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) |
Share capital | $200 000 |
Retained earnings | $100 000 |
Revaluation surplus | $150 000 |
Share capital | $255 000 |
Retained earnings | $205 000 |
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/F2009C01113Hello! I have an interest for writing since my college days and hold a relevant experience of four years in academic writing. I’m passionate about words, grammar, punctuation and style and I’ve been known to engage in lengthy discussions about hyphens and compound modifiers as it actually interests me. People call me enthusiastic, optimistic and outgoing. I believe in helping the students with their lengthy assignments which is one of the reason I’ve been associated with My Assignment Services.
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