Preparation of Consolidated Financial Statements for Parent Ltd and Sub Ltd

Parent Ltd's Acquisition of Equity in Sub Ltd

Parent Ltd acquired equity in Sub Ltd on 1 April 2009. At that date, the identifiable net assets were considered to be fairly valued and the equity of Sub Ltd comprised:

Parent Ltd has requested your help in the preparation of their consolidated financial Question statements for the financial year ended 31 March 2019 and has provided you with the following information:

· During March 2018 Sub Ltd made sales to Parent Ltd of $8 000 and recognised a profit of $4 200. Parent Ltd sold this purchase of inventory to Robert Ltd during May 2018.

· During March 2019 Sub Ltd made sales to Parent Ltd of $ 8 500. The inventory sold has cost Sub Ltd $5 400.  At 31 March 2019, the inventory Parent Ltd had on hand included this purchase from Sub Ltd.

· Parent Ltd borrowed $60 000 from Sub Ltd during November 2017. Interest of $1 200 is outstanding on this loan as at 31 March 2019. The total interest for the financial year ended 31 March 2019 was $1 500.

· In 2011 the total goodwill of Sub Ltd was considered by the directors to be impaired by $ 15 000 and impaired again in 2016 by $ 72 600.  The directors of Parent Ltd believe that the total goodwill has been further impaired by $63 000 during this financial year ended 31 March 2019.

· During March 2018 Parent Ltd made sales to Sub Ltd of $3 200 and recognised a profit of $1 600.  Sub Ltd sold this inventory to Alex Ltd on 31 March 2018.

· During March 2019 Parent Ltd made sales to Sub Ltd of $4 860. The inventory sold has cost Parent Ltd $2 000. The inventory of Sub Ltd at 31 March 2019 included this purchase.

· At 31 March 2019 Sub Ltd declared a final dividend of $120 000 and Parent Ltd declared a final dividend of $75 000. Both these dividends were paid during April 2019.

· Parent Ltd rents a small office to Sub Ltd at a cost of $26 000 per annum. At 31 March 2019, Sub Ltd still owed Parent Ltd $5 000 of rental for the year ended 31 March 2019.

Question 1 continued:

Required:

(a) Assume Parent Ltd only acquired 42% of the equity in ‘Sub Ltd’ for $600 000 on

1 April 2009. The following equity account balances have been extracted from the financial statements of ‘Sub Ltd’ on 31 March 2019:

Details on Sub Ltd's Equity

Prepare the notional journal entry, at 31 March 2019, to account for Parent Ltd’s investment in ‘Sub Ltd’ using the equity method as required by NZ IAS 28 Investments in Associates. The directors do not believe the investment has ever been impaired. The tax rate is 28%.

Complete a ‘quick estimate’, in the space provided, to support your notional journal entry.

Note: Your workings must be included on each line of your notional journal entry.

(b) Refer back to your answer for (a) and determine the amount at which the investment asset will be measured at, after being equity accounted for, in the financial statements as at 31 March 2019. Show your workings.

Question 2

Note: The same information as Assignment 4 Question 3 but different requirements.

Parent Ltd acquired equity in Subsidiary Ltd on 1 April 2011. At that date, the identifiable net assets were considered to be fairly valued and the equity of Subsidiary Ltd comprised:

Parent Ltd has requested your help in the preparation of their consolidated financial statements for the financial year ended 31 March 2019 and has provided you with the following information:

· At 31 March 2019, Sub Ltd declared a final dividend of $35 000, and Parent Ltd declared a final dividend of $90 000. Both these dividends were paid during April 2019.

Question 2 continued:

· Subsidiary Ltd rents a small part of its warehouse to Parent Ltd at a cost of $9 000 per annum. At 31 March 2019, Parent Ltd still owed Subsidiary Ltd $1 200 of rental for the year ended 31 March 2019.

· During March 2018, Subsidiary Ltd made sales to Parent Ltd of $7 600 and recognised a profit of $3 800. Parent Ltd sold this purchase of inventory to Me Ltd on 29 April 2018.

· During March 2019, Subsidiary Ltd made sales to Parent Ltd of $9 460. The inventory sold has cost Subsidiary Ltd $5 460.  At 31 March 2019, the inventory Parent Ltd had on hand included this purchase from Subsidiary Ltd.

· In 2013 the total goodwill of Subsidiary Ltd was considered by the directors to be impaired by $4 100 and impaired again in 2016 by $2 500.  The directors of Parent Ltd believe that the total goodwill has been further impaired by $1 200 during this financial year ended 31 March 2019.

Sales of Inventory and Recognition of Profit

· During March 2018, Parent Ltd made sales to Subsidiary Ltd of $6 000 and recognised a profit of $2 860.  Subsidiary Ltd sold this inventory to Yu Ltd on 28 March 2018.

· During March 2019, Parent Ltd made sales to Subsidiary Ltd of $6 850. The inventory sold has cost Parent Ltd $3 750. The inventory of Subsidiary Ltd at 31 March 2019 included this purchase.

Required:

(a) Assume Parent Ltd only acquired 42% of the equity in ‘Subsidiary Ltd’ for $294 000 on

1 April 2011.

The following equity account balances have been extracted from the financial statements of ‘Subsidiary Ltd’ on 31 March 2019:

Prepare the notional journal entry, at 31 March 2019, to account for Parent Ltd’s investment in ‘Subsidiary Ltd’ using the equity method as required by NZ IAS 28 Investments in Associates. The directors do not believe the investment has ever been impaired. The tax rate is 28%.

Note: Your workings must be included on each line of your notional journal entry. Complete a ‘quick estimate’ in the space provided.  

Question 2 continued:

(b) Refer back to your answer for (a) and determine the amount at which the investment asset will be measured at, after being equity accounted for, in the financial statements as at 31 March 2019. Show your workings.

Question 3    

Desla Ltd finalised their financial statements for the year ended 30 June 2019 and authorised them for issue on 23 August 2019. The new managing director is unsure about the treatment of the following eight material events and has asked for your professional advice.

(i) 20 June 2019 – An error was discovered in the measurement of cash and accounts payable due to an omitted transaction. The omitted transaction was for $640 000.

(ii) 20 July 2019 – The directors declared a final dividend for the year ended 30 June 2019 of 10 cents per share. The total dividend payable was $450 000.

(iii) 24 July 2019 – A fire occurred at a Desla Ltd factory in May 2019, and some machinery was damaged as a result. No impairment loss related to the fire had been recognised in the financial statements as at 30 June 2019.  It has now been assessed that an impairment loss of $300 000 should be recognised for the damaged machinery. Machinery is measured using the cost model.

(iv) 1 August 2019 – At the 30 June 2019 balance date, the general ledger inventory account included items of inventory measured at a cost of $600 000. On 1 August 2019, it is discovered that due to the factory fire damage in May, the net realisable value for these items of inventory is $400 000.

(v) 2 August 2019 – GreenTech Ltd, a significant supplier of Desla Ltd, initiated legal proceedings against Desla Ltd concerning a breach of contract; the breach of contract happened after the 30 June 2019 balance date. Desla Ltd is being sued for $320 000. A lawyer has suggested the likelihood of paying this amount is “less than probable.”