Solutions Manual to accompany Company Accounting 10e prepared by Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan © John Wiley & Sons Australia, Ltd 2015 Chapter 21: Consolidation: non-controlling interest Chapter 21 – Consolidation: non-controlling interest REVIEW QUESTIONS What is meant by the term “non-controlling interest” (NCI)? NCI is the term used for the ownership interest in a subsidiary other than the parent It is defined in AASB 127 as: The equity in a subsidiary not attributable, directly or indirectly, to a parent Explain whether the NCI is better classified as debt or equity The main argument for the NCI being classified as equity is that it better fits the definition of equity The subsidiary has no present obligation in relation the NCI so the NCI does not meet the definition of a liability Some writers argue that NCI should be disclosed separately from equity an liabilities – the “mezzanine” treatment This argumentrelates to the utility of financial statements in relation to the user group, the parent shareholders It is argued that this form of presentation provides more relevant information to the parent shareholders Explain whether the NCI is entitled to a share of subsidiary equity or some other amount If the NCI is classified as equity, it is entitled to a share of consolidated equity Note that consolidated equity is basically subsidiary equity adjusted for the effects of intragroup transactions – that is, realised subsidiary equity If it were classified as a liability of the subsidiary then the calculation of the NCI would be based on the obligation held by the subsidiary How does the existence of an NCI affect the business combination valuation entries? There is no effect However if the full goodwill method is used, the recognition of the subsidiary’s goodwill is made via a BCVR entry In contrast, where the partial goodwill method is used, goodwill is recognised in the pre-acquisition entry Why? The 3BCVR entries, apart from that for goodwill, are prepared because at of fair the requirement of AASB to show the identifiable assets and liabilities of the acquiree value The determination of fair value is not affected by the parent’s ownership in the subsidiary © John Wiley and Sons Australia, Ltd 2015 21.1 Solutions manual to accompany Company Accounting 10e How does the existence of an NCI affect the pre-acquisition entries? The pre-acquisition entry eliminates the investment account recorded by the parent and the preacquisition equity of the subsidiary, as well as recognising any gain on bargain purchase The consideration transferred reflects the amount paid by the parent for its share of the equity of the subsidiary The first effect then on the pre-acquisition entry is that the equity eliminated is only the parent’s share The second effect is that the gain on bargain purchase recognised is only that relating to the parent’s share of the equity of the subsidiary Why is it necessary to change the format of the worksheet where a NCI exists in the group? The AASB require the disclosure of the equity of the group, as well as the relative proportions of the parent and the subsidiary For a wholly owned subsidiary situation, the final column in the worksheet represents the group position which is also the parent’s position, as there is no NCI Where an NCI exists, having determined the group position, the equity must be divided into parent share and the NCI share Hence, the worksheet must have additional columns to divide the group equity into the relative shares of the parent and the NCI This is done by calculating the NCI share and subtracting it from the group equity so that the final column is then the parent entity’s share Explain how the adjustment for intragroup transactions affects the calculation of the NCI share of equity The NCI does not affect the adjustment itself, as the full effects of the intragroup transaction are adjusted for on consolidation However, where the subsidiary records profit which is unrealised to the group, this affects the calculation of the NCI The NCI is entitled only to a share of consolidated equity rather than subsidiary equity Hence, where the subsidiary has recorded unrealised profit, the NCI share of the recorded profit of the group must be adjusted for any of that profit which is unrealised In the Step & Step calculations of the NCI share of equity, this is a share of recorded equity As adjustments are made for intragroup transactions, where these transactions reflect adjustments for unrealised subsidiary profit, an adjustment is also made to the NCI share of profit The net result is then that the NCI gets a share of realised subsidiary equity Explain whether an NCI adjustment needs to be made for all intragroup transactions An NCI adjustment does NOT need to be made for all intragroup transactions An NCI adjustment only needs to be made where the adjustment is for unrealised profit recorded by the subsidiary Hence the transaction must be an upstream – subsidiary to parent – transaction in order for an NCI adjustment to be made Further the upstream transaction must relate to unrealised subsidiary profit What is meant by ‘realisation of profit’ ? Profit is realised when the group transacts with an entity external to the group The point of realisation depends then on identifying when the external entity is involved With inventory (and other sale) transactions the point of realisation is easily identified as it is the point of sale when the external entity is involved It is at this point that the group recognises © John Wiley and Sons Australia, Ltd 2015 21.2 Chapter 21: Consolidation: non-controlling interest profit on sale, being the excess of the sale proceeds over the cost to the group of the item being sold With assets not sold but used by the group – see 10 below With intragroup services, see the answer to 11 below 10 When is profit realised on an intragroup transaction involving a depreciable asset? See the answer to above With assets used by the group such as depreciable assets, the group does not interact with an external entity It is then impossible to determine a point of realisation based on direct involvement of the group with an external entity The point of realisation is then based on indirect involvement The depreciable asset is used by the group to assist in its interaction with external entities eg by making inventories for sale to external entities The depreciation charge measures the extent of that involvement in any one year as the depreciation charge is based on para 60 of AASB 116 which notes that the depreciation charge reflects the pattern of benefits consumed by the entity Realisation of profit then occurs as the asset is used up or consumed by the entity Realisation is then in proportion to the depreciation charge made on the asset 11 When is profit realised on an intragroup transaction involving the parent renting a warehouse from the subsidiary? With such a transaction, the subsidiary records revenue, which increases subsidiary profit This profit is not recognised by the group However, no adjustment is made to the NCI share of equity as a result of this transaction This is because of the difficulty of determining a point of realisation as no external entity is ever involved in this transaction 12 If a step approach is used in the calculation of the NCI share of equity, what are the steps involved? There are steps: Share of equity at acquisition date Share of change in equity between the acquisition date and the beginning of the current period Share of change in equity in the current period 13 What are two events that could occur between the acquisition date and the beginning of the current period that could affect the calculation of the NC I share of retained earnings? 14 Changes in the assets & liabilities recognised via the BCVR entries eg sale of the inventory on hand in the subsidiary at the acquisition date Movements in equity eg transfers to/from general reserve, prior period dividends For what line items i n the financial statements is it necessary to provide a break-down into parent entity share and NCI share? © John Wiley and Sons Australia, Ltd 2015 21.3 Solutions manual to accompany Company Accounting 10e Statement of Profit or Loss and Other Comprehensive Income: AASB 101 para 83: Disclose both NCI and parent share of profit/loss for the period AND share of total comprehensive income for the period Statement of Financial Position: AASB 101 para 54 (q) and (r): NCI share of equity, and share capital and reserves attributable to parent Statement of Changes in Equity: AASB 101 para 106 (a): total comprehensive income for the period, showing that attributable to the parent and that attributable to the NCI © John Wiley and Sons Australia, Ltd 2015 21.4 Chapter 21: Consolidation: non-controlling interest CASE STUDY QUESTIONS Case Study Equity classification Len Inn is the accountant for Wallaby Trucks Ltd This entity has an 80% holding in the entity Tyres-R-Us Ltd Len is concerned that the consolidated financial statements prepared under AASB 10 may be misleading He believes that the main users of the consolidated financial statements are the shareholders of Wallaby Trucks Ltd The key performance indicators are then the profit numbers relating to the interests of those shareholders He therefore wants to prepare the consolidated financial statements showing the non-controlling interest in Tyres-RUs Ltd in a c ategory other than equity in the statement of financial performance, and for the statement of changes in equity to show the profit numbers relating to the parent shareholders only Required Discuss the differences that would arise in the consolidated financial statements if the noncontrolling interests were classified as debt rather than equity, and the re asons the standard setters have chosen the equity classification in AASB 10 Prime users: There is nothing in either AASB 101 or AASB 127 that indicates who the prime users of the consolidated financial statements are In the income statement there is no preference given to the parent over the NCI, although in the balance sheet, the NCI is limited to a one-line disclosure The Framework also gives no preference to either the parent or the NCI NCI as equity or liability: The main argument for the NCI being classified as equity is that it better fits the definition of equity The subsidiary has no present obligation in relation to the NCI so the NCI does not meet the definition of a liability Some people argue that the NCI should be disclosed separately from equity and liabilities – the “mezzanine” treatment This argumentrelates to the utility of financial statements in relation to the user group, the parent shareholders It is argued that this form of presentation provides more relevant information to the parent shareholders Disclosure requirements: Statement of Profit or Loss and Other Comprehensive Income: AASB 101 para 83: Disclose both NCI and parent share of profit/loss for the period AND share of total comprehensive income for the period Statement of Financial Position: AASB 101 para 54 (q) and (r): NCI share of equity, and share capital and reserves attributable to parent Statement of Changes in Equity: AASB 101 para 106 (a): total comprehensive income for the period, showing that attributable to the parent and that attributable to the NCI © John Wiley and Sons Australia, Ltd 2015 21.5 Solutions manual to accompany Company Accounting 10e If the NCI were classified as debt, any dividends would be disclosed as an expense, while the NCI would not receive a share of profit In the statement of financial position the NCI would be shown under liabilities, while in the statement of changes in equity there would be no NCI information © John Wiley and Sons Australia, Ltd 2015 21.6 Chapter 21: Consolidation: non-controlling interest Case Study Adjustment for the NCI share of equity The consolidated financial statements of Whale Submarine Works Ltd are being prepared by the group accountant, Raz Putin He is currently in dispute with the auditors over the need to adjust for the NCI share of equity in relation to intragroup transactions He understands the need to adjust for the effects of the intragroup transactions, but believes that it is unnecessary to adjust for the NCI share of equity He argues that the NCI group of shareholders has its interest in the subsidiary and as a result is entitled to a share of w hat the subsidiary records as equity He also disputes with the auditors about the notion of ‘realisation’ of profit in relation to the NCI If realisation requires the involvement of an external entity in a transaction, then in relation to transactions such as intragroup transfers of vehicles and services such as interest payments, there is never any external party involved Those transactions are totally within the group and never involve external entities As a r esult, the more appropriate accounting is to give the NCI a share of subsidiary equity and not be concerned with the fictitious involvement of external entities Required Write a report to Raz convincing him that his argument is fallacious The need to adjust for the NCI share of equity in relation to intragroup transactions: If the NCI is classified as equity, it is entitled to consolidated equity Note that consolidated equity is basically subsidiary equity adjusted for the effects of intragroup transactions – that is, realised subsidiary equity If it were classified as a liability of the subsidiary then the calculation of the NCI would be based on the obligation held by the subsidiary Vehicles Profit&isservices: realised when the group transacts with an entity external to the group The point of realisation depends then on identifying when the external entity is involved With inventory (and other sales) transactions the point of realisation is easily identified as it is the point of sale when the external entity is involved It is at this point that the group recognises profit on sale, being the excess of the sale proceeds over the cost to the group of the item being sold With assets used by the group such as depreciable assets, the group does not interact with an external entity It is then impossible to determine a point of realisation based on direct involvement of the group with an external entity The point of realisation is then based on indirect involvement The depreciable asset is used by the group to assist in its interaction with external entities eg by making inventories for sale to external entities The depreciation charge measures the extent of that involvement in any one year as the depreciation charge is based on para 60 of AASB 116 which notes that the depreciation charge reflects the pattern of benefits consumed by the entity Realisation of profit then occurs as the asset is used up or consumed by the entity Realisation is then achieved in proportion to the depreciation charge made on the asset services, the With transactions such subsidiary records revenue, which increases subsidiary profit This profit is notas recognised by the group However, no adjustment is made to the NCI share of equity as a result of this transaction This is because of the difficulty of determining a point of realisation as no external entity is ever involved in this transaction © John Wiley and Sons Australia, Ltd 2015 21.7 Solutions manual to accompany Company Accounting 10e Case Study The step approach In December 2016, Frog Ltd acquired 60% of the shares of Kovrov Ltd The accountant for Frog Ltd, Nikki Romanov, is concerned about the approach she should take in preparing the consolidated financial statements for the newly established group In particular, she is concerned about the calculation of the NCI share of equity, particularly in the years after acquisition date She has heard accountants in other companies talking about a ‘step’ approach, and in particular how this makes accounting in periods after the acquisition date very easy as it is then necessary to prepare only one step Required Prepare a report for Nikki, e xplaining the step approach to the calculation of NCI and the effects of this approach in the years after acquisition date The steps are: Share of equity at acquisition date Share of the change in equity between the acquisition date and the beginning of the current period Share of change in equity in the current period In preparing the consolidated financial statements at, say, 30 June 2018, the consolidation worksheet prepared at 30 June 2017 will contain Steps and for the 2018 worksheet: - Step journal entry never changes - Step for 2008 is the combination of Steps and for 2017 Hence in 2018, the only new calculations relate to Step 3, namely the share of changes in equity for the 2017-18 period © John Wiley and Sons Australia, Ltd 2015 21.8 Chapter 21: Consolidation: non-controlling interest Case Study Effects of intragroup transactions Because the Moth Cement Works Ltd has a number of subsidiaries, Star Lin is required to prepare a set of consolidated financial statements for the group She is concerned about the calculation of the NCI share of e quity particularly where there are intragroup transactions The auditors require that when adjustments are made for intragroup transactions the effects of these transactions on the NCI should also be adjusted for Star has two concerns First, w hy is it necessary to adjust the NCI share of equity for t he effects of intragroup transactions? Second, is it necessary to make NCI adjustments in relation to all intragroup t ransactions? Required Prepare a report for Star, explaining these two areas of concern Why is it necessary? Under Australian accounting standards, the NCI is classified as equity, mainly because the NCI does not fit the definition of a liability If the NCI is classified as equity, it is entitled to a share of consolidated equity Consolidated equity is determined after adjusting for the effects of intragroup transactions Consolidated equity for the NCI is then subsidiary equity adjusted for the effects of those intragroup transactions affecting subsidiary equity– that is, realised subsidiary equity Is it necessary to make NCI adjustments in relation to all intragroup transactions? The NCI does not affect the adjustment itself, as the full effects of the intragroup transaction are adjusted for on consolidation However, where the subsidiary records profit which is unrealised to the group, this affects the calculation of the NCI The NCI is entitled only to a share of consolidated equity rather than subsidiary equity Hence, where the subsidiary has recorded unrealised profit, the NCI share of the recorded profit of the group must be adjusted for any of that profit which is unrealised In the Step & Step calculations of the NCI share of equity, this is a share of recorded equity As adjustments are made for intragroup transactions, where these transactions reflect adjustments for unrealised subsidiary profit, an adjustment is also made to the NCI share of profit The net result is then that the NCI gets a share of realised subsidiary equity However, an NCI adjustment does NOT need to be made for all intragroup transactions An NCI adjustment only needs to be made where the adjustment is for unrealised profit recorded by the subsidiary Hence the transaction must be an upstream – subsidiary to parent – transaction in order for an NCI adjustment to be made Further the upstream transaction must relate to unrealised subsidiary profit © John Wiley and Sons Australia, Ltd 2015 21.9 Solutions manual to accompany Company Accounting 10e QUESTION 21.14 (cont’d) 14 Depreciation Accumulated depreciation Depreciation expense (1/2 x 20% x $1200) Dr Cr 120 Income tax expense Deferred tax asset Dr Cr 36 Dr Cr 21 120 36 15 NCI adjustment NCI share of profit NCI (25% x $84) © John Wiley and Sons Australia, Ltd 2015 21 21.92 Chapter 21: Consolidation: non-controlling interest QUESTION 21.14 (cont’d) B: FULL GOODWILL METHOD Acquisition analysis At July 2012 Net fair value of identifiable assets and liabilities of Whale Ltd (a) Consideration transferred (b) Non-controlling interest Aggregate of (a) and (b) Goodwill = = = = = = = ($30 000 + $3 000 + $15 000) (equity) + $15 000 (1 – 30%)(plant) + $6 000 (1 – 30%) (inventory) - $3 000 (1 – 30%) (receivables) $60 600 $67 500 – (75% x $10 000) dividend $60 000 $19 500 $79 500 $18 900 Goodwill of Whale Ltd: Fair value of Whale Ltd Net fair value of identifiable assets and liabilities of Whale Ltd Goodwill of Whale Ltd Goodwill of Fin Ltd: Goodwill acquired Goodwill of Whale Ltd Goodwill of Fin Ltdcontrol – premium = = $19 500/25% $78 000 = = $60 600 $17 400 = = $18 900 $17 400 $1 500 = DIFFERENT ENTRIES Business combination valuation entries at 30/6/17 An additional entry is required: Goodwill Business combination valuation reserve Dr Cr 17 400 17 400 Pre-acquisition entry at 30/6/13: Retained earnings (1/7/16) * Dr 12 825 Share capital Dr 22 500 Business combination valuation reserve ** Dr 20 925 General reserve Dr 250 Goodwill Dr 500 Shares in Whale Ltd Cr * 75%[$15 000 + $4 200 (inventory) – $2 100 (receivables)] ** 75% ($10 500 plant + $17 400 goodwill) 60 000 NCI share of equity at 1/ 7/12 Retained earnings (1/7/16) Share capital Business combination valuation reserve General reserve NCI * 25% x ($10 500 + $4 200 - $2 100 + $17 400) Dr Dr Dr Dr Cr © John Wiley and Sons Australia, Ltd 2015 750 500 500 750 19 500 21.93 Solutions manual to accompany Company Accounting 10e Question 21.15 Full goodwill method, consolidated financial statements On July 2014, Mudlark Ltd acquired 80% of t he shares of Peewee Ltd on an ex div basis for $305 600 At this date, all the identifiable assets and liabilities of Peewee Ltd were recorded at amounts equal to fair value except for: Inventory Machinery (cost $200 000) Carrying amount $120 000 160 000 Fair value $130 000 165 000 At 30 June 2014, Peewee Ltd had recorded a dividend payable of $10 000 The inventory on hand at July 2014 was all sold by 30 November 2014 The machinery had a f urther 5-year life, but was sold on April 2017 At acquisition date, Peewee Ltd reported a contingent liability of $15 000 that Mudlark Ltd considered to have a fair value of $7000 This liability was settled in June 2015 for $10 000 At acquisition date, Peewee Ltd had not recorded an asset relating to equipment design as the asset was still in the research phase Mudlark Ltd placed a fair value on the asset of $12 000, r eflecting expected benefits existing at acquisition date The asset was considered to have a further 10-year life O n January 2016, the asset met the requirements of IAS 38 I ntangible Assets and subsequent expenditure by Peewee Ltd on the asset was capitalised Mudlark Ltd uses the full goodwill method At July 2014, the fair value of the noncontrolling interest was $75 000 Additional information (a) (b) (c) (d) (e) (f) (g) (h) On July 2015, Peewee Ltd sold an item of plant to Mudlark Ltd at a profit before tax of $4000 Mudlark Ltd depreciates this class of plant at a rate of 10% p.a on cost while Peewee Ltd applies a rate of 20% p.a on cost At 30 June 2016, Mudlark Ltd had on hand some items of inventory purchased from Peewee Ltd in June 2015 at a profit before tax of $500 These were all sold by 30 June 2017 During the 2016–17 period Mudlark Ltd sold $12 000 inventory to Peewee Ltd at a markup of 20% on cost $3000 of this inventory remains unsold by 30 June 2017 The other components of equity relate to financial assets These assets are measured at fair value with movements in fair value being recognised in other comprehensive income The parent and the subsidiary are considered to be separate cash generating units Management have analysed the impairment indicators on an annual basis and conducted an impairment test on the subsidiary cash generating unit in the 2015 –16 year, which resulted in the writing down of goodwill in the records of the subsidiary by $4000 There have been no other business combinations involving these entities since July 2014 The tax rate is 30% Shareholder approval is not required in relation to dividends On 30 June 2017 the trial balances of Mudlark Ltd and Peewee Ltd were as follows: Debit balances Shares in Peewee Ltd Inventory Financial assets Other current assets Deferred tax assets Plant Land Equipment design Goodwill Mudlark Ltd $305 600 180 000 229 000 10 000 15 800 452 100 144 200 — 20 000 © John Wiley and Sons Australia, Ltd 2015 Peewee Ltd — $60 000 215 000 000 000 303 000 42 000 18 000 22 000 21.94 Chapter 21: Consolidation: non-controlling interest Cost of sales Other expenses Income tax expense Dividend paid Dividend declared Credit balances Share capital Other components of equity Other reserves Retained earnings (1/7/16) Transfer from other reserves Sales Other revenue Gains/losses on sale of non-current assets Debentures Deferred tax liability Other current liabilities Dividend payable Accumulated amortisation – equipment design Accumulated impairment losses – goodwill Accumulated depreciation plant – (i) 120 000 50 000 35 000 14 000 20 000 $1 595 700 70 000 10 000 40 000 000 000 $800 000 $800 000 100 000 50 000 45 000 — 200 000 40 000 10 000 70 000 20 000 38 700 10 000 — — 212 000 $1 595 700 $330 000 80 000 000 16 000 000 140 000 25 000 000 20 000 12 000 35 000 000 000 16 000 110 000 $800 000 Extracts from the statement of changes in equity for Peewee Ltd were as follows: 2014–15 2015–16 Retained earnings (opening balance) $20 000 $19 000 Profit for the year 20 000 20 000 Dividends paid (3 000) (6 000) Dividends declared (15 000) (17 000) Transfers to/from other reserves* (3 000) — Retained earnings (closing balance) $19 000 $16 000 Other reserves (opening balance) $30 000 $33 000 Transfers to/from retained earnings* 000 — Bonus issue* — — Other reserves (closing balance) $33 000 $33 000 Other components of equity (op bal.) $10 000 $42 000 Movements in fair value 32 000 30 000 Other components of equity (cl bal.) $42 000 $72 000 Share capital (opening balance) $300 000 $300 000 Bonus issue* — — Share capital (closing balance) $300 000 $300 000 * These items were from equity earned prior to July 2014 2016–17 $16 000 50 000 (6 000) (4 000) 000 $58 000 $33 000 (2 000) (30 000) $1 000 $72 000 000 $80 000 $300 000 30 000 $330 000 Required Prepare the consolidated financial statements of Mudlark Ltd at 30 June 2017 At July 2014: Peewee Ltd: Goodwill Accum impairment losses ($16 000 - $4 000) © John Wiley and Sons Australia, Ltd 2015 $22 000 12 000 10 000 21.95 Solutions manual to accompany Company Accounting 10e Net fair value of identifiable assets, liabilities and contingent liabilities of Peewee Ltd = = $300 000 + $30 000 + $10 000 + $20 000 + $10 000 (1 – 30%) (BCVR – inventory) + $5 000 (1 – 30%) (BCVR – machine) - $7 000 (1 – 30%) (BCVR – provision) + $12 000 (1 – 30%) (BCVR – equip design) - $10 000 (goodwill) $364 000 (a) Consideration transferred = $305 600 (b) Non-controlling interest Aggregate of (a) and (b) Goodwill = = = $75 000 $380 600 $16 600 Goodwill of Peewee Ltd: Fair value of Peewee Ltd = = $75 000/20% $375 000 = = = = $364 000 $11 000 $10 000 $1 000 Net fair value of identifiable assets and liabilities of Peewee Ltd Goodwill of Peewee Ltd Recorded goodwill Unrecorded goodwill Goodwill of Mudlark Ltd: Goodwill acquired Goodwill of Peewee Ltd Goodwill of Mudlark Ltd –control premium = = = $16 600 $11 000 $5 600 © John Wiley and Sons Australia, Ltd 2015 21.96 Chapter 21: Consolidation: non-controlling interest QUESTION 21.15 (cont’d) CONSOLIDATION WORKSHEET ENTRIES Business combination entries Equipment design Deferred tax liability Business combination valuation reserve Dr Cr Cr 12 000 Amortisation expense Retained earnings (1/7/16) Accumulated amortisation (1/10 x $12 000 p.a for years) Dr Dr Cr 200 400 Deferred tax liability Income tax expense Retained earnings (1/7/16) Dr Cr Cr 080 Depreciation expense Gain on sale of machinery Income tax expense Retained earnings (1/7/16) Transfer from business combination valuation reserve (Depreciation is 1/5 x $5 000 p.a.) Dr Dr Cr Dr 750 250 Accumulated impairment losses goodwill – Goodwill 600 400 600 360 720 900 400 Cr Dr Goodwill Business combination valuation reserve © John Wiley and Sons Australia, Ltd 2015 500 12 000 Cr Dr Cr 12 000 000 000 21.97 Solutions manual to accompany Company Accounting 10e QUESTION 21.15 (cont’d) Pre-acquisition entries At July 2014: Retained earnings (1/7/14) Share capital Other reserves (1/7/14) Other components of equity (1/7/14) Dr Dr Dr Dr 16 000 240 000 24 000 000 Business combination valuation reserve Goodwill Shares in Peewee Ltd Dr Dr Cr 12 000 600 Dr Dr Dr Dr Dr Dr Cr 15 280 240 000 26 400 000 10 320 600 305 600 At 30 June 2017: Retained earnings (1/7/16) Share capital Other reserves (1/7/16) Other components of equity (1/7/16) Business combination valuation reserve Goodwill Shares in Peewee Ltd 305 600 RE: 80%[$20 000 + $7 000 (BCVR – inv) - $4 900 (BCVR –prov) - $3 000 (transfer to other reserves)] Other reserves: 80% ($30 000 + $3 000) BCVR: 80%($3 500 + $8 400 + $1 000) Share capital Other reserves: bonus issue (Bonus issue: 80% x $30 000) Dr Cr 24 000 Transfer from other reserves [RE] Transfer to retained earnings [OR] (80% x $2 000) Dr Cr 600 Dr Cr 800 Transfer from business combination valuation reserve Business combination valuation reserve 24 000 600 800 (80% x $3500) © John Wiley and Sons Australia, Ltd 2015 21.98 Chapter 21: Consolidation: non-controlling interest QUESTION 21.15 (cont’d) NCI share of equity at acquisition date 1/7/14 Retained earnings (1/7/16) Share capital Other reserves (1/7/09) Other components of equity (1/7/16) Business combination valuation reserve * NCI Dr Dr Dr Dr Dr Cr 000 60 000 000 000 000 75 000 (20% of balances) * 20% x ($7 000 inv + $3 500 mach -$4 900 liab + $8 400 eq design + $1000 g’will) NCI share of changes in equity from 1/7/14 to 30/6/16 Other reserves (1/7/16) Dr Other components of equity (1/7/16) Dr Retained earnings (1/7/16) Cr Business combination valuation reserve Cr NCI Cr RE: 20% [$16 000 - $20 000 - $1 400 – ($2 400 - $720)] BCVR: 20% ($7 000 - $4 900) Other reserves: 20% ($33 000 - $30 000) Other components: 20% ($72 000 - $10 000) 600 12 400 416 420 11 164 NCI share of changes in equity from 1/7/16 to 30/6/17 NCI share of profit Dr 412 NCI Cr (20% [$50 000 – ($1 200 - $360) – ($750 + $2 250 - $900)] NCI Dr Cr 200 Dr Cr 800 Dr Cr 400 Share capital Other reserves: bonus issue (20% x $30 000) Dr Cr 000 Movements in fair value [OCE] NCI (20% x $8 000) Dr Cr 600 Dividend paid (20% x $6 000) NCI Dividend declared (20% x $4 000) Transfer from other reserves [RE] Transfer to retained earnings [OR] 412 200 800 400 (20% x $2 000) © John Wiley and Sons Australia, Ltd 2015 000 600 21.99 Solutions manual to accompany Company Accounting 10e QUESTION 21.15 (cont’d) Transfer from business combination valuation reserve Business combination valuation reserve (20% x $3 500) Dr Cr 700 Dividend revenue Dr 800 Dividend paid (80% x $6 000) Cr 700 Dividend paid 800 Dividend declared Dividend revenue Dividend declared (80% x $4 000) Dr Cr 200 Dividend payable Dividend receivable Dr Cr 200 Dr Dr Cr 800 200 Dr Cr 560 Accumulated depreciation Retained earnings (1/7/16) Depreciation expense (10% x $4 000 p.a.) Dr Cr Cr 800 Income tax expense Retained earnings (1/7/16) Deferred tax asset Dr Dr Cr 120 120 Dr Dr Cr 56 56 200 200 Sale of plant: Peewee Ltd to Mudlark Ltd Retained earnings (1/7/16) Deferred tax asset Plant 000 NCI effect NCI Retained earnings (1/7/16) (20% x $2 800 560 10 Depreciation 400 400 240 11 NCI effect NCI share of profit Retained earnings (1/7/16) NCI © John Wiley and Sons Australia, Ltd 2015 112 21.100 Chapter 21: Consolidation: non-controlling interest QUESTION 21.15 (cont’d) 12 Profit in opening inventory Retained earnings (1/7/16) Income tax expense Cost of sales Dr Dr Cr 350 150 Dr Cr 70 500 13 NCI effect NCI share of profit Retained earnings (1/7/16) 70 14 Sales of inventory: current period Mudlark Ltd to Peewee Ltd Sales Cost of sales Inventory Deferred tax asset Income tax expense Dr Cr Cr 12 000 Dr Cr 150 © John Wiley and Sons Australia, Ltd 2015 11 500 500 150 21.101 Solutions manual to accompany Company Accounting 10e QUESTION 21.15 (cont’d) Financial Statements Mudlark Peewee Ltd Ltd Sales revenue Other revenue 200 000 140 000 40 000 25 000 Cost of sales 240 000 165 000 120 000 70 000 Other expenses 50 000 10 000 170 000 70 000 10 000 80 000 85 000 000 80 000 90 000 35 000 40 000 Profit 45 000 50 000 Ret earnings (1/7/16) 45 000 16 000 Transfer from BCVR Transfer from other reserves Trading profit Gains on noncurrent assets Profit before tax Tax expense Dividend paid Div declared Ret earnings (30/6/17) Share capital BCVR Other reserves (1/7/16) Transfer to/from RE Bonus issue Other reserves (30/6/17) Group 14 12 000 800 200 1 200 750 250 10 12 120 150 0 000 600 90 000 14 000 20 000 34 000 56 000 68 000 000 000 10 000 58 000 856 000 388 000 35 000 33 000 328 000 57 000 500 11 500 400 12 14 10 385 000 178 000 61 550 239 550 145 450 12 750 360 900 150 1 14 73 860 84 340 400 400 15 280 800 120 350 800 Parent Cr 158 200 1 10 12 800 000 330 000 NCI Dr 240 000 24 000 10 320 412 56 70 000 56 74 802 720 400 10 39 770 500 700 700 400 400 800 200 2 11 13 11 400 000 1 800 26 400 125 210 15 200 20 800 36 000 89 210 200 800 866 000 880 60 000 000 000 000 600 957 090 41 600 416 560 70 420 700 112 562 14 000 20 000 34 000 78 562 878 562 35 000 600 14 600 400 (30 000) 50 000 000 24 000 (6 000) 50 200 000 © John Wiley and Sons Australia, Ltd 2015 5 37 760 800 000 (2 000) 15 000 13 15 000 50 000 21.102 Chapter 21: Consolidation: non-controlling interest OCE (1/7/16) 90 000 72 000 Movements OCE (30/6/17) Total equity: parent Total equity: NCI 10 000 100 000 000 80 000 Total equity Accumulated depreciation Equipment design Accumulated amortisation Land Deferred tax assets Inventory Financial assets Receivables Goodwill Accumulated impairment losses Total assets 000 154 000 18 000 172 000 1006000 469 000 Dividend 10 000 000 payable Other current 38 700 35 000 Deferred tax 20 000 12 000 liabilities Debentures 70 000 20 000 Total liabilities 138 700 71 000 Total equity 1144700 540 000 and liabilities Shares in Peewee Ltd Plant 1179290 200 1 080 600 452 100 303 000 000 751 100 (212 000 (110 000) 10 800 (321 200 12 000 30 000 (4 000) 144 200 15 800 42 000 000 180 000 60 000 229 000 215 000 10 000 000 20 000 22 000 (16 000) 1144700 540 000 200 800 560 16 400 156 000 084 562 75 000 11 164 412 600 5 94 728 108 854 108 112 854 11 179 290 90 000 209 020 1388310 18 000 5 139 600 73 700 34 520 305 600 000 12 400 600 10 800 305 600 14 1 200 150 000 600 12 000 600 (7 600) 240 10 186 200 24 910 500 14 200 12 000 396 970 396 970 239 500 444 000 800 36 600 (4 000) 1388310 © John Wiley and Sons Australia, Ltd 2015 21.103 Solutions manual to accompany Company Accounting 10e QUESTION 21.15 (cont’d) MUDLARK LTD Consolidated Statement of Profit or Loss and Other Comprehensive Income for the financial year ended 30 June 2017 Revenue: Sales Other Total revenue Expenses: Cost of sales Other $328 000 57 000 385 000 Profit from trading Gains from sale of non-current assets Profit before tax Income tax expense 178 000 61 550 239 550 145 450 12 750 158 200 73 860 Profit for the period $84 340 Other comprehensive income: Movements in fair value of financial assets Comprehensive income for the period Profit for the period attributable to: Parent entity interest Non-controlling interest Comprehensive income for the period attributable to: Parent interest Non-controlling interest © John Wiley and Sons Australia, Ltd 2015 18 000 $102 340 $74 802 $9 538 $91 202 $11 138 21.104 Chapter 21: Consolidation: non-controlling interest QUESTION 21.15 (cont’d) MUDLARK LTD Consolidated Statement of Changes in Equity for the financial year ended 30 June 2017 Group Parent Comprehensive income for the period $102 340 $91 202 Retained earnings: Balance at July 2016 Profit for the period Transfer from BCVR Transfer from other reserves Dividend paid Dividend declared Balance at 30 June 2017 $39 770 84 340 700 400 (15 200) (20 800) $89 210 $37 760 74 802 0 (14 000) (20 000) $78 562 Other reserves: Balance at July 2016 Transfers to/from retained earnings Bonus issue of shares Balance at 30 June 2017 $41 600 14 600 (6 000) $50 200 $35 000 15 000 $50 000 $2 550 $1 880 0 $154 000 18 000 $172 000 $139 600 $16 400 $156 000 Business combination valuation reserve Balance at July 2016 Balance at 30 June 2017 Other components of equity: Balance at July 2016 Gains/Losses Balance at 30 June 2017 © John Wiley and Sons Australia, Ltd 2015 21.105 Solutions manual to accompany Company Accounting 10e QUESTION 21.15 (cont’d) MUDLARK LTD Consolidated Statement of Financial Position as at 30 June 2017 Current Assets Inventories Receivables Financial assets $239 500 800 444 000 692 300 Non-current Assets Property, plant and equipment Plant Accumulated depreciation Equipment design Accumulated amortisation Land Tax assets: Deferred tax asset Goodwill Accumulated impairment losses 751 100 (321 200) 30 000 (7 600) 186 200 24 910 36 600 (4 000) 696 010 $1 388 310 Total Non-current Assets Total Assets Equity and liabilities Equity attributable to equity holders of the parent Share capital Reserves: Other reserves Other components of equity Retained earnings Parent Entity Interest Non-controlling Interest Total Equity $800 000 50 000 156 000 78 562 084 562 94 728 179 290 Current Liabilities Payables: Dividend payable Other Total Current Liabilities Non-current Liabilities 10 800 73 700 84 500 Interest-bearing liabilities: Debentures Tax liabilities: Deferred tax liability Total Non-current Liabilities Total Liabilities Total Equity and Liabilities 90 000 34 520 124 520 209 020 © John Wiley and Sons Australia, Ltd 2015 $1 388 310 21.106 ...Chapter 21: Consolidation: non-controlling interest Chapter 21 – Consolidation: non-controlling interest REVIEW QUESTIONS What... full goodwill method © John Wiley and Sons Australia, Ltd 2015 21. 12 Chapter 21: Consolidation: non-controlling interest Question 21. 2 Full goodwill and partial goodwill methods Swamp Ltd acquired... Sons Australia, Ltd 2015 21. 14 Chapter 21: Consolidation: non-controlling interest Aggregate of (a) and (b) Goodwill of Swamp Ltd = $251 000 = $251 000 - $230 000 = $21 000 Goodwill recorded