Corporate Accounting Systems
Autumn 2018
Practical Project
Topic: | Accounting for income tax and acquisition of a subsidiary and consolidation entries |
Length: | 1,500 words maximum (comprising calculations and working papers in Part A equivalent to 250 words and Part B equivalent to 1000 words and a written component of 250 words in Part C) |
The practical project involves three parts:
Part A
The following represented an extract from the Statement of Financial Position of the assets and liabilities of Sunnybank Ltd for the years ending 30 June 2010 and 30 June 2011.
Reporting date was 30 June.
Assets | 2011 | 2010 | Liabilities | 2011 | 2010 |
Cash | 110 000 | 87 000 | Accounts payable | 28 500 | 31 700 |
Accounts receivable (net) | 45 000 | 52 000 | Accrued expenses | 7 200 | 11 600 |
Inventory | 58 000 | 43 000 | Deferred tax liability | ? | 15 150 |
Interest receivable | 8 400 | 5 000 | Rent revenue in advance | 12 000 | - |
Prepaid insurance | 7 000 | 5 000 | Bank loan | 50 000 | 50 000 |
Deferred tax asset | ? | 10 470 | Provision for employee benefits | 21 000 | 17 300 |
Development costs | 32 000 | 32 000 | |||
Less: Accumulated amortisation | (8000) | - | |||
Property, plant & equipment | 75 000 | 75 000 | |||
Less: Accumulated depreciation | (22 000) | (13 500) |
You were appointed as a graduate accountant at Sunnybank Ltd after graduation from university in January 2011. You were requested to prepare the deferred tax worksheet for the business for year ended 2011. After a meeting with your supervisor, you gathered the following information which you might need to complete your work:
Carrying Amount | Tax Base | Deductible Temporary Differences | Taxable Temporary Differences | |
Part B
Sunnybank Ltd acquired all issued share capital of Sunnybank Hills Ltd on 1 July 2011 for a cash payment of $885,000. Sunnybank Hills Ltd is the only subsidiary of Sunnybank Ltd. The share capital and reserves of Sunnybank Hills Ltd at the date of acquisition were:
Share capital $598,000
Retained earnings $102,000
Revaluation surplus $50,000
As at the date of acquisition, all assets of Sunnybank Hills Ltd were at fair value, other than the property, plant and equipment, which had a fair value of $250,000. The cost of the property, plant and equipment was $328,000 and it had accumulated depreciation of $178,000. The property, plant and equipment were expected to have a remaining useful life of eight years. At the date of acquisition, the notes to Sunnybank Hills Ltd’s financial statements identify a contingent liability related to an unsettled legal claim with a fair value of $10,000 which would be tax deductible when paid. On 1 May 2012, the liability relating to the legal claim was settled and paid in full. There were no intra-group transactions between Sunnybank Ltd and Sunnybank Hills Ltd between 1 July 2011 and 30 June 2014.
On 1 March 2015 Sunnybank Hills Ltd sold an item of equipment to Sunnybank Ltd for $43,200 when its carrying value in Sunnybank Hills’s books was $36,000 (original cost $60,000 and original estimated life of ten years). There were no other intro-group transactions between Sunnybank Ltd and Sunnybank Hills Ltd for year ended 30 June 2015.
On 1 June 2016 Sunnybank Ltd sold an item of plant to Sunnybank Hills Ltd for $74,240 when its carrying value, and original cost, in Sunnybank’s books was $80,000 and estimated remaining useful life was four years. There were no other intro-group transactions between Sunnybank Ltd and Sunnybank Hills Ltd for year ended 30 June 2016.
During year 2017, Sunnybank Ltd made sales of inventory to Sunnybank Hills Ltd for onsale to external parties. The inventory had originally cost Sunnybank Ltd $26,000. At the year end, Sunnybank Hill Ltd still had a quarter of the inventory on hand. On-hand inventory was expected to be sold in the following financial period. There were no other intro-group transactions between Sunnybank Ltd and Sunnybank Hills Ltd for year ended 30 June 2017.
During year 2018, Sunnybank Hills Ltd made sales of inventory to Sunnybank Ltd for onsale to external parties. The inventory had originally cost Sunnybank Hills Ltd $28,000. All intra-group inventories were sold in 2018. Sunnybank Ltd provided management services to Sunnybank Hills Ltd in 2018. Sunnybank Hills Ltd paid $5,000 for those services and has a balance of 1,000 for management fees payable at the year end. Sunnybank Hills Ltd declared and paid dividend $10,000 at year end 2018. There were no other intro-group transactions between Sunnybank Ltd and Sunnybank Hills Ltd for year ended 30 June 2018.
You were requested to prepare the followings:
After meeting with your supervisor you gathered the following information which you might need to complete your work:
The consolidated financial statements for year ending 30 June 2018 for the economic entity were prepared on the basis of your journals from Part B (IV). These statements were presented to the Board of Directors.
The Board noted that at date of acquisition, the carrying amount of Sunnybank Hills Ltd’s property, plant and equipment was not equal to their fair values and adjustment journals to these assets were accordingly prepared. The Board had the following question:
‘What is ‘fair value’ and why is it relevant to consolidation accounting?’
After a shorting meeting with your supervisor, you were requested to prepare a response to the above question.
You might make reference to relevant paragraphs of Australian Accounting Standards and/or AASB Framework and to other sources of material.
Harvard Style referencing is expected. For details on the Harvard referencing system go to: http://library.westernsydney.edu.au/uws_library/guides/referencing-citation (and click on ‘Harvard’ link).
Part B
PP&E Revaluation:
PPE Cost Value 328000
Less: Accumulated Depreciation (178000)
Carrying Value 150000
Fair Value 250000
Revaluation Surplus (positive) 100000 (net of tax: 70,000)
Hence, fair value of all the assets of Sunnybank Hill Ltd. will be:
Share capital $598,000
Retained earnings $102,000
Revaluation surplus $50,000
PPE revaluation surplus $70,000
$820,000
Cost of Acquisition $885,000
Hence, Goodwill $65,000
Cr. PP&E 178,000
(Accumulated depreciation charged to PPE account)
Cr. Revaluation Surplus 70,000
Cr. Deferred tax liability 30,000
(Increased in the value of PP&E recorded)
Dr. Retained earnings 102,000
Dr. Revaluation surplus 50,000
Dr. PP&E Revaluation surplus 70,000
Dr. Goodwill 65,000
Cr. Investment in Sunnybank Hill Ltd. Stocks 885,000
(Elimination of pre-acquisition equity accounts)
Cr. Cash 885,000
(Purchase of stocks of Sunnybank Hills Ltd recorded)
Cr. Cash 10,000
(Contingent liability paid and settled)
Cr. Income tax expenses 3,000
(Deferred tax gain recorded on payment of contingent liability)
Consolidation adjustment for the first year
Cr. PP&E Revaluation Surplus 100,000
(Revaluation surplus account closed and transferred to PP&E account)
Cr. Accumulated depreciation 31,250
(Depreciation charged on PP&E charged)
Calculation for Depreciation –
Revalued fair value of PP&E = 250,000
Useful life = 8 ; Residual value = 0
Hence, depreciation = 31,250
Calculations for 2014, 2015 and 2016
Calculation for PP&E purchased on 1 March, 2015- (in the books of Sunnybank Ltd)
Value of acquired PP&E at July 1, 2014 [250,000- (31,250*3 years)] = 156,250
Carrying Value of equipment purchased from Sunnybank Hills Ltd = 36,000
Purchase price for the equipment = 43,200
Depreciation on remaining PP&E-
Depreciation for each year (straight line method) = [Original cost – Residual value] / Useful life
= [60000-0] / 10 = 6,000
Depreciation for 4 months = (6000*4) /12 = 2,000
Depreciation chargable on remaining PP&E= 31,250 + 2000 = 33,250
Value of PP&E as on June 30, 2015 = [(156250 + 43200) -33250] = 166,200
Calculation for PP&E sale on 1 June, 2016-(in the books of Sunnybank Ltd)
Value of PP&E at July 1, 2015 = 166,200
Carrying Value of equipment sold to Sunnybank hills Ltd = 80,000
Since, in the question it is mentioned that the carrying value as well as the original cost of the equipment sold on June 1, 2016 is $80,000. We are assuming that the value is before charging depreciation, hence depreciation needs to be calculated on this amount.
Depreciation for each year (straight line method) = [Original cost – Residual value] / Useful life
= [80000-0] / 4= 20,000
Hence, the book value = (80,000- Depreciation for 11 months)
= (80,000 - 18,333) = 61,666
Book Value of equipment sold to Sunnybank hills Ltd = 61,666
Selling price for the equipment = 74,240
Gain on sale = 12,573
Remaining PP&E (value as on 1 July, 2016) = 166,200 - 80,000 = 86,200
New Depreciation chargable on remaining PP&E= 86200/4 years = 21,550
Value of PP&E as on June 30, 2016 = (86200-21550) = 64,650
Calculation for sale of inventory-
Cost of inventory sold = 26000/4 = 6500
Selling price = Cost + Profit markup of 10%
= 6500 + 650 = 7150
Calculation for depreciation expenses for 2017-
Value of PP&E as on July 1, 2016 = 64,650
Depreciation to be charged = 21,550
Cr. Inventory 6500
Cr. Profit on sale 650
(Sale of inventory in cash recorded)
Cr. Accumulated depreciation 21,550
(Depreciation charged on remaining PP&E charged)
Calculation for purchase of inventory-
Cost price of inventory purchased = Original Cost + Profit markup of 10%
= 28000 + 2800 = 30800
Calculation for depreciation expenses for 2017-
Value of PP&E as on July 1, 2016 = (64,650 - 21550) = 43,100
Depreciation to be charged = 21,550
Cr. Cash 30800
(Purchase of inventory in cash recorded)
Cr. Accumulated depreciation 21,550
(Depreciation charged on remaining PP&E charged)
Cr. Cash 5,000
Cr. Management fees payable 1,000
(Management fees expenses recoded)
Cr. Cash 10,000
(Dividend expenses paid and recorded)
Cr. Goodwill Impairment 2,000
(Impairment of goodwill recorded)
Note: Since, it is mentioned in the question that the management assumes an impairment in goodwill only in the year 2017-18, hence entry is not passed in any of the previous years.