ACC705 Corporate Accounting and Reporting

Published : 04-Sep,2021 | Views : 10

Question:

Ben Ltd operates a number of supermarkets with an emphasis on the supply of quality produce The operations of Sam Ltd are primarily in the fine fruit market. Believing that the acquisition of Sam Ltd would enable Ben Ltd to expand its supply of quality produce to its customers, Ben Ltd commenced actions to acquire the shares of Sam Ltd. On 1 July 2013, Ben Ltd acquired all the issued shares (cum div.) of Sam Ltd for $123 500. At this date the equity of Sam Ltd consisted of:

Share capital $100 000

Reserves 5 000

Retained earnings 10 000

On 1 July 2013, Sam Ltd had recorded a dividend payable of $6000 and goodwill of $5000 (net of accumulated impairment losses of $7000). The dividend was paid in August 2013. In the previous year’s annual report Sam Ltd had reported the existence of a contingent liability for damages based upon a lawsuit by a customer who had slipped on some fallen fruit in one of the stores operated by Sam Ltd. Ron Ltd calculated that this liability had a fair value of $10 000. Sam Ltd also had some customer databases that were not recorded as assets but Ron Ltd placed affair value of $6000 on these items. Sam Ltd believed that the databases had a future life of 4 years.All of the identifiable assets and liabilities of Sam Ltd were recorded at amounts equal to their fair values except for the following:

Carrying amount Fair value

Plant (cost $120 000) $94 000 $96 000

Land 80 000 85 000

Inventory 20 000 24 000

The plant had an expected remaining useful life of 10 years. The land was sold by Sam Ltd in February 2015. The inventory was all sold by 30 June 2014. In February 2016, Sam Ltd transferred $3000 of the reserves on hand at 1 July 2013 to retained earnings. The remaining $2000 was transferred in February 2017. The court case involving the damages sought by the customer was settled in May 2017.Sam Ltd was required to pay $7500 to the customer.

Required

Prepare the consolidation worksheet entries for the preparation by Sam Ltd of its consolidated financial statements at 30 June 2017.are taken from the accounting records of Mercy Ltd as at 30 June 2016:

	Debit		Credit
Plant and equipment (net of depreciation) Land Buildings (net of depreciation) Investments (long-term) Accounts receivable Allowance for impairment of receivables Inventory Bank overdraft Accounts payable Dividend payable Goodwill (net of impairment) Share capital (3 200 000 shares) General reserve		$ 800 000 600 000 900 000 460 000 600 000 520 000 300 000		$ 60 000 200 000 400 000 256 000 2 400 000 290 000
Retained earnings Income tax payable Other debtors		50 000		375 000 249 000
		$4 230 000		$4 230 000

Additional information

(a) Profit for the year was $581 000.

(b) Balance of retained earnings at 1 July 2015 was $80 000.

(d) A final dividend of 8c per share has been declared by directors and is not subject to shareholders’ approval.

Required

Prepare the statement of financial position and statement of changes in equity to comply with AASB 101. Include Notes to the accounts for the above financial statements.

Answer:

Acquisition Analysis

Net fair value of identifiable assets and liabilities of Sam Ltd
Share Capital	100,000
Reserves	5,000
Retained Earnings	10,000
Plant (2000 x (1 - 30%))	1,400
Land (5000 x (1 - 30%))	3,500
Inventory (4000 x (1 - 30%))	2,800
Databases (6000 x (1 - 30%))	4,200
Damages payable (-10000 x (1 - 30%))	(7,000)
Goodwill	(5,000)
Consideration paid	123,500
Less: Dividend receivable	(6,000)
Net Consideration paid	117,500
Recorded goodwill	5,000
Unrecorded goodwill	2,600 - 5,000

Consolidation Worksheet entries at 30 June 2017:

at 30th June-2017:

the entry at acquisition date is affected by:

- sale of inventory in prior period

- payment of dividend: $6 000 in prior period

- sale of land in prior period

- transfer from reserves - $3 000 - in prior period

- transfer from reserve - $2 000 – in current period

- settlement of court case in current period

- de-recognition of databases in current period

Particulars	Dr./Cr.	Amount (Dr.)
Retained earnings (1/7/16)	Dr.	19,300
Share Capital	Dr.	100,000
Reserves	Dr.	2,000
Transfer from Reserves	Dr.	2,000
Business Combination Valuation Reserve	Dr.	7,000
Transfer from Business Combination Valuation Reserve	Dr.	4,200

Particulars		As at 30 June, 2016
Trade and other receivables		590,000
Inventories		520,000
Total current assets		1,110,000
Property, plant and equipment		2,300,000
Intangible assets - Goodwill		300,000
Investments		460,000
Total non-current assets		3,060,000
Total assets - (a)		4,170,000
Trade and other payables		656,000
Short term borrowings		200,000
Current tax liabilities		249,000
Total current liabilities		1,105,000
Total liabilities - (b)		1,105,000
Net assets (a-b)		3,065,000
Share capital		2,400,000
Reserves		290,000
Retained earnings		375,000
Total equity		3,065,000

Notes:

As per AASB-101, Para 77 - An entity shall disclose, either in the statement of financial position or in the notes, further sub-classifications of the line items presented, classified in a manner appropriate to the entity’s operations. The required notes to the above financial statements are presented below:

1 - Trade and other receivables
Particulars	Amount (in $)
Allowance for impairment of receivables	$540,000
Other debtors	$50,000
Total	$590,000

2 - Property, Plant & Equipment
Particulars	Amount (in $)
Plant and equipment (net of depreciation)	$800,000
Buildings (net of depreciation)	$900,000
Land	$600,000
Total	$2,300,000

Statement of Changes in Equity

Particulars	Retained Earnings	Total
Balance as on 1 July 2015	$80,000	$2,740,000
Total comprehensive income for the year	$581,000	$581,000
Dividend payable - ordinary	($256,000)	-$256,000
Transfer to general reserve	($30,000)	$0
Balance as on 30 June 2016	$375,000	$3,065,000