Company Accounting 9th Edition Solutions PDF

Tutorial Week 2 Homework
Chapter 3: Company Operations

CASE STUDIES
Case Study 4:
CLEARSAILING LTD
A.
Currently, there is no Australian accounting standard to provide accounting

policies or guidance to deal with accounting for advertising expenditure of this
kind.
Two potential accounting policies are:
(a)
expense all advertising expenditure as incurred, or
(b)
capitalise all advertising expenditure (i.e. treat the costs as an asset).
B.
AASB 108, paragraph 10 states that, in the absence of an Australian accounting

standard, management shall use its judgement in developing and applying an
accounting policy that results in information that is both relevant to the
economic decision making needs of users and is reliable, i.e. provides a faithful
representation of the entitys financial position and performance, as well as
being free from bias and complete. Paragraph 11 requires management to refer
to the accounting standards of other bodies dealing with similar and related
issues and the definitions, recognition criteria and measurement concepts
contained in the conceptual framework when choosing between competing
accounting policies.
D.
Students could select either policy the key issue is whether or not such
expenditure results in the creation of an asset as per the Conceptual
Frameworks definition. If so, the expenditure should be capitalised. If not, the
expenditure should be expensed. Students should provide valid arguments to
support their choice of accounting policy. In this case, we would argue against
capitalisation as the main purpose of the board is to show a higher profit in the
current year, i.e. this is not a faithful representation of the entitys financial
position or performance.
Jeffreys View (sometimes accountants disagree with each other)

Advertising that is prepaid e.g. 3 months of television commercials, might be
recognised as an asset.But advertising costs should otherwise not be recognised as an
asset. Subsequent expenditure on brands (i.e., advertising) should always be
recognised in profit or loss as incurred. This is because such expenditure cannot be
distinguished from expenditure to develop the business as a whole. (reference AASB
138 para 20)
PRACTICE QUESTIONS
RACTICE QUEST
IONS
QUESTION 3.11
PANSY LTD
A.
Statement of Profit or Loss and Other Comprehensive Income
For year ended 30 June 2014
Income:
Sales
Less sales returns
Interest revenue
Total revenues
Expenses:
Selling expenses
Cost of sales
Other selling expenses
Salaries and wages
Total selling expenses
Administrative expenses
Financial expenses
Interest expense
Total expenses
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income for the year
$1 600 000
65 000
$1 535 000
20 000
1 555 000
850 000
125 000
150 000
1 125 000
262 000
56 500
1443 500
111 500
65 000
$46 500
0
$46 500

B.
-/-/14
30/6/14
30/6/14
30/6/14
Interim div paid

Final div declared
Transfer to general
reserve
Balance c/d
Retained Earnings
100 000 1/7/13
Balance
150 000 30/6/14
P or L Summary
25 000 30/6/14
Transfer from
revaluation surplus
85 000
360 000
1/7/14
Balance b/d
263 500
46 500
50 000
360 000
85 000
Opening balance of retained earnings = $38 500 add back dividends paid and declared
during the year i.e. $100 000 + 150 000 (which have been deducted from the retained
earnings) less $50 000 transfer from revaluation surplus (which is included in the $38
500) and plus $25 000 transfer to general reserve (which is included in the $38 500) =
$263 500
PANSY LTD
Statement of Changes in Equity
for the year ended 30 June 2014
$46 500
Retained earnings:
Balance at 1 July 2013
Profit for the period
Transfer from revaluation surplus
Interim dividend paid
Final dividend declared
Transfer to general reserve
Balance at 30 June 2014
$263 500
46 500
50 000
(100 000)
(150 000)
(25 000)
$85 000
Share capital:
$200 000
$200 000
Other reserves:
Revaluation surplus
Transfer to retained earnings
General reserve
Transfer from retained earnings
70 000
(50 000)
20 000
$0
25 000
$25 000

C.
PANSY LTD
Statement of Financial Position
as at 30 June 2014
Current assets
Cash
Inventory
Accounts receivable
Total current assets
Non-current assets
Land
Plant and equipment
Accumulated depreciation
Total non-current assets
Total assets
Current liabilities
Accounts payable
Dividend payable
Mortgage loan
Current tax liability
Total current liabilities
Non-current Liabilities
Mortgage loan
Total non-current liabilities
Total liabilities
Net assets
$117 000
85 000
180 000
382 000
200 000
250 000
(37 000)
213 000
413 000
795 000
50 000
150 000
50 000
65 000
315 000
150 000
150 000
465 000
$330 000
Equity
Share capital
Revaluation surplus
General reserve
Retained earnings
Total equity
$200 000
20 000
25 000
85 000
$330 000
Chapter 12: Disclosure: Legal requirements and accounting

policies
REVIEW QUESTIONS
15. What is the difference between the two types of events occurring after the
end of the reporting period? Is their accounting treatment identical?
Events occurring after the end of the reporting period are defined in AASB 110 as
those events, both favourable and unfavourable, that occur between the end of the
reporting period and the date when the financial statements are authorised for issue.
There are two types of events described in AASB 110:
adjusting events after the end of the reporting period which provide evidence
of conditions that existed at end of the reporting period (e.g. the settlement of a
court case after the end of the reporting period that confirms the company had
a present obligation at the end of the reporting period)
non-adjusting events after the end of the reporting period are events that are
indicative of conditions that arose after the end of the reporting period (e.g. a
flood or fire after the end of the reporting period that destroys a companys
building and plant).
The treatment in the financial statements is different in both cases. Paragraph 8 of

AASB 110 requires the financial effect of the adjusting events to be reflected in the
financial statements prepared at the end of the reporting period, i.e. an adjustment
must be made to the financial statements before publication.
AASB 110, paragraph 21 requires material non-adjusting events to be disclosed by
way of note to the financial statements.
Chapter 13 Disclosure: presentation of financial statements

PRACTICE QUESTIONS
QUESTION 13.14
BLACK HOLE LTD
[Comparative information must be disclosed in respect of the previous period for all
amounts reported in the financial statements in accordance with ED 213 paragraph
38. However this information is not provided in the question].
A.
BLACK HOLE LTD
Statement of Profit or Loss and Other Comprehensive Income
Sales revenue
Cost of sales
Gross profit
Other income*
Administrative expenses**
Other expenses
Finance costs
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Items that will not be reclassified to profit or loss
Gain on revaluation of land
Gain on revaluation of buildings
Income tax relating to items not reclassified
Other comprehensive income for the year, net of tax
$ 825 000
(450 000)
375 000
6 000
(236 300)
(10 000)
(28 700)
106 000
(50 400)
55 600
25 000
30 000
(16 500)
38 500
$ 94 100
Workings:
*Other income:
Interest
Dividends
** Administrative expenses:
Administrative expenses
Less Interest expense
$ 2 500
3 500
6 000
$ 265 000
(28 700)
236 300
2

B.
BLACK HOLE LTD
Statement of Financial Position
as at 30 June 2015
ASSETS
Current asets
Cash and cash equivalents
Trade and other receivables*
Inventories
Total current assets
Non-current assets
Deferred tax asset
Property, plant and equipment**
Goodwill***
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables****
Short-term borrowings*****
Current portion of long-term borrowings
Current tax payable
Short-term provisions
Total current liabilities
$ 500
52 200
87 700
140 400
9 800
780 000
95 000
884 800
$ 1 025 200
$ 82 300
149 200
50 000
52 100
18 000
351 600
Non-current liabilities
Long-term borrowings******
Deferred tax liability
Long-term provisions
Total non-current liabilities
Total liabilities
200 000
18 400
16 200
234 600
$ 586 200
Net assets
$ 439 000
EQUITY
Share capital
Reserves
Retained earnings
Total equity
$ 200 000
110 000
129 000
$ 439 000
Workings:
*Trade and other receivables:
Accounts receivable
Allowance for doubtful debts
Prepaid insurance
**Property, plant and equipment:
Land
Buildings
Plant and equipment
***Goodwill:
Goodwill
Accumulated impairment
****Trade and other payables:

Interest payable
Accounts payable
Dividend payable
***** Short-term borrowings:

Bank overdraft (at call)
7% Debentures
******Long-term borrowings:
Mortgage loan
Less instalment payable 1 March 2016
$ 58 000
(12 800)
7 000
52 200
$ 220 000
380 000
$ 222 500
(42 500)
180 000
780 000
$ 105 000
(10 000)
95 000
$ 2 800
69 500
10 000
82 300
$ 69 200
80 000
149 200
$ 250 000
(50 000)
200 000
C.
BLACK HOLE LTD
Statement of Changes in Equity

Total comprehensive income
for the year
Issue of share capital
Dividend paid ordinary
Dividend declared ordinary
Transfer to general reserve
Share
capital
$ 100 000
General
Reval. Retained
Total
reserve surplus earnings
- $ 46 500 $ 128 400 $ 274 900
100 000
$ 200 000
- 38 500
55 600
94 100
- 100 000
- (20 000) (20 000)
- (10 000) (10 000)
25 000
- (25 000)
$ 25 000 $ 85 000 $ 129 000 $ 439 000
Dividends: 30 cents per share (assuming shares issued during the year entitled to
dividends paid and declared).
Chapter 6: Accounting for income tax

REVIEW QUESTIONS
1.
Outline the different treatments for accounting and tax purposes of the
following items:
(a) depreciation of non-current assets
(b) goodwill
(c) long-service leave payable
(d) allowance for doubtful debts
(e) entertainment costs
(f) prepaid insurance
(g) warranties liability
(h) rent received in advance.
(a) The accounting treatment for depreciation as per AASB 116 is to allocate the
depreciable amount of the asset on a systematic basis over the assets useful life.
The tax treatment is based on a set of rates provided by the tax office which is
usually different to the accounting depreciation rates.
(b) Purchased goodwill is for accounting purposes recognised and then tested for
impairment. For tax purposes, write-downs of goodwill are not allowed as a
deduction. Note AASB 112 provides an exclusion in this regard to temporary
differences. (See 6.4.3 of text).
(c) Long service leave is an accounting expense that is recognised as it is incurred,
however, for tax purposes it is only recognised as an allowable deduction when
the leave is actually taken by an employee and paid in cash.
(d) Doubtful/bad debts are recognised as an accounting expense when the likelihood
of recovering a debt is doubtful, whereas for tax purposes the deduction will only
be allowed when the debt is written out of the accounting records as bad.
(e) Entertainment expenses are an accounting expense, but for tax purposes are not an
allowable deduction.
(f) Prepaid insurance is recognised as an asset for accounting purposes and then
charged to expense over time. The tax treatment is to record the amount prepaid
as an allowable deduction immediately.
(g) Warranty expenses are recognised on the sale of the inventory for accounting
purposes, whereas for tax purposes the deduction is not allowed until the
inventory has been returned to be fixed and a warranty cost has been incurred.
(h) Rent received in advance is regarded as a liability for accounting purposes and
then recorded as income (revenue) over time. The common tax treatment is to
record the amount received in advance as taxable income immediately.
1
PRACTICE QUESTIONS
QUESTION 6.14
BARTLE FRERE LTD
A.
Taxable Income
for year ended 30 June 2014
Accounting profit before tax
Add
Bad debts expense
Depreciation expense plant
Long service leave
Annual leave
Office supplies used
Entertainment
Depreciation buildings
Rent received in advance
$600 000
60 000
50 000
45 000
30 000
15 000
18 000
8 000
35 000
861 000
Deduct
Rent revenue
Government grant received
Depreciation expense of plant for tax
Bad debts written off
Long service leave paid
Annual leave paid
Office supplies paid for
30 000
10 000
75 000
45 000
30 000
20 000
18 000
228 000
633 000
$189 900
Taxable income
Current tax liability = 30% x $633 000
The appropriate journal entry is:

Income Tax Expense
Current Tax Liability
Dr
Cr
189 900
189 900

Workings:
Allowance for Doubtful Debts
45 000
Beginning balance
55 000
Expense
100 000
40 000
60 000
100 000
Revenue
Ending balance
Rent Received in Advance

30 000
Beginning balance
25 000
Cash
55 000
20 000
35 000
55 000
Cash
Ending balance
Long Service Leave Payable

30 000
Beginning balance
60 000
Expense
90 000
45 000
45 000
90 000
Cash
Ending balance
Annual Leave Payable

20 000
Beginning balance
40 000
Expense
60 000
30 000
30 000
60 000
Accs Receivable
Ending balance
Plant for taxation purposes:

Carrying amount at 1 July 2013
Depreciation
Tax base at 30 June 2014
($500 000 315 000)
$185 000
(75 000)
110 000

B.
Carrying
Amount
$
Assets
Cash
Inventory
Receivables
Supplies
Plant
Buildings
Goodwill
Liabilities
A/cs payable
LSL payable
Annual leave
payable
Rent in adv
Total
temporary
differences
Excluded
differences
Net
temporary
differences
Deferred tax
liability
Deferred tax
asset
Beginning
balances
Movement
during year
Adjustment
BARTLE FRERE LTD

Calculation of deferred tax
as at 30 June 2014
Taxable Deductble Tax Base
Amount
Amount
$
Taxable
Temp Diffs
Deductible
Temp
Diffs
$
80 000
170 000
445 000
25 000
240 000
152 000
70 000
(170 000)
(0)
(25 000)
(240 000)
(152 000)
(70 000)
170 000
55 000
0
110 000
0
0
80 000
170 000
500 000
0
110 000
0
0
55 000
290 000
60 000
40 000
0
0
(60 000)
(40 000)
290 000
0
0
60 000
40 000
25 000
(25 000)
25 000
25 000
130 000
152 000
70 000
377 000
180 000
222 000
155 000
180 000
46 500
54 000
(38 100)
(40 500)
-
8 400Cr
13 500 Dr
The journal entry required for the year ended 30 June 2014 would be:
Deferred Tax Asset
Deferred Tax Liability
Income Tax Exp/Income
Dr
Cr
Cr
13 500
8 400
5 100

C.
As a result of a change in the tax rate, the company would need to restate the
beginning balances of the deferred tax asset and liability as follows:
Deferred Tax Asset
*$40 500 x 5/30
**$38 100 x 5/30
Dr
Cr
Cr
*6 750
**6 350
400
The current tax liability would now be recorded by the following entry (assuming that
the entry had not been made previously)
Income Tax Expense
Current Tax Liability
$633 000 x 35%
Dr
Cr
221 550
221 550
The entry from the second worksheet would now appear as follows, as the change in
tax rate appears as a movement at the bottom of the worksheet:
155 000
Net
temporary
differences
Deferred tax
liability
(35%)
Deferred tax
asset (35%)
Beginning
balances
Movement
during year
Adjustment
Deferred Tax Asset

180 000
54 250
63 000
Dr
Cr
Cr
(38 100)
(40 500)
(6 350)
(6 750)
9 800Cr
15 750 Dr
15 750
9 800
5 950
Chapter 5 Fair value measurement

CASE STUDIES
Case Study 1
1. Determine the asset or liability that is the subject of measurement:
In this case, there are 2 assets that could be measured at fair value, namely land
and factory. An alternative would be to consider the land and the factory as a
single asset.
2. Determine the valuation premise consistent with the highest and best use
The land could be sold for residential purposes for an estimated $1m. Given the
cost to demolish the existing factory of $100 000, the land could be sold for
residential purposes for $900 000. Measuring fair value in this fashion assumes a
specific use and is based on an in-exchange valuation premise as the land is
considered on a stand-alone basis.
The land and factory could also be sold as a package for use by market
participants in conjunction with other assets. The factory has been depreciated by
the reporting entity to half its original cost. Given the cost to build a new factory
is $780 000, a depreciated replacement cost of the existing factory could be said to
be $390 000. However as the factory could presumably be viably built on a
cheaper block of land ie one not usable for residential purposes, it is unlikely that
there is a market for the land and the factory on an in-use basis. A market
participant would be forced to pay the $900 000 for the factory and the land given
the alternative use of the land for residential purposes.
3. Determine the most advantageous market for the assets
The most advantageous market would appear to be the selling of the property for
residential purposes.
4. Determine the valuation technique
The market approach would be the appropriate valuation technique given that
there are observable market inputs in relation to the selling prices of similar
properties.
The land has a fair value based on market prices for similar properties of $900 000.
The factory has a zero fair value as a separate asset.
Example 2 of the Illustrative Examples considers a similar situation to this case.
The highest and best use of the land is determined by comparing:
(i) the value of the land as a vacant block for residential purposes which would
include the factory at a zero fair value, and
(ii) the value of the land as currently developed for industrial use which would
include the factory as an ongoing asset.

The highest and best use is the higher of these two values.
If (i) is chosen, then the factory has a zero fair value and no subsequent depreciation
would be determined.
If (ii) is chosen, then it would be necessary to determine the fair value of the land
separate from the fair value of the factory in order to depreciate the factory. It could
be argued that that the fair value of the factory equals the difference between the fair
value of the land for residential purposes and the fair value of the combined assets.
Chapter 7: Property, plant and equipment

PRACTICE QUESTIONS
QUESTION 7.1
SYDNEY LTD
31 December 2012
Depreciation expense Machine A
(1/2 x 10% x $300 000)
Dr
Cr
15 000
Depreciation expense Machine B

(1/2 x 10% x $200 000)
Dr
Cr
10 000
Machine A
Machine B
Cost
Accum depn
Fair value
Increment
300 000
135 000
165 000
180 000
15 000
Accumulated depreciation Machine A

Machine A
(Writing the asset down to carrying amount)
15 000
10 000
Cost
Accum depn
200 000
40 000
160 000
155 000
5 000
Fair value
Decrement
Dr
Cr
135 000
Machine A
Dr
Gain on revaluation of machinery (OCI) Cr
(Revaluation of asset)
15 000
135 000
15 000
Income tax expense gain on

revaluation of asset (OCI)
(Tax-effect of revaluation)
Dr
Cr
4 500
Gain on revaluation of machinery (OCI)

Income tax expense (OCI)
Dr
Cr
15 000
4 500
4 500

Asset revaluation surplus Machine A Cr
(Accumulation of net revaluation gain in equity)
10 500
Accumulated depreciation Machine B

Machine B
(Writing the asset down to carrying amount)
Dr
Cr
40 000
Loss revaluation decrement (P/L)

Machine B
(Revaluation of machine from $200 000
to $155 000)
Dr
Cr
5 000
Depreciation expense Machine A

(1/6 x x $180 000)
Dr
Cr
15 000
Depreciation expense Machine B

(1/5 x x $155 000)
Dr
Cr
15 500
Machine A
Carrying amount
Fair value
Decrement
Machine B
Carrying amount
Fair value
Decrement
40 000
5 000
30 June 2013
$
165 000
163 000
2 000
15 000
15 500
$
139 500
136 500
3 000
Accumulated depreciation Machine A

Machine A
(Writing down to carrying amount)
Dr
Cr
15 000
Loss on revaluation of machinery (OCI)

Machine A
(Revaluation downwards)
Dr
Cr
2 000

Dr
Cr
(Tax-effect of revaluation decrement on asset
previously revalued upwards)
600
Asset revaluation surplus Machine A

Dr
Dr
Loss on revaluation of machinery (OCI) Cr
(Reduction in accumulated equity due
to revaluation decrement)
1 400
600
15 000
2 000
600
2 000
Accumulated depreciation Machine B

Machine B
(Writing down to carrying amount)
Dr
Cr
15 500
Loss revaluation decrement

Machine B
(Writing down to fair value)
Dr
Cr
3 000
15 500
3 000
B: Basis for change in accounting policy

Refer to AASB 8 paragraph 9.
Discuss the cost basis method and the fair value method in relation to the relevance and
reliability of information.
Current information is generally more relevant than past information. Determination of cost is
generally more reliable than determination of fair value.
Discuss the trade-off between relevance and reliability, that is, as information becomes less
reliable it also loses its relevance. A fair value measure may, because of its timeliness, be
more relevant but if the measure becomes more unreliable, the relevance of the information
decreases.
Chapter 10 Business Combinations

PRACTICE QUESTIONS
QUESTION 10.13
SWEETLIP LTD WAREHOU LTD
Acquisition Analysis
Net fair value of identifiable assets and liabilities acquired:
Accounts receivable
Land
Buildings
Farm equipment
Irrigation equipment
Vehicles ($172 000 - $48 000)
$125 000
840 000
550 000
364 000
225 000
124 000
2 228 000
80 000
$2 148 000
Accounts payable
Consideration transferred:
Shares:
Cash:
Land:
Goodwill
100 000 x $14 per share

$480 000 +$5 500 +$150 000 - $20 000
$1 400 000
615 500
220 000
$2 235 500
$2 235 500 - $2 148 000 =
$87 500
The journal entries in Sweetlip Ltd are:
Land
Gain
(Re-measurement as part of consideration
transferred in a business combination)
Accounts receivable
Land
Buildings
Farm equipment
Irrigation equipment
Vehicles
Goodwill
Accounts payable
Share capital
Payable to Warehou Ltd
Land
(Acquisition of net assets of Warehou Ltd)
Dr
Cr
140 000
140 000
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Cr
Cr
Cr
Cr
125 000
840 000
550 000
364 000
225 000
124 000
87 500
80 000
1 400 000
615 500
220 000
Payable to Warehou Ltd

Cash
(Payment of purchase consideration)
Dr
Cr
615 500
Acquisition-related expenses
Cash
(Payment of acquisition-related costs)
Dr
Cr
25 000
Share capital
Cash
(Share issue costs)
Dr
Cr
18 000
615 500
25 000
18 000
Chapter 11 Impairment of assets

PRACTICE QUESTIONS
QUESTION 11.2
NARRABRI LTD
The carrying amount of the assets of the Toy Train Division is $500 000. If the recoverable
amount is $423 000, then there is an impairment loss of $77 000.
The impairment loss is firstly used to write off the goodwill - $50 000. The balance of the loss
- $27 000 is allocated across the other assets, except for inventory assuming it is recorded at
the lower of cost and net realisable value:
Factory
Brand
Carrying
Amount
Proportion
Allocation
of Loss
Net Carrying
Amount
250 000
50 000
300 000
5/6
1/6
22 500
4 500
27 000
227 500
45 500
The journal entry to record the impairment loss is:

Impairment loss
Goodwill
Accumulated depreciation and
impairment losses factory
Accumulated amortisation and
impairment losses brand
(Allocation of impairment loss)
Dr
Cr
77 000
50 000
Cr
22 500
Cr
4 500
Chapter 16 Controlled entities: the consolidation method

REVIEW QUESTIONS
10. Why are some adjustment entries in the previous periods consolidation worksheet
also made in the current periods worksheet?
The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not
affect the underlying financial statements or the accounts of the parent or the subsidiary.
Hence, if last years profits were required to be adjusted on consolidation, then potentially
retained earnings needs to be adjusted in the current period.
Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in
the consolidation worksheet for each year that the land remains in the subsidiary. The entry
does not change from year to year. Again the reason is that the adjustment to the carrying
amount of the land is only made in a worksheet and not in the actual records of the subsidiary
itself.
PRACTICE QUESTIONS
QUESTION 16.3
PYXIS LTD GEMINI LTD
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Gemini Ltd
Consideration transferred
Goodwill
=
=
=
($100 000 + $50 000 + $36 000) (equity)

+$8 000 (1 30%) (inventory)
+ $15 000 (1 30%) (land)
+ $10 000 (1 30%) (equipment)
$209 100
$218 500
$9 400
1. Worksheet entries at 1 July 2013

Business combination valuation entries
Inventory
Business combination valuation reserve
Dr
Cr
Cr
8 000
Land
Dr
Cr
Cr
15 000
Accumulated depreciation - equipment

Equipment
Dr
Cr
Cr
Cr
50 000
Goodwill
Dr
Cr
9 400
Dr
Dr
Dr
Dr
Cr
36 000
100 000
50 000
32 500
2 400
5 600
4 500
10 500
40 000
3 000
7 000
19 400
Pre-acquisition entries
Retained earnings (1/7/13)
Share capital
General reserve
Shares in Gemini Ltd
218 500
2. Worksheet entries at 30 June 2014

Business combination valuation entries
The entries at 1 July 2013 are affected by:
- the sale of the inventory
- the depreciation of the equipment
Cost of sales
Income tax expense
Transfer from business combination
valuation reserve
Dr
Cr
8 000
Cr
Land
Dr
Cr
Cr
15 000
Accumulated depreciation - equipment

Equipment
Dr
Cr
Cr
Cr
50 000
Depreciation expense
(10% x $10 000)
Dr
Cr
1 000

Income tax expense
(30% x $1 000)
Dr
Cr
300
Goodwill
Dr
Cr
9 400
2 400
5 600
4 500
10 500
40 000
3 000
7 000
1 000
300
9 400
Pre-acquisition entries
The pre-acquisition entries are affected by:
- transfer from general reserve $25 000
- transfer from business combination valuation reserve
Share capital
General reserve
Shares in Gemini Ltd
Dr
Dr
Dr
Dr
Cr
36 000
100 000
50 000
32 500
Transfer from general reserve

General reserve
Dr
Cr
25 000
Transfer from business comb. valuation reserve

Dr
Cr
5 600
218 500
25 000
5 600
Chapter 17 Consolidated financial statements: intragroup

transactions
REVIEW QUESTIONS
1. Why is it necessary to make adjustments for intragroup transactions?
The consolidated financial statements are the statements of the group, an economic
entity consisting of the parent and its subsidiaries.
The consolidated financial statements then can only contain profits, assets and liabilities
that relate to parties external to the group.
Adjustments must then be made for intragroup transactions as these are internal to the
economic entity, and do not reflect the effects of transactions with external parties.
This is also consistent with the entity concept of consolidation, which defines the group
as the net assets of the parent and the net assets of the subsidiary. Transactions between
these parties must then be adjusted in full as both parties are within the economic entity.
PRACTICE QUESTIONS
QUESTION 17.2
ADDISON LTD ERIN LTD
(a)
(b)
(c)
(d)
Sales revenue
Cost of sales
Inventory
Dr
Cr
Cr
15 000
Deferred tax asset

Income tax expense
(30% x $5 000)
Dr
Cr
1 500
Sales revenue
Cost of sales
Dr
Cr
15 000
Sales revenue
Cost of sales
Inventory
Dr
Cr
Cr
15 000
Deferred tax asset

Income tax expense
(30% x $2 500)
Dr
Cr
750

Income tax expense
Cost of sales
Dr
Dr
Cr
4 200
1 800
10 000
5 000
1 500
15 000
12 500
2 500
750
6 000
(e)
Proceeds on sale of land

Land
Carrying amount of land sold
Dr
Dr
Cr
20 000
5 000
Land
Dr
Cr
5 000
Income tax expense

(30% x $5 000)
Dr
Cr
1 500
Loan from Erin Ltd

Loan to Addison Ltd
Dr
Cr
12 000
Proceeds on sale of plant

Carrying amount of asset sold
Plant
Dr
Cr
Cr
12 000
Gain on sale of plant

Asset
Dr
Cr
2 000
Deferred tax asset

Income tax expense
Dr
Cr
600
Dr
Cr
200
Income tax expense

Deferred tax asset
Dr
Cr
60
Sales revenue
Cost of sales
Machinery
Dr
Cr
Cr
6 000
Deferred tax asset

Income tax expense
Dr
Cr
600
Dr
Cr
200
Income tax expense

Deferred tax asset
Dr
Cr
60
25 000
OR
Loss on sale of land
(f)
5000
1 500
12 000
10 000
2 000
OR
(g)
2000
600
200
60
4 000
2 000
600
200
60
TUTORIAL 11 Homework Solutions

Chapter 19: Consolidation: other issues
REVIEW QUESTIONS
3. Why does the indirect NCI receive a share of only post-acquisition equity?
Assume:
80%
A Ltd
60%
B Ltd
C Ltd
A Ltd 80%
DNCI 20%
A Ltd 48%
DNCI 40%
INCI 12%
The DNCI in B Ltd receives a share of the whole of the equity of B Ltd which
includes equity relating to the asset Shares in C Ltd. This asset reflects the assets of
C Ltd that were on hand in C Ltd at the date B Ltd acquired its shares in C Ltd. The
pre-acquisition equity of C Ltd also relates to these assets. As the DNCI receives a
share of the equity of B Ltd relating to these assets, and as the DNCI in B Ltd is the
same party as the INCI in C Ltd, to give the DNCI a share of all the equity of B Ltd as
well as the INCI in C Ltd getting a share of the pre-acquisition equity of C Ltd would
double-count the share of equity to the NCI. As the investment account Shares in C
Ltd only relates to the pre-acquisition equity of C Ltd, the INCI is then entitled to a
share of the post-acquisition equity of C Ltd.
PRACTICE QUESTION
Exercise 19.3 Consolidation worksheet entries, multiple subsidiaries
LAOS LTD MALDIVES LTD MALAYSIA LTD
70%
Laos Ltd
60%
Maldives Ltd
DNCI
30%
Malaysia Ltd
DNCI 40%
INCI
18%
Acquisition analysis: Laos Ltd Maldives Ltd

At 1 July 2009:
and liabilities of Maldives Ltd
Net fair value acquired
Goodwill
= $100 000 share capital+ $40 000 ret. profits

= $140 000
= 70% x $140 000
= $98 000
= $100 000
= $2 000
Acquisition analysis: Maldives Ltd Malaysia Ltd

At 1 July 2009:
and liabilities of Malaysia Ltd
Goodwill
= $80 000 share capital + $30 000 ret. profits

= $110 000
= 60% x $110 000
= $66 000
= $70 000
= $4 000
STAGE 1 THE ACQUISITION RELATED JOURNALS

1. Pre-acquisition entry 30 June 2012
Share capital
Goodwill
Shares in Maldives Ltd
Dr
Dr
Dr
Cr
28 000
70 000
2 000
100 000
2. Pre-acquisition entry 30 June 2012

Dr
18 000
Share capital
Dr
48 000
Goodwill
Dr
4 000
Shares in Malaysia Ltd
Cr
(Note that there are no fair value entries required in this example)
70 000
3
STAGE 2 THE INTRAGROUP TRANSACTIONS AND BALANCES
3. Dividends paid
Maldives Ltd: 70% x $10 000 = $7 000
Dividend revenue
Dividend paid
Dr
Cr
7 000
Dr
Cr
3 000
7 000
Malaysia Ltd: 60% x $5 000 = $3 000

Dividend revenue
Dividend paid
3 000
4. Sale of inventory: Maldives Ltd Laos Ltd

Sales
Dr
Cr
Cr
20 000
Cost of sales
Inventory
Deferred tax asset
Income tax expense
Dr
Cr
750
17 500
2 500
750
5. Sale of motor vehicle: Malaysia Ltd Maldives Ltd

Proceeds on sale of motor vehicle
Carrying amount of vehicle
Motor vehicle
Dr
Cr
Cr
25 000
Deferred tax asset

Income tax expense
Dr
Cr
600
(30% x $2 000)
Dr
Cr
600
Income tax expense

Deferred tax asset
Dr
Cr
180
23 000
2 000
600
6. Depreciation
600
180
4
STAGE 3 THE NCI
Step 1 date of acquisition 1/7/09
7. NCI 30% share of equity in Maldives Ltd at 1/7/09

Share capital
NCI
Dr
Dr
Cr
12 000
30 000
42 000
8. NCI 40% share of equity in Malaysia Ltd at 1/7/09

Share capital
NCI
Dr
Dr
Cr
12 000
32 000
44 000
Step 2 from date of acquisition 1/7/09 to beginning of current year 30/6//11
9. NCI share of equity in Maldives Ltd: 1/7/09 30/6/11

NCI
(30% ($46 000 - $40 000))
Dr
Cr
1 800
1 800
10. NCI share of equity in Malaysia Ltd: 1/7/09 30/6/11

NCI
(DNCI 40% ($25 000 - $30 000))
NCI
(INCI 18% ($25 000 - $18 000/0.6))
Dr
Cr
2 000
Dr
Cr
900
2 000
900
Note retained earnings decreases over the period in this example instead of increasing.
Note there are no eliminations of adjustment entries in the acquisition stage or intra-group
stage in this example where we have adjusted or eliminated post-acquisition profits of the
subsidiaries up until 30/06/11.
5
Step 3 the current year 1/07/11 to 30/06/12
11. NCI share of equity in Maldives Ltd: 1/7/11 30/6/12

NCI share of profit
NCI
(30% x $12,250)
Dr
Cr
Maldives Book profit

Less: Intragroup dividend revenue
Less: Unrealised profit sale of inventory after tax
Maldives adjusted profit
NCI
Dividend paid
(30% x $10 000)
Dr
Cr
3 675
3 675
17 000
(3 000)
(1 750)
12,250
See journal 3
See journal 4
3 000
3 000
12. NCI share of equity in Malaysia Ltd: 1/7/11 30/6/12

NCI share of profit
NCI
(40% x $16 020)
Dr
Cr
6 408
NCI share of profit

NCI
(18% x $16 020)
Dr
Cr
2 884
Malaysias Book profit

Less:Unrealised profit sale of motor vehicle after tax
Add: Depreciation adjustment after tax
Malaysias adjusted profit
NCI
Dividend paid
(40% x $5 000)
Dr
Cr
6 408
2 884
17 000
(1,400)
420
16 020
See journal 5
See journal 6
2 000
2 000
Chapter 20: Accounting for investments in associates
REVIEW QUESTIONS
10. Explain why equity accounting is sometimes referred to as one-line consolidation.
Equity accounting is similar to consolidation in that:
- both recognise the investors share of post-acquisition equity in the income statement.
The consolidation method recognises the MI share as well, but divides equity into
parent and MI share.
- both adjust for the effects of inter-entity transactions
- in the income statement, the share of profits/losses of an associate is similar to the
parents share of the post-acquisition equity of a subsidiary however, under the equity
method this is not taken against individual accounts but there is a one-line total.
- in the balance sheet, the investment in the associate is adjusted for the increase in the
investors share of the net assets of the associate similar to the parents share of the
net assets of a subsidiary. However, under equity accounting, there is no recognition of
the individual assets and liabilities of the associate, rather, there is a one-line
recognition.
PRACTICE QUESTIONS
Question 20.1
ACOUSTIC LTD BASS LTD
30%
Acoustic Ltd
At 1 July 2011:
and liabilities of Bass Ltd
Cost of investment
Goodwill
Bass Ltd
=
=
=
=
=
$150 000
30% x $150 000
$45 000
$50 000
$5 000
A. Journal Entries in the Accounts of Acoustic Ltd

1 July 2011
2011 2012
Investment in Bass Ltd

Cash/Payable
(Acquisition of shares in Bass Ltd)
Dr
Cr
50 000
Cash
Dr
Cr
24 000

Share of profit or loss of
associates
(Recognition of profit in Bass Ltd:
30% x $50 000)
Dr
Cr
15 000
Cash
Dr
Cr
4 500

(Dividend received from Bass Ltd: 30% x
$80 000)
30 June 2012
2012 2013

(Dividend received: 30% x $15 000)
30 June 2013
2013 2014
50 000
24 000
15 000
4 500

associates
30% x $45 000)
Dr
Cr
13 500
Cash
Dr
Cr
3 000
Dr
Cr
12 000

(Dividend from associate:
30% x $10 000)
Investment in Bass Ltd *
associates
30% x $40 000)
13 500
3 000
12 000
Question 20.1 (contd)

B. Consolidation Worksheet Entries
30 June 2012:
Share of profit or loss of associates
(30% x $50 000
Dr
Cr
15 000
Dividend revenue
(30% x $80 000
Dr
Cr
24 000

(30% x $(30 000))
Dr
Cr
9 000

Share of profits or losses of associates
(30% x $45 000)
Dr
Cr
13 500
Dividend revenue
(30% x $15 000)
Dr
Cr
4 500

(30% [$30 000 + $(30 000)])
Dr
Cr

(30% x $40 000)
Dr
Cr
12 000
Dividend revenue
(30% x $10 000)
Dr
Cr
3 000
15 000
24 000
30 June 2013:
9 000
13 500
4 500
30 June 2014:
12 000
3 000
Chapter 4 - Fundamental concepts of corporate governance
REVIEW QUESTIONS
6.
How can accountants contribute to effective governance?
Accountants must produce timely, accurate and reliable reports of the true position of
the company.
The accounting function will need to provide directors (as well as senior managers)
with insights into the strategic factors at play in their organisations.
Auditors play a key role in the external flow of information that they provide and the
expectation that they will be independent and report breaches.
12.
What are the ASX Corporate Governance Councils Corporate

governance principles and recommendations and how do they operate?
On 31 March, 2003 the ASX Corporate Governance Council released a 75 page

document titled Principles of good corporate governance and best practice
recommendations.
In August 2007, the ASX Corporate Governance Council issued a revised document
titled Corporate governance principles and recommendations (the Principles),
effective the first financial year beginning on or after 1 January 2008. The ASX noted
that there were no drastic or wholesale changes to the corporate governance principles
issued in 2003. Details of the revised Principles are available from:
According to the
http://www.asx.com.au/about/corporate_governance/index.htm
ASX, Best practice has been removed from the title and the text of the document .
. . to eliminate any perception that the Principles are prescriptive and so not to
discourage companies from adopting alternative practices and if not, why not
reporting where appropriate (ASX Media Release, Revised corporate governance
principles released, 2 August 2007).
On 30 June 2010, a revised version of the 2007 document entitled Corporate
governance principles and recommendations with 2010 amendments was issued,
effective the first financial year beginning on or after 1 January 2011. Major
amendments include: (1) reporting on the processes and transparency surrounding
board selection processes and aspects of director induction set out in Principle 2; (2)
an explicit focus on diversity, particularly gender diversity and reporting on steps the
company is taking to achieve gender diversity in Principles 2 and 3; (3) guidance on
investor briefings in Principle 6; and (4) recommendations on the structure of the
remuneration committee in Principle 8.
The role of the principles is to provide guidance to companies and investors on best
practice corporate governance and to increase the transparency of a listed companys
corporate governance practices. As such, the guidance provided in the Principles is
1

not mandatory; rather, the approach of the ASX is an if not, why not approach
where companies are asked to (1) detail whether they comply with each best practice
recommendation and (2) explain why they do not comply if this is the case. The
principles are examples of hybrid regulation which are not strictly binding but
generally entail some form of sanction if they are not followed.
PRACTICE QUESTIONS
Question 20.1
ACOUSTIC LTD BASS LTD
30%
Acoustic Ltd
At 1 July 2011:
and liabilities of Bass Ltd
Cost of investment
Goodwill
Bass Ltd
=
=
=
=
=
$150 000
30% x $150 000
$45 000
$50 000
$5 000
A. Journal Entries in the Accounts of Acoustic Ltd

1 July 2011
2011 2012

Cash/Payable
(Acquisition of shares in Bass Ltd)
Dr
Cr
50 000
Cash
Dr
Cr
24 000

associates
30% x $50 000)
Dr
Cr
15 000
Cash
Dr
Cr
4 500

(Dividend received from Bass Ltd: 30% x
$80 000)
30 June 2012
2012 2013

(Dividend received: 30% x $15 000)
30 June 2013
2013 2014
50 000
24 000
15 000
4 500

associates
30% x $45 000)
Dr
Cr
13 500
Cash
Dr
Cr
3 000
Dr
Cr
12 000

(Dividend from associate:
30% x $10 000)
Investment in Bass Ltd *
associates
30% x $40 000)
13 500
3 000
12 000
Question 20.1 (contd)

B. Consolidation Worksheet Entries
30 June 2012:
(30% x $50 000
Dr
Cr
15 000
Dividend revenue
(30% x $80 000
Dr
Cr
24 000

(30% x $(30 000))
Dr
Cr
9 000

Share of profits or losses of associates
(30% x $45 000)
Dr
Cr
13 500
Dividend revenue
(30% x $15 000)
Dr
Cr
4 500

(30% [$30 000 + $(30 000)])
Dr
Cr

(30% x $40 000)
Dr
Cr
12 000
Dividend revenue
(30% x $10 000)
Dr
Cr
3 000
15 000
24 000
30 June 2013:
9 000
13 500
4 500
30 June 2014:
12 000
3 000

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Depreciation expense Machine B

Accumulated depreciation Machine A

Income tax expense gain on

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Depreciation expense Machine B

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Asset revaluation surplus Machine A

Accumulated depreciation Machine B

Loss revaluation decrement

Tutorial Week 5 Homework

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$2 235 500 - $2 148 000 =

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