On 1 December 2013, House Ltd acquired 70% of the voting shares (ex div) of Smart Ltd for $6,000,000 and obtained the capacity to dominate the financial and operating policies of Smart Ltd. At this date, the accounts of Smart Ltd included the following balances:
($1 ordinary shares) $3,990,000
General reserve $1,140,000
Retained profits $2,760,000
Dividends payable $319,200
All the identifiable net assets of Smart Ltd were recorded at fair value except for the asset Land, which had a recorded amount of $900,000 below its fair value. Adjustments for the differences between carrying amounts and fair values are made on consolidation.
On the 1 January 2014, Smart Ltd paid a further cash dividend of 5% (calculated on the share capital) appropriated from pre-acquisition profits. This amount was recognised as revenue, but the Financial Controller of House Ltd felt that the dividend had impaired the value of the company’s investment in Smart Ltd and subsequently records an impairment of the Investment in Smart Account for the amount received as a dividend.
Additional Information for the current year ended 30 June 2015
(a) On 1 April 2015, Smart sold inventory to House Ltd for $1,650,000, at a mark-up of 75%. At 30 June 2015, $950,000 of this inventory was still on hand.
(b) On 5 December 2013, Smart Ltd sold some inventory to House Ltd for $560,000, at a profit of $200,000. This was still on hand in House Ltd at 30 June 2014, but was all sold by 30 June 2015.
(c) On 1 January 2014, Smart Ltd sold part of its Motor Vehicle Fleet to House Ltd for $2,500,000 at a before tax profit of $620,000. The Vehicles have a further useful life of 2 years and are depreciated using the straight-line method by both companies.
(d) During the current year, Smart Ltd borrowed funds from House Ltd to undertake the installation of solar panels in several of its buildings so as to reduce the energy consumption of the company. House Ltd extended a loan of $2,090,000 to Smart Ltd. This loan was issued on the 1 March 2015 payable over 5 years, with an interest rate on the loan of 4.5% pa. Interest on the loan is paid on 31 March of every year. Interest has been paid up to 31 March 2015.
(e) As part of the loan transaction, Smart Ltd incurred $145,000 charges owing to House Ltd for services performed in helping with a feasibility study for the solar panels. Only $45,000 of this amount has been paid at 30 June 2015.
(f) All dividends are recognised before receipt of cash.
(g) It is Group Policy that any Goodwill is impairment tested on an annual basis. It was determined that goodwill was impaired by $20,000 in the year ended 30 June 2014. However, no impairment of goodwill was estimated for the year ended 30 June 2015.
(h) The tax rate is 30%.
(i) The companies in the group have financial years from 1 July to 30 June.
The financial statements of House Ltd and Smart Ltd at 30 June 2015
Statement of Comprehensive Income (Extract)
House Ltd Smart Ltd
Revenues $83,160,000 $27,562,500
Cost of sales $19,495,200 $6,803,750
Operating expenses $29,106,000 $9,646,875
Selling expenses $12,474,000 $4,134,375
Finance costs $1,247,500 $413,500
Other expenses $4,158,000 $1,378,125
Profit before income tax $16,679,300 $5,185,875
Interest income $837,774 $378,000
Dividend income $363,090 -
Tax expense $5,363,790 $1,777,762
Profit after income tax $12,516,374 $3,786,113
Retained profits as at 1 July 2014 $ 2,264,063 $2,917,500
Amount available for appropriation $14,780,437 $6,703,613
Dividends paid $1,155,000 $119,700
Dividends provides $1,443,750 $399,000
Retained profits as at 30 June 2015 $12,181,687 $6,184,913
Statement of Financial Position (Extract)
House Ltd Smart Ltd
Cash and cash equivalents $7,455,000 $0
Trade and other receivables $1,587,600 $1,837,500
Other current assets $7,144,200 $4,665,570
Deferred tax asset $1,742,400 0
Trademarks and patents $3,745,190 $6,930,000
Goodwill (net of impairment) $2,605,000 $0
Plant & equipment $9,513,000 $5,628,000
Less accumulated depreciation (P&E) -$1,902,600 -$504,000
Motor vehicles & fleet equipment $5,363,400 $3,643,500
Less accumulated depreciation (MV) -$1,609,020 -$1,457,400
Investment in S Ltd $6,000,000 $0
Less accumulated impairment -$139,650
Loans receivable $7,000,000 $2,323,000
Buildings $15,550,000 $0
Land $5,972,400 $8,610,000
Total assets $70,026,920 $31,676,170
Bank overdraft $0 $1,955,920
Trade and other payables $9,011,310 $2,998,150
Current liabilities and provisions $8,070,472 $1,816,500
Deferred tax liability $1,719,217 $0
Loans $5,326,650 $2,090,000
Other non-current liabilities $4,088,350 $4,102,350
Total Liabilities $28,215,999 $12,962,920
Net assets $41,810,921 $18,713,250
Share capital - ordinary shares $11,550,000 $3,990,000
Asset revaluation reserve $6,037,500 $3,600,000
General reserve $12,041,734 $4,938,337
Retained profits $12,181,687 $6,184,913
Total shareholders’ equity $41,810,921 $18,713,250
Students are required to consolidate House Ltd and its subsidiary Smart Ltd, use the Excel worksheet.
(a) Prepare the consolidation journal entries to consolidate House Ltd and Smart Ltd for the year ended 30 June 2015. Use Partial Goodwill method to account for goodwill and NCI.
Journal entries include:
• Revalue assets acquired to fair value
• Pre-acquisition entry
• Impairment of asset
• Eliminate intragroup sales of inventory
• Eliminate unrealised profit in closing stock
• Eliminate unrealised profit in opening stock
• Sale of non-current assets - reverse profit/loss
• Sale of non-current assets - adjust depreciation
• Eliminate intragroup loans
• Eliminate intragroup loan interest and interest owing
• Eliminate inter-company service fees/expenses and payables
• Post Acq Dividends paid and provided in current period
• Goodwill impairment
• Account for NCI (share capital, reserves, retained earnings and Net Profit)