the accounting standards defined accounting and reporting of such entity are done by business combination IFRS 3 or AASB 1024 or IAS 27(ACCA, n.d). When the parent entity, holds an ownership interest in a subsidiary company more than 50% of controlling right it immediate coming into the ambit of consolidation accounts. As per the standard, it becomes utmost necessary to make combined accounts irrespective of the fact that individual accounts are being maintained and to be presented for proper reporting of financial statements.
To prepare such statements consolidation adjustments are essentials, and these adjustments are majorly on account of the composition of the books of accounts. The net effect of the invested amount is to be nullified in the group summary. Further, other compositions are done with the assistance of various other accounting standards. Accounting standards which help in maintenance of actual report analysis can be laid as -
AASB 1013: Accounting for Goodwill and AASB 1015: Accounting for the Acquisition of Assets Accounting Standard AASB 1010: Accounting for the Revaluation of Non-current Assets Accounting Standard AASB 1019: Measurement and Presentation of Inventory Accounting Standard AASB 1020: Accounting for Income Tax (Tax-effect Accounting).
Accounting for Income Taxes (Tax-effect Accounting) AASB 1020 treats the accounting of tax segment with respect to current tax and deferred tax adjustment about assets and liabilities along with the required provisioning. The point to be noted is that the deferred tax is not real tax calculation done by profit and loss achieved. It is an accounting measure concept done on the accrual basis. The deferred tax is calculated to set off the temporary and permanent differences were arising due to time effect like transactions (AASB, 1989). This appears when there is a different accounting treatment with a perspective of accounts and a different one on taxation.On account of group accounts deferred tax being an accounting adjustment to reflect the true and fair view of the company financial reporting. The disclosure in the books of accounts and changes in statements will be done as considering the entity as an economic entity. Hence if any one company reflects this adjustment, the entry will be evident in the group accounts. Therefore, though the holding company World Retailing Ltd did not have a deferred tax adjustment, Mark Construction Ltd had an accounting change with respect to the deferred tax on the year closing. Hence it is not an alarming situation and a normal accounting process to state an accurate reporting thereby; it will appear in the consolidation reporting for the true and fair view of the accounting statements.
References
Association of Chartered Certified Accountant (n. d.).Preparing Simple Consolidated Financial Statements. Available at
http://www.accaglobal.com/pk/en/student/exam-support-resources/fundamentals-exams-study-resources/f3/technical-articles/preparing-simple-consolidated-financial-statements.html
Australian Accounting Standard Board1992, Consolidated Accounts viewed 1 May 2017
http://www.aasb.gov.au/admin/file/content102/c3/AASB1024_5-92.pdf
Australian Accounting Standard Board 1989, Accounting for Income Tax (Tax-Effect
Accounting), viewed 1 May 2017.
http://www.aasb.gov.au/admin/file/content102/c3/AASB1020_10-89.pdf
Federal Register of Legislation, AASB 127 - Consolidated and Separate Financial Statements –
March 2008. Available at
https://www.legislation.gov.au/Details/F2009C01113
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