Corporate Accounting Systems 

 Corporate Accounting Systems 

Autumn 2018 

Practical Project 

The practical project involves three parts:  

• Part A is the preparation of a deferred tax worksheet for a single economic entity.  
• Part B is the preparation of a selection of consolidation elimination journals for an economic entity comprising a parent and a subsidiary. 
• Part C is an explanation of the outcome of the consolidation process undertaken in Part B.  

 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. 

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: 

• The balance of allowance for doubtful debts for 2011 and 2010 was $5,000 and $6,000 respectively. 
• Interest revenue was assessable when the cash was received. 
• Insurance was deductible when paid. 
• Development costs were deductible when paid together with an additional deduction of 50%. 
• Accrued expenses were deductible when paid. 
• Rent revenue was assessable when the cash was received. 
• Employee benefits were deductible when the payment was made to the employee. 
• The tax depreciation rate for plant and equipment was double the rate of accounting. 
• The company tax rate was 30%. 
• Worksheet template: 

 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: 

1. acquisition analysis and adjustment/elimination journal entries for consolidation at acquisition, 1 July 2011; 
2. adjustment/elimination journal entries for consolidation as at 30 June 2012; 
3. adjustment/elimination journal entries for consolidation as at 30 June 2017, and 
4. adjustment/elimination journal entries for consolidation as at 30 June 2018. 

After meeting with your supervisor you gathered the following information which you might need to complete your work: 

• Sunnybank Ltd has the following accounting policies for the economic entity: 
  • Revaluation adjustments on acquisition are to be made on consolidation only, not in the books of the subsidiary; 
  • All plants are depreciated using the straight-line method with no residual value. For part-years, depreciation is to be calculated on the number of months the asset is held in the relevant year. 
  • Intragroup sales of inventory are at a mark-up of 10% on cost. 
  • All calculated amounts are to be rounded to the nearest whole dollar. Companies in the group do not show cents in any journals, worksheets, or financial statements. 
• Management team of Sunnybank Ltd believes that goodwill acquired from business combination is impaired by $2,000 in the current financial year (1 July 2017 - 30 June 2018). There is no previous impairment of goodwill. 
• The company tax rate is currently 30% and this rate has not changed for a number of years. 
• Reporting date is 30 June. 
• Journal narrations are required. 
• Number each year consolidation elimination/adjusting journal entries by 1, 2, 3, …, etc;. Where more than one journal entry is needed for an event to be completely accounted for add the letters a,b,c,…etc to them as necessary. 

Part C 

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).