Bill Pty Ltd (Bill) is a private company with many strategic investments. The finance director is concerned that he might be required to consolidate some of these investments, pursuant to AASB 10. Details of the investment relationships are as follows:
I. Bill has a 25% interest in the share capital of William Pty Ltd (William), which is a company involved in the same industry as Bill. The remaining 75% of the share capital is owned by William’s founders, Mr and Mrs Russel. Mr and Mrs Russel are unfamiliar with the industry and so have given Bill three of the five seats available on the board of directors. Bill takes the lead on all decisions, but the business is closely monitored by Mr and Mrs Russel who hold the other two board positions.
II. Bill has a substantial loan receivable from Susan Pty Ltd (Susan). Susan, as a result of the currenteconomic climate, has experienced significant trading problems. Susan has failed to make its regular payments under the loan agreement. Bill has become concerned about the recoverability of the loan and has reach an agreement with the management of Susan that Bill executives will take control of the company’s finances for a period of five years. An executive of Bill has been given control of Susan’s cheque book and makes all payments. Bill has not gained any seats on Susan’s board of directors, which is still dominated by Susan shareholders.
III. Bill owns 50% of Tom Pty Ltd (Tom), with the other 50% being owned by Jerry Pty Ltd (Jerry). Both companies have equal voting rights and an equal share of seats on the board of directors. Under an agreement with Jerry, Bill supplies the finance to the company on normal commercial terms. The loan is fully secured against the assets of the company. Jerry provides the management and entrepreneurial flair to Tom. Under the agreement forged, Jerry will receive a management fee in respect of the net profits of Box after allowing for interest payments on the Bill loan. In times of no profits the interest payments will still be met but Jerry will not receive any remuneration.
IV. Bill operates the trustee company for the Bill Trading Trust. The trust is a discretionary trust with the nominated beneficiaries being the directors of Bill. These directors are Mr Fuschia, Mrs Glady and Mr Lilac. Over the years the trust has distributed its income in the following proportions; Mr Fuschia 70, Mrs Glady 20 and Mr Lilac 10. Under the terms of the trust deed, Bill has complete control over the operating and financing decisions of the trust.
V. Bill holds 75% interest in Felix Pty Ltd (Felix). The interest was created when Bill converted a substantial loan it made to Felix into equity at the invitation of Felix when Felix began trading poorly and recovery of the loan seemed uncertain. Felix has a large deficiency in net assets and has been consolidated for many years. Bill is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of Felix.
1. Advise the finance director of Bill of the requirements of AASB 10 in respect of the control criterion.
2. For each of the above investments:
a. Discuss in which entity control lies; and,
b. Explain whether consolidation is required.
Question 2 (15 marks)
At 1 July 2017, Lobstar Ltd acquired the following non-current assets:
Equipment $100 000
Vehicles $80 000
They are in different classes of non-current assets and are to be measured at fair value. The expected useful lives of vehicles and equipment are 5 years and 10 years, respectively. At 30 June 2015, the fair values of both assets were assessed. The equipment had a fair value of $82 000, and the vehicles, $70 000. The remaining useful lives were assessed to be 8 years for equipment and 7 years for vehicles.
Prepare the journal entries for Lobstar Ltd for the years ending 30 June 2015 and 2016.
Swiftsure Ltd has carried forward a deferred tax liability of 170000, arising from differences between carrying amount and tax bases of the company’s assets. On 30 June 2013, the carrying amounts and tax bases of the company’s assets were as follows:
Assets Carrying amount Tax base
A $142000 $108000
B $541000 $340000
C $820000 $610000
D $86000 $40000
The current income tax expense for the year ended 30 June 2013 is $8400000 and tax rate is 30%.
(a) Prepare general journal entries on 30 June 2013 to record company’s income tax expense.
(b) How would your answer differ if the balance of the deferred tax liability carried forward was $120000?
On 1 July 2015, Fluffy Ltd acquired all the issued shares of Glider Ltd. Fluffy Ltd paid $30 000 in cash and 20 000 shares in Fluffy Ltd valued at $3 per share. At this date, the equity of Glider Ltd consisted of $66 000 share capital and $6000 retained earnings.
At 1 July 2015, all the identifiable assets and liabilities of Glider Ltd were recorded at amounts equal to their fair values except for:
Carrying amount Fair value
Plant (cost $150 000) $120 000 $123 000
Patents $105 000 $90 000
Inventory $18 000 $22 500
The plant was considered to have a further 5-year life. The patents were sold for $120 000 to an external entity on 18 August 2015. The inventory was all sold by 30 June 2016. Additional information
(a) Fluffy Ltd sells certain raw materials to Glider Ltd to be used in its manufacturing process. At 1 July 2016, Glider Ltd held inventory sold to it by Fluffy Ltd in the previous year at a profit of $600. During the 2016–17year, Fluffy Ltd sold inventory to Glider Ltd for $21 000. None of this was on hand at 30 June 2017.
(b) Glider Ltd also sells items of inventory to Fluffy Ltd. During the 2016–17year, Glider Ltd sold goods to Fluffy Ltd for $4500. At 30 June 2017, inventory which had been sold to Fluffy Ltd at a profit of $300 was still on hand in Fluffy Ltd’s inventory.
(c) On 1 July 2016, Glider Ltd sold an item of plant to Fluffy Ltd for $15 000. This plant had a carrying amount in the records of Glider Ltd of $14 000 at time of sale. This type of plant is depreciated at 10% p.a. on cost.
(d) On 1 January 2015, Fluffy Ltd sold an item of inventory to Glider Ltd for $18 000. The inventory had cost Fluffy Ltd $16 000. This item was classified by Glider Ltd as plant. Plant of this type is depreciated by Glider Ltd at 20% p.a.
(e) On 1 March 2017, Glider Ltd sold an item of plant to Fluffy Ltd. Whereas Glider Ltd classified this as plant, Fluffy Ltd classified it as inventory. The sales price was $9000 which included a profit to Glider Ltd of $1500. Fluffy Ltd sold this to another entity on 31 March for $9900.
(f) The tax rate is 30%