Consolidation: Principles, accounting requirements and intra-group transactions

Topics 1 & 2: Consolidation: Principles, accounting requirements and intra-group transactions

On 1 July 2015, Peace Ltd acquired all the shares of Sublime Ltd. At this date, the equity and liability sections of Sublime Ltd’s statement of financial position comprised of the following items:

$
Share capital (30 000 shares) 30 000
Retained earnings 10 500
General reserve 15 000
Other reserves 3 000

At acquisition date, all the identifiable assets and liabilities of Sublime Ltd were recorded at amounts equal to fair value except for:

Carrying amount Fair value
$ $
Inventory 25 000 28 000
Equipment (cost $15 000) 12 000 16 000
Machinery (cost $8 500) 7 500 8 000
Land 9 240 12 240

The inventory on hand in Sublime Ltd at 1 July 2015 was sold during September 2015.
The machinery which had a further 5-year life on acquisition date was sold on 1 January 2017. The land on hand at acquisition date was sold by 1 March 2016. The equipment was estimated to have a further 8-year life. Valuation adjustments are made on consolidation and, on realisation of a business combination valuation reserve, a transfer is made to retained earnings on consolidation.
On 30 June 2017, the trial balances of Peace Ltd and Sublime Ltd were as follows:

Debit balances Peace Ltd Sublime Ltd
$ $
Shares in Sublime Ltd 68 600 —
Inventory 85 790 35 160
Other current assets 4 310 1 550
Deferred tax assets 8 100 3 700
Machinery 14 000 11 000
Land — 12 240
Equipment 17 000 18 650
Cost of sales 32 500 26 750
Other expenses 11 000 13 500
Income tax expense 3 600 1 000
Interim dividend paid 2 000 1 000
Final dividend declared 5 000 1 500
Advance to Sublime Ltd 5 000 —
256 900 126 050
Credit balances
Share capital 85 000 33 000
General reserve 20 500 15 000
Retained earnings (1/7/16) 8 000 17 750
Debentures 60 000 —
Final dividend payable 5 000 1 500
Current tax liabilities 4 000 1 250
Other payables 17 400 5 050
Advance from Peace Ltd — 5 000
Sales 42 500 32 500
Other revenue 9 500 10 500
Gains/(losses) on sale of non-current assets 2 000 500
Accumulated depreciation – machinery 2 000 1 000
Accumulated depreciation – equipment 1 000 3 000
256 900 126 050

Additional information
(1) A bonus dividend, on the basis of 3 ordinary shares for every 30 ordinary shares held, was paid in January 2017 out of other reserves existing at acquisition date.
(2) On 1 July 2016, Sublime Ltd has on hand inventory worth $6 000 transferred from Peace Ltd in June 2016. The inventory had previously cost Peace Ltd $5 900. Profit in inventory on hand at 30 June 2016 is $100. By 30 June 2017, Sublime Ltd had sold all $6 000 of the inventory to external parties.

(3) On 1 January 2017, Peace Ltd acquired $7 500 worth of inventory for cash from Sublime Ltd. The inventory had previously cost Sublime Ltd $5 500. By 30 June 2017, Peace Ltd had sold $5 625 of the transferred inventory for $8 000 to external entities.

(4) On 1 January 2016, Sublime Ltd sold equipment to Peace Ltd for $4 000. This had originally cost Sublime Ltd $6 000 and had a carrying amount at the time of sale of $3 500. Both entities charge depreciation at a rate of 10% p.a. straight-line.

(5) Peace Ltd sold an item of inventory to Sublime Ltd on 1 January 2017 for use as machinery. This item cost Peace Ltd $2 000 and was sold to Sublime Ltd for $3 000. Sublime Ltd depreciated the item at 10% p.a. straight-line.

(6) On 30 June 2017, half of the goodwill was written off as a result of an impairment test.

(7) All dividends declared by Sublime Ltd have been from post-acquisition profits.

(8) The tax rate is 30%.

Required
(i) 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 Peace Ltd and Sublime Ltd.
(ii) Complete a detailed consolidation worksheet for the year ending 30 June 2017.
(iii) Prepare the following financial statements for Peace Ltd at 30 June 2017:
a. Consolidated Statement of Profit or Loss and Other Comprehensive Income.
b. Consolidated Statement of Changes in Equity.
c. Consolidated Statement of Financial Position.

Question 1 Max. marks allocated
Acquisition analysis 7
Consolidation entries with workings - accuracy 63
Consolidation worksheet including presentation 10
Consolidated financial statements including presentation 20
Total 100

Rationale
This assessment task covers topics 1 & 2. It has been designed to ensure that you are engaging with the subject content on a regular basis. More specifically it seeks to assess your ability to:

1. be able to explain the relationships that exists between a parent company and its subsidiary and an investor and its investee;

2. be able to prepare accounts for each of the above-mentioned business combinations in accordance with relevant professional and statutory reporting requirements.
Marking criteria

The marking guide for this task is provided below. The detailed allocation of marks for relevant questions has been provided above for your information.

Criteria High distinction Distinction Credit Pass
Prepare acquisition analysis and consolidation journal entries, consolidation worksheets and consolidated financial statements for group structures, in accordance with relevant professional and statutory reporting requirements. Acquisition analysis and determination of goodwill or gain on bargain purchase is computed accurately.

At least 85% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.

Consolidation worksheet presented with all entries entered correctly and appropriate cross referencing provided for all adjustments made.

Financial statements are presented in publishable format without flaw and in accordance with relevant accounting standards. Acquisition analysis and determination of goodwill or gain on bargain purchase is computed with very few minor errors.

At least 75% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.

Consolidation worksheet presented with almost all entries entered correctly. Appropriate cross referencing provided for all adjustments made.

Financial statements are presented in publishable format with minor flaws and in accordance with relevant accounting standards. Acquisition analysis and determination of goodwill or gain on bargain purchase is computed correctly with some minor errors.

At least 65% of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.

Consolidation worksheet presented with a number of minor errors made. Appropriate cross referencing provided for all adjustments made.

Financial statements are presented in publishable format with minor flaws. Acquisition analysis and determination of goodwill or gain on bargain purchase is computed with a limited number of errors.

At least half of the consolidation journal entries are prepared accurately in accordance with relevant statutory reporting requirements.

Consolidation worksheet presented with a number errors made. Appropriate cross referencing provided for all adjustments made.

Financial statements are presented in publishable format with a few flaws.
Presentation

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