BFA201 Financial Accounting

1. Prepare acquisition analysis as at the acquisition date, and journal entries to record the acquisition of the equity interest in MIEL Ltd in PEACE Ltd’s records

Particulars	Amount (In $)
Fair value of assets
Plant	50000
Land	30000
Total fair value of assets	80000
Fair value of liabilities	132813
Fair of value of net assets	212813
Purchase consideration	874575
Capital Reserve	661762

Journal entries
Particulars	Debit	Credit
Plant account Dr	50000
To fair value adjustments		50000
(Being property taken at fair value)
Fair value adjustment a/c Dr	30000
Land account Dr		30000
To Fair value adjustments
(Being Land taken over at fair value)
Fair value adjustments account Dr	32000
To deferred tax liability (80000*40%)		32000
Share capital a/c dr	386095
Retained earnings a/c Dr	1058242
Fair value adjustment a/c Dr	80000
Revaluation reserve a/c Dr	12000
To investment in beach ltd		874575
To Capital reserve		661762

Prepare the consolidated adjustments for PEACE Ltd and its controlled entity on 30 June 2018

	PEACE Ltd	MIEL Ltd	Consolidated Entries		Group
Particular			Dr	Cr
Sales revenue	3,625,810	2,481,765	67840 (W.N.1)	48528 (W.N.2)	6088263
Cost of goods sold	-1,765,800	-1,414,820	32448 (W.N. 4)	5152 (W.N.3)	3153324
Gross profit	1,860,010	1,066,945		2240 (W.N. 5)	2929195
Other income (expense)	271,060	27,800			298860
Operating income	2,131,070	1,094,745			3225815
Expenses, including depreciation	-1,858,000	-958,745			2816745
Net profit before tax	273,070	136,000			409070
Income tax expenses	-77,249	-53,540			130789
Net profit after tax (NPAT)	195,821	82,460			2782821
Retained earnings at 1 July 2017	655,064	720,520	180130		1195454
Retained Earnings (Dividend declared)	23,498	24,738	30920 (W.N. 6)		17316
NPAT of the year	195,821	82,460	23498.52 (W.N. 7)		254782.48
Retained earnings at 30 June 2018	827,386	778,242	778,242 (W.N. 8)		827386
Shareholders’ Equity
Share capital	1,000,000	690,000	386095 (W.N. 9)		1023905
Retained earnings	827,386	778,242	1058242 (W.N. 10)		827386
Revaluation Reserve	250,000	12,000	250000 (W.N. 11)		12000
NCI		96591.25 (W.N. 12)			96591.25
Total shareholders’ equity	2,077,386	1,480,242			3654219.25
Liabilities
Current Liabilities
Accounts Payable	48,068	41,892			89960
Dividend Payable	23,498	24,738	30920		17316
Income tax payable	109,228	54,400			163628
Other payable	21,643	11,783			33426
Total current liabilities	202,437	132,813			335250
Non-Current Liabilities
Deferred Tax Liabilities	0	32000			32000
Bank Loan	280,000	80,000			360000
Total non-current liabilities	280,000	80,000			360000
Total Liabilities	482,437	212,813			695250
Total Equity and Liabilities	2,559,824	1,693,055			4284879
Assets
Current Assets
Cash	683,502	154,744			838246
Accounts Receivable	56,642	37,010			93652
Less: Allowance for doubtful accounts	-10,000	-4,800			-14800
Dividend Receivable	120,000	0			120000
Inventory	17,158	38,950	17520 (W.N. 13)		38588
Total Current Assets	867,302	225,904			1075686
Non-Current Assets
Goodwill	290500	0	7000		283500
Deferred Tax assets	79,947	2,151			82098
Investment in Dark Ltd	874,575	0			874575
Land	138,000	465,000	30000		573000
Property, Plant and Equipment (PPE)	900,000	1,500,000	193000 (W.N.14)	38600 (W.N.15)	2245600
Less: Accumulated depreciation of PPE	-300,000	-500,000		43600(W.N.16)	-843600
Total non-current assets	1,692,522	1,467,151			3215173
Total Assets	2,559,824	1,693,055			4290859

Working Notes

 W.N.1 Sales revenue Debit balance

Inventory sold= 60000+ (5600*140%= 7840)

= 67840

W.N.2 Sales revenue Credit balance

Inventory sold

= 60000*75%= 45000

= 5600*45%= 2520

= 45000+2520= 47520

W.N.3 Cost of goods sold Credit balance

= 5600*92%= 5152

W.N.4 Cost of goods sold Debit balance

Inventory cost= 32000

= 5600*8%= 448

= 32448

W.N.5 Gross profit credit balance

= 5600*40%= 2240

W.N. 6 Retained earning

Particulars	MIEL LTD
Dividend declared	24738
Dividend payout ratio	30%
Retained earning	7421

 

Particulars	PEACE LTD
Profit	195821
Dividend payout ratio	12%
Retained earning	23498.52

 

W.N. 7

Particulars	PEACE LTD
Profit	195821
Dividend payout ratio	12%
Retained earning	23498.52

23498.52 amounts will get deducted from the total retained earning amount of both the entity such as PEACE LTD as well as MEIL LTD. This amount will get deducted as this amount has paid in the form of a declared dividend.

W.N.8

778242 is the amount of retained earnings of MIEL LTD will get deducted from the consolidated financial statement as this amount is utilised in paying the purchase consideration to MEIL LTD for purchasing the shares in their firm.

W.N.9

386095 of share capital is utilized in paying off the total consideration of 874575 will get deducted from the total share capital of 690000 of MEIL LTD.

W.N. 10

1058242 is total retained earning amount which got deducted from MEIL LTD as this utilizes in paying the total purchase consideration for the investment made in MEIL LTD. It is a mixture of same component of different periods such as 778242 of 2018 and 280000 at the time of acquisition in the year 2014 is combined to meet the purchase consideration liability.

W.N. 11

Revaluation reserve of 250000 is also involved in paying purchase consideration to MEIL LTD as it is essential for an individual to pay the amount to get the overall benefits attached with the acquisition transactions takes places between PEACE LTD and MEIL LTD for proportionate share basis of their ownership (Masadeh, Mansour and A L Salamat, 2017).

W.N. 12

 96591.25 shows the non-controlling interest in profit and reserves and share capital for the year 2018 and non- controlling interest in the opening retained earning is not consider as it belong to the previous year that is 2017. This entire amount is determined at 25% of profit and shares and share capital (Sinclair and Keller, 2017).

W.N. 13

It shows the amount which belongs to MIEL LTD before the acquisition as their business inventory which will be adjust just like a acquisition transaction. 75% of the total inventory is sold to other entity and the remaining 25% of the same will belongs to MEIL will get deducted from the current inventory held by the firm for the financial year 2018 (Alver and Alver, 2017). 25% of 60000 are 15000+ 5600*45% is 2520 which in total amounts to 17520 will get excluded from the total amount of inventory held by an enterprise for the year 2018.

W.N. 14

193000 is total amount of property, plant and equipment which includes 80000 as the fair of plant, selling value of plant of 88000 and 25000 from the sale proceeds of equipment.

W.N.15

38600 amounts shows the profit on sale of plant and equipment as 28000 as profit on sale of the plant and 10600 as profit on the sale of equipment.

W.N.16

Depreciation on plant

Particulars	Amount
Cost	100000
Life of asset	5
Depreciation for 2013	20000
Cost after depreciation	80000
Life of asset	4
Depreciation for 2015	20000
Cost after depreciation	60000
Sale of asset	88000
Profit on Sale	28000

Particulars	Amount
Cost	18000
Life of asset	5
Depreciation for 2013	3600
Cost after depreciation	14000
Sale of asset	25000
Profit on Sale	106000

Particulars	Amount
Cost of Plant	100000
Depreciation as per books
Life in years	6
Depreciation	16667
Depreciation as per income tax act
Life in years	4
Depreciation	25000
Difference	8333
Tax @40%	3333.2
Deferred tax asset	3333.2

Particulars	Debit	Credit
Deferred tax asset a/c Dr	3333.2
To Income tax expense		3333.2

Non controlling interest is a term used to denote the remaining share of acquiree which is not acquired by an acquirer in a financial year (Kochiyama and Seki, 2017). Acquisition is one of the practice in which stronger entity will capture the weaker enterprise who are not able to meet up their current costs and fell into bankruptcy (Bradley, 2017). By using option, an entity that’s financially weaker can compensate all their costs by selling their firm to a stronger business (Cheng, Lin, Lu and Wei, 2017). Non controlling interest situation occurs when an acquirer will acquire an entity with higher share of 50% but less than 100%.

In the current case, PEACE LTD has acquired the firm of MEIL LTD for 75% of their total business as they purchases 448500 shares out of the total shares of 690000 of the firm. The purchased shares in the MEL LTD amounts to 75% and remaining 25% shares left with MEIL LTD (Assor, Feinberg, Kanat-Maymon and Kaplan, 2018). PEACE LTD has taken 75% shares as majority of the business decisions will taken by the new owner as they have power to influence the previous owner as they have full control over their firm in taking all kinds of firm’s decisions (Skoulikidis, Vardakas, Amaxidis and Michalopoulos, 2017). Changes in the financially statements will occur as their financial structure has changed due to fluctuations in the ownership of the business (Kokan, Kova?evi?, Stefanic, Tzvetkova and Kirin, 2018).

Non-controlling interest allow an acquirer to participate in the board meeting of their firm to gain benefits of the business operations (Kieso, Weygandt and Warfield, 2010). MEIL LTD has not lost full control over their business as some amount of the total profit will goes to MEIL LTD who is 25% owner of MEIL LTD (Samkin and Deegan, 2010). It is essential deduct the non controlling interest from the total profit to know the actual worth of PEACE LTD after acquiring the MEIL LTD. The non- controlling interest will help in ascertaining the actual efforts applied by the new entity in generating higher return over a short span of time (Baluch and et. al., 2010).

Particulars	Non-Controlling interest in Profit 2018
Profit	82460
NCI	25%
NCI in amount	20615

Profit a/c Dr   20615

To non- controlling interest     20615

(Being 25% of NCI worth 20615 deducted from the profit)

Particulars	Non-Controlling interest in opening retaining earning
Retained earning	720520
NCI	25%
NCI in amount	180130

Retained Earnings a/c Dr   180130

To Non controlling interest     180130

(Being non- controlling interest deducted from the retained earnings)

Particulars	Non-Controlling interest in Profit 2018
Reserves and share capital	303905
NCI	25%
NCI in amount	75976.25

Reserves and share capital a/c Dr 75796.25

To Non controlling interest       75796.25

(Being reserves and share capital of Peace LTD decreases by 75976.25)

	PEACE Ltd	MIEL Ltd	Consolidated Entries		Group	NCI Entries			Parent
Particular			Dr	Cr		Dr		Cr
Sales revenue	3,625,810	2,481,765	67840 (W.N.1)	48528 (W.N.2)	6088263
Cost of goods sold	-1,765,800	-1,414,820	32448 (W.N. 4)	5152 (W.N.3)	3153324
Gross profit	1,860,010	1,066,945		2240 (W.N. 5)	2929195
Other income (expense)	271,060	27,800			298860
Operating income	2,131,070	1,094,745			3225815
Expenses, including depreciation	-1,858,000	-958,745			2816745
Net profit before tax	273,070	136,000			409070
Income tax expenses	-77,249	-53,540			130789
Net profit after tax (NPAT)	195,821	82,460			2782821
Retained earnings at 1 July 2017	655,064	720,520			1375584	180130			1195454
Retained Earnings (Dividend declared)	23,498	24,738	30920 (W.N. 6)		17316
NPAT of the year	195,821	82,460	23498.52 (W.N. 7)		254782.48
Retained earnings at 30 June 2018	827,386	778,242	778,242 (W.N. 8)		827386
Shareholders’ Equity
Share capital	1,000,000	690,000	386095 (W.N. 9)		1023905				75976.25
Retained earnings	827,386	778,242	1058242 (W.N. 10)		827386
Revaluation Reserve	250,000	12,000	250000 (W.N. 11)		12000				0
NCI		0			0		96591.25 (W.N. 12)		96591.25
Total shareholders’ equity	2,077,386	1,480,242			3654219.25
Liabilities
Current Liabilities
Accounts Payable	48,068	41,892			89960
Dividend Payable	23,498	24,738	30920		17316
Income tax payable	109,228	54,400			163628
Other payable	21,643	11,783			33426
Total current liabilities	202,437	132,813			335250
Non-Current Liabilities
Deferred Tax Liabilities	0	32000			32000
Bank Loan	280,000	80,000			360000
Total non-current liabilities	280,000	80,000			360000
Total Liabilities	482,437	212,813			695250
Total Equity and Liabilities	2,559,824	1,693,055			4284879
Assets
Current Assets
Cash	683,502	154,744			838246
Accounts Receivable	56,642	37,010			93652
Less: Allowance for doubtful accounts	-10,000	-4,800			-14800
Dividend Receivable	120,000	0			120000
Inventory	17,158	38,950	17520 (W.N. 13)		38588
Total Current Assets	867,302	225,904			1075686
Non-Current Assets
Goodwill	290500	0	7000		283500
Deferred Tax assets	79,947	2,151		3333.2	82098				85431.2
Investment in Dark Ltd	874,575	0			874575
Land	138,000	465,000	30000		573000
Property, Plant and Equipment (PPE)	900,000	1,500,000	193000 (W.N.14)	38600 (W.N.15)	2245600
Less: Accumulated depreciation of PPE	-300,000	-500,000		43600	-843600
Total non-current assets	1,692,522	1,467,151			3215173
Total Assets	2,559,824	1,693,055			4290859

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