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Question:
Discuss about the Financial Accounting for Share Capital of Jewel.

 
Answer:

1. 100% of the share capital of Jewel Ltd. acquired by Joan

Evaluation of Acquisition

as on 30 June, 2016

 

 

Acquired Net assets – Fair value

 

 

Share Capital

 

$2,00,000.00

Retained Earnings

 

$80,000.00

Revaluation Surplus ((9000*(100-30%))

 

$6,300.00

 

 

$2,86,300.00

Acquisition Cost

 

$3,56,000.00

Goodwill on acquisition

 

$69,700.00

 

journal entries   (Consolidation)

as on 30 June, 2016

 

 

Plant Ac  Dr.

 

$9,000.00

To Tax Liability (Deferred)

 

$2,700.00

To Revaluation Surplus

 

$6,300.00

(being plant considered at fair value)

 

 

Share Capital A/c   Dr

 

$2,00,000.00

Retained Earnings A/c   Dr.

 

$80,000.00

Revaluation Surplus A/c    Dr.

 

$6,300.00

Goodwill A/c          Dr.

 

$69,700.00

To Jewel investment

 

$3,56,000.00

(being entry passed for acquisition)

 

 

Retained earnings A/c      Dr.

 

$6,000.00

Depreciation  A/c               Dr.

 

$1,500.00

To Accumulated Depreciation A/c

 

$7,500.00

(being recording of depreciation done)

 

 

Deferred tax liability  A/c  Dr.

 

$2,250.00

To, expenses of income tax

 

$450.00

To Retained earnings

 

$1,800.00

(being tax accounted on depreciation)

 

 

Sales  A/c    Dr.

 

$42,000.00

To Cost of goods sold

 

$42,000.00

(Being stock sale of intercompany removed)

 

 

Sales  A/c    Dr.

 

$65,000.00

To Cost of goods sold

 

$65,000.00

(Being stock sale of intercompany removed)

 

 

Cost of goods sold A/c   Dr.

 

$2,000.00

To Inventory A/c

 

$2,000.00

(Being elimination of Profit on inventory done)

 

 

Cost of goods sold A/c   Dr.

 

$13,000.00

To Inventory

 

$13,000.00

(Being elimination of Profit on inventory done)

 

 

Sales A/c        Dr.

 

$20,000.00

To Cost of goods sold

 

$15,000.00

To Inventory

 

$5,000.00

(Being elimination of Profit on inventory done)

 

 

Gain on sale of plant A/c Dr.

 

$36,000.00

To Plant

 

$36,000.00

(Being elimination of Profit on plant sale done)

 

 

Management fee revenue  A/c   Dr.

 

$26,500.00

To, fee expenses of Management

 

$26,500.00

(Being  revenue and expense of inter company eliminated)

 

 

Dividend received  from Jewel A/c       Dr.

 

$93,000.00

To payment of dividend

 

$93,000.00

(Being inter company dividend eliminated)

 

 


Part B

Worksheet Consolidated

 

 

 

Removals

 

 

 Joan

 Jewel

 Dr.

 Cr.

 
Financials  (Consolidated)

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 $                             -  

Accounts Receivable

 $        55,400.00

 $       84,500.00

 

 

 $          1,39,900.00

Inventory

 $    1,05,000.00

 $       38,000.00

 

 $      20,000.00

 $          1,23,000.00

Non-Current Assets

 

 

 

 

 $                             -  

Land and buildings

 $    2,78,000.00

 $    3,26,000.00

 

 

 $          6,04,000.00

Plant - at cost

 $    2,99,850.00

 $    3,55,800.00

 $        9,000.00

 $      36,000.00

 $          6,28,650.00

Less: Accumulated Depreciation

 $      (85,750.00)

 $ (1,38,800.00)

 

$7,500.00

 $        (2,32,050.00)

Investment in Jewel Ltd.

 $    3,56,000.00

 

 

 $  3,56,000.00

 $                             -  

Goodwill

 

 

 $      69,700.00

 $                     -  

 $              69,700.00

Total Assets

 $  10,08,500.00

 $    6,65,500.00

 $      78,700.00

 $  4,19,500.00

 $        13,33,200.00

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Retained Earnings

 $    3,58,000.00

 $    2,44,200.00

 $  2,19,700.00

 $      78,450.00

 $          4,60,950.00

Share capital

 $    3,50,000.00

 $    2,00,000.00

 $  2,00,000.00

 

 $          3,50,000.00

Revaluation Surplus

 

 

 

 

 $                             -  

Current Liabilities

 

 

 

 

 

Accounts Payable

 $        81,700.00

 $       76,300.00

 

 

 $          1,58,000.00

Tax Payable

 $        66,300.00

 $       25,000.00

 

 

 $              91,300.00

Non-current Liabilities

 

 

 

 

 

Loans

 $    1,52,500.00

 $    1,20,000.00

 

 

 $          2,72,500.00

Deferred tax liability

 

 

 

 $            450.00

 $                    450.00

 

 

 

 

 

 $                             -  

Total Liabilities

 $  10,08,500.00

 $    6,65,500.00

 $  4,19,700.00

 $      78,900.00

 $        13,33,200.00

 

 

 

 

 Removals

 

 

 Joan

 Jewel

 Dr.

 Cr.

 Financials  (Consolidated)

Sales

 $    7,81,400.00

 $    7,40,000.00

 $    (1,27,000.00)

 

 $        13,94,400.00

Cost of Sales

 $  (4,94,000.00)

 $ (4,38,000.00)

 $      1,22,000.00

 $      15,000.00

 $        (8,25,000.00)

Gross Profit

 $    2,87,400.00

 $   3,02,000.00

 

 

 $          5,69,400.00

Dividend recd from Jewel

 $        93,000.00

 $                       -  

 $       (93,000.00)

 

 $                             -  

Management fee revenue

 $        26,500.00

 $                       -  

 

 $      26,500.00

 $                             -  

Gain on sale of plant

 $        40,000.00

 $       36,000.00

 $       (36,000.00)

 

 $              40,000.00

Expenses

 

 

 

 

 

Admin expenses

 $      (40,800.00)

 $     (28,700.00)

 

 

 $            (69,500.00)

Depreciation

 $      (29,500.00)

 $     (56,800.00)

$1,500.00

 

 $            (87,800.00)

Expenses of Management fee

 $                       -  

 $     (26,500.00)

 

 $      26,500.00

 $                             -  

Other expenses

 $  (1,25,100.00)

 $     (86,000.00)

 

 

 $        (2,11,100.00)

Operating profit before tax

 $    2,51,500.00

 $   1,40,000.00

 

 

 $          2,41,000.00

Income tax exp

 $      (75,500.00)

 $     (42,000.00)

 

 $            450.00

 $        (1,17,050.00)

Operating profit after tax

 $    1,76,000.00

 $       98,000.00

 

 

 $          1,23,950.00

Retained earnings 1 July 2015

 $    3,19,400.00

 $    2,39,200.00

$84,200.00

 

 $          4,74,400.00

Available for appropriation

 $    4,95,400.00

 $   3,37,200.00

 

 

 $          5,98,350.00

Dividends paid

 $  (1,37,400.00)

 $     (93,000.00)

 

 $      93,000.00

 $        (1,37,400.00)

Retained earnings 30 June 2016

 $    3,58,000.00

 $   2,44,200.00

 

 

 $          4,60,950.00


2. According to IFRS-3, a subsidiary can be termed as a company having a voting right greater than 50% controlled by different company. Specifically, it is termed as the parent company (Graham & Smart, 2012). A subsidiary can be controlled by the holding company either in part or in full. In this scenario, Bosco Ltd. contains a holding of 80% of Circus Ltd. Therefore, the relationship can be term as holding subsidiary and not associates (Horngren, 2013).

 
Partial Goodwill Method

Acquisition analysis

as on 30 June, 2016

Acquired Net assets – Fair value

 

 

Share Capital

 

$5,00,000.00

Retained Earnings

 

$4,25,000.00

Revaluation surplus

 

$10,000.00

 

 

$9,35,000.00

Bosco Ltd Share (80%)

 

$7,48,000.00

Acquisition csost

 

$8,90,000.00

Goodwill on acquisition

 

$1,42,000.00

Journal entries  as on 30 June, 2016

Consolidated

Share Capital A/c   Dr

 

$5,00,000.00

Retained Earnings A/c   Dr.

 

$4,25,000.00

Revaluation Surplus A/c    Dr.

 

$10,000.00

Goodwill A/c    Dr.

 

$1,42,000.00

To Circus Ltd. investment

 

$8,90,000.00

To interest of Non-Controlling

 

$1,87,000.00

(being entry passed for Acquisition)

 

 

Sales

 

$1,43,000.00

To COGS

 

$1,43,000.00

(being sale of inventory by Bosco to Circus)

 

 

Sales

 

$1,20,000.00

To COGS

 

$1,20,000.00

(being sale of inventory by Circus to Bosco)

 

 

COGS (84000-70000) A/c      Dr.

 

$14,000.00

To Inventory A/c

 

$14,000.00

(Being elimination done for Unrealised gain on sale of inventory)

 

 

Impairment of goodwill A/c   Dr.

 

$5,000.00

To Goodwill A/c

 

$5,000.00

(Being Goodwill impairment done)

 

 

Profit on sale of plant A/c    Dr.

 

$87,500.00

To Plant

 

$87,500.00

(Being Profit on sale of plant eliminated done on a inter company basis)

 

 

Loan from Bosco Ltd A/c               Dr.

 

$3,00,000.00

To, Loan to Circus Ltd

 

$3,00,000.00

(being elimination of intercompany loan done)

 

 

Income on interest  A/c     Dr.

 

$9,000.00

To Interest expense

 

$9,000.00

(Being Interest income & expense on inter company loan eliminated)

 

 

Dividend revenue A/c       Dr.

 

$1,86,000.00

To payment of dividend

 

$1,86,000.00

(Being elimination of dividend to holding company done  )

 

 

Circus Retained earnings A/c Dr.

 

$6,77,000.00

To Bosco Ltd (attributable profit)

 

$5,41,600.00

To Non controlling interest (attributable profit)

 

$1,35,400.00

(Being distribution of profit done))

 

 

Part – C

Acquisition analysis

As on 30 June, 2016

Full Goodwill Method

Acquired Net assets – Fair value

 

 

Share Capital

 

$5,00,000.00

Retained Earnings

 

$4,25,000.00

Revaluation surplus

 

$10,000.00

 

 

$9,35,000.00

Cost of Acquisition (890000+200000)

 

$10,90,000.00

Acquisition leading to Goodwill

 

$1,55,000.00

Journal entries (Consolidated)

 as on 30 June, 2016

Share Capital A/c   Dr

 

$5,00,000.00

Retained Earnings A/c   Dr.

 

$4,25,000.00

Revaluation Surplus A/c    Dr.

 

$10,000.00

Goodwill A/c    Dr.

 

$1,55,000.00

To Investment in Circus Ltd.

 

$8,90,000.00

To Non-Controlling interest

 

$2,00,000.00

(Being full goodwill method used)

 

 

 
3. Acquisition analysis

Acquired Net assets – Fair value

 

 

Share Capital

 

$2,00,000.00

Retained Earnings

 

$95,000.00

 

 

$2,95,000.00

Cricket Ltd. Share

 

$1,18,000.00

Acquisition Cosst

 

$1,60,000.00

Goodwill on acquisition

 

$42,000.00

Consolidation Journal entries  -

As on 30 June, 2017

Share Capital A/c Dr.

 

$80,000.00

Retained earnings A/c Dr.

 

$38,000.00

Goodwill  A/c   Dr.

 

$42,000.00

To Investment in Charlie Ltd.

 

$1,60,000.00

(being passing of Acquisition entry done)

 

 

Sales A/c Dr.

 

$6,000.00

To COGS

 

$4,000.00

To Inventory

 

$2,000.00

(Being elimination of inventory held by  cricket ltd)

 

 

Sales A/c Dr.

 

$12,000.00

To COGS

 

$9,000.00

To Inventory

 

$3,000.00

(Being elimination of inventory held by  Charlie ltd)

 

 

Land A/c Dr.

 

$50,000.00

To Asset revaluation Surplus

 

$35,000.00

To Deferred Tax Liability

 

$15,000.00

(being revaluation of land done)

 

 

Dividend Income A/c      Dr.

 

$80,000.00

To payment of dividend

 

$80,000.00

(Being dividend payment eliminated)

 

 

Retained earnings (WN:1)

 

$10,36,400.00

To Cricket Ltd. (attributed profit)

 

$10,36,400.00

(Being attribution of [profit done)

 

 

 

Working 1

 Computation of attributable profit

 

 

30 June 2017 – figure of Retained earnings

 

$25,91,000.00

Cricket Ltd. – share %

 

40%

Cricket Ltd. – attributable profit

 

$10,36,400.00


 
 
References

Graham, J. & Smart, S. (2012). Introduction to corporate finance. Australia: South-Western Cengage Learning.

Horngren, C. (2013) Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.

Leo, Ken J. (2011). Company Accounting, Boston:McGraw Hill

Libby, R., Libby, P. & Short, D. (2011)   Financial accounting. New York: McGraw-

Hill/Irwin.

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