Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests

Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.

Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.

All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:4

	Carrying amount	Fair value
	$	$
Plant (cost $150,000)	100,000	110,000
Land	60,000	76,000

The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.

Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:

	Parent Ltd	Subsidiary Ltd
	$	$
Sales	632,000	440,000
Other revenue:
Debenture interest	10,000	-
Management and consulting fees	10,000	-
Dividends from Subsidiary Ltd	24,000	-
Total revenue	676,000	440,000
Cost of sales	260,000	170,000
Manufacturing expenses	180,000	120,000
Depreciation on plant	30,000	30,000
Administrative expenses	30,000	16,000
Financial expenses	22,000	10,000
Other expenses	28,000	24,000
Total expenses	550,000	370,000
Profit before tax	126,000	70,000
Income tax expense	(50,000)	(34,000)
Operating profit after tax	76,000	36,000
Retained earnings 1 July 2016	100,000	90,000
	176,000	126,000
Transfer to general reserve	6,000	-
Interim dividend paid	20,000	20,000
Final dividends declared	20,000	10,000
	46,000	30,000
Retained earnings 30 June 2017	130,000	96,000
General reserve	100,000	20,000
Other components of equity	26,000	20,000
Share capital	600,000	200,000
Debentures	400,000	200,000
Current tax liability	50,000	34,000
Dividend payable	20,000	10,000
Deferred tax liability	-	14,000
Other liabilities	180,000	24,000
	1,506,000	618,000
Assets
Financial assets	100,000	120,000
Debentures in Subsidiary Ltd	200,000	-
Shares in Subsidiary Ltd	263,200	-
Plant (cost)	240,000	204,000
Accumulated depreciation plant	(130,000)	(110,000)
Other depreciable assets	152,000	110,000
Accumulated depreciation	(80,000)	(50,000)
Inventory	180,000	170,000
Deferred tax asset	170,800	60,000
Land	402,000	114,000
Dividend receivable	8,000	-
	1,506,000	618,000

Additional information:

(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.

(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.

(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.

(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.

(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.

(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.

(g) The tax rate is 30%.

Required:

Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.

Note: show all necessary workings and narrations.

Question 1	Max. marks allocated
Acquisition analysis	5
Consolidation entries - accuracy	35
Total	40