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ACCT3103 Advanced Financial Accounting Lecture 4: Fair Value Adjustment - Worked examples Bill Ltd & Ben Ltd - Worked example 1 Noah Ltd & Ark Ltd - Worked example 2 Prepared by Paul J Woollard, Updated, April 2020 by Michael Russell CRICOS code 00025B On 1 July 20X7, Bill Ltd purchased all of the issued

shares of Ben Ltd for a cash payment of

$2,500,000. At that date, both companies recorded

non-current assets using the cost model. For Bill

Ltd, the recorded amounts (using the cost model)

also represented fair value. The statements of

financial position of Bill Ltd and Ben Ltd at

acquisition date are as follows:

Bill Ltd & Ben Ltd Fair Value Adjustments on consolidation: Example 1 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples 2 CRICOS code 00025B Statement of Financial Positions at 1 July 20X7 ($000) Bill Ltd Ben Ltd Recorded Recorded Fair Value Assets Cash 3,400 -- -- Accounts receivable 500 200 200 Plant – at cost 2,000 1,000 1,500 Accumulated depreciation – plant (800) (200) -- Land 500 400 600 Total Assets 5,600 1,400 2,300 Fair Value Adjustments on consolidation: Example 1 3 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Statements of Financial Position at 1 July 20X7 Bill Ltd Ben Ltd Recorded Recorded Fair Value Liabilities Accounts payable 650 120 120 Non-current borrowings 950 -- Total Liabilities 1,600 120 Net Assets 4,000 1,280 2,180 Shareholders’ Equity Issued capital 3,800 1,000 Retained earnings 200 280 Total Equity 4,000 1,280 2,180 Fair Value Adjustments on consolidation: Example 1 4 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Additional information: • At the time of its purchase on 1 July 20X5, the plant held by Ben

Ltd had an estimated useful life of 10 years with a zero residual

value, and was depreciated on a straight line method. No

adjustment to remaining life occurred as a result of the acquisition. • Assume a 30% company income tax rate Required: a) Show the general journal entry recorded by Bill Ltd to account for

its acquisition of Ben Ltd on 1 July 20X7. b) Show the consolidation journal entries required to complete

consolidated financial statements for the Bill and Ben group at 1

July 20X7. c) Show the consolidation journal entries required to complete

consolidated financial statements for the Bill and Ben group at 30

June 20X8 (and complete the consolidation worksheet). Fair Value Adjustments on consolidation: Example 1 5 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Fair Value Adjustments on consolidation: Example 1 Initial Information for Parts a) & b)

6 DOR DOA 1/07/20X7 30/06/20X8 BILL 1-Jul-X7 100% $2,500,000 BEN ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B a) Bill Ltd records the following journal to account for its acquisition of

the issued share capital of Ben Ltd: General Journal of Bill Ltd ($000) 1 July 20X7 Dr Investment in Ben Ltd 2,500 Cr Cash 2,500 Q: What entries does Ben Ltd process in its own separate books to

record its acquisition by Bill Ltd? Fair Value Adjustments on consolidation: Example 1 7 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B b) Investment analysis: Calculation of Fair Value Adjustment (FVA) Cost A/D CA FV FVA DTL 30% Land 400 - 400 600 +200

(60) Plant 1,000 (200) 800 1,500 +700 (210) Total Gross FV increase

+900 Deferred Tax Liability (270) Consolidation adjustments are required for A/D (200), FV +900 & DTL (270) Fair Value Adjustments on consolidation: Example 1 8 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B b) Investment analysis: $000 Cost of acquisition 2,500 Less FV of identifiable net assets (FVINA): Issued capital 1,000 Retained earnings 1.7.X7 280 Plus FV adjustment 900 Less deferred tax liability (30% x FVA) (270) FVINA 1,910 Goodwill (cost of acquisition> FVINA) 590 Note: Net FVA = 900 – 270 = 630 Fair Value Adjustments on consolidation: Example 1 9 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B (1) Write back accumulated depreciation against the asset Dr Accumulated Depreciation - plant 200 Cr Plant 200 (2) Undertake fair value adjustment of the land and plant Dr Plant 700 Dr Land 200 Cr Revaluation Surplus 630 Cr Deferred Tax Liability 270 Set-off of accumulated depreciation at date of acquisition, plus FVA The plant cannot have accumulated depreciation in the consolidated accounts

at the date of acquisition, as it has come into the group for the first time, and

thus has never been used by the group at that date. Fair Value Adjustments on consolidation: Example 1 (b) Consolidation Journals ($000) 1 July 20X7

10 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B (3) Elimination of investment in subsidiary against pre-acquisition

equity Dr Issued capital 1,000 Dr Retained earnings 280 Dr Revaluation Surplus 630 Dr Goodwill (balance) 590 Cr Investment in subsidiary (Ben Ltd) 2,500 Elimination of pre-acquisition equity of the subsidiary, which the new Group

has no benefit in, it being accumulated by the old shareholders of the

subsidiary pre-acquisition. Fair Value Adjustments on consolidation: Example 1 11 (b) Consolidation Journals ($000) 1 July 20X7

ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Fair Value Adjustments on consolidation: Example 1 Initial Information Part (c)

This time, there will be two sets of adjustments: 1. Repeat of initial DOA adjustments per parts b) & c);

and 2. Adjustments required in the year to DOR at 30/6/20X8 12 DOR DOA 1/07/20X7 30/06/20X8 BILL 1-Jul-X7 100% $2,500,000 BEN ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B (1) Write back accumulated depreciation against the asset Dr Accumulated Depreciation - plant 200 Cr

Plant 200 (2) Undertake fair value adjustment of the land and plant Dr Plant 700 Dr Land 200 Cr

Revaluation Surplus 630 Cr

Deferred Tax Liability 270 Exactly the same as date of acquisition – adjustments made at the date of

acquisition do not change for subsequent events, and can only be finally

removed when the subsidiary is sold out of the group or ceases to exist. Fair Value Adjustments on consolidation: Example 1 c)

Consolidation Journals ($000)

30 June 20X8 13 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B (3) Elimination of investment in subsidiary against pre-acquisition

equity Dr Issued capital 1,000 Dr Retained earnings 280 Dr Revaluation Surplus 630 Dr Goodwill 590 Cr Investment in subsidiary (Ben Ltd) 2,500 Exactly the same as date of acquisition – adjustments made at the date of

acquisition do not change for subsequent events, and can only be finally

removed when the subsidiary is sold out of the group or ceases to exist. Fair Value Adjustments on consolidation: Example 1 c)

Consolidation Journals ($000)

30 June 20X8 14 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation Journals ($000)

30 June 20X8 Calculation of depreciation charge: Original Cost $1,000,000 on 10 year straight line depreciation At DOA, accumulated depreciation = $200,000 => 2 years old No change in useful life advised => 8 years left @ DOA Value to Group @ DOA = FV $700,000 higher than in Ben Ltd books 1st year additional depreciation charge required

= FV adjustment /remaining useful life = $700,000/8 years = $87,500 Fair Value Adjustments on consolidation: Example 1 c)

15 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B (4) Additional depreciation on FVA and related tax effects Dr Depreciation expense (P&L) 87.50 Cr Accumulated depreciation – plant (BS) 87.50 Dr Deferred tax liability (BS) 26.25 Cr Income tax expense (P&L) 26.25 Current year depreciation charge on revalued plant value

No depreciation adjustment required to land – land not depreciated. The main tax effect is being accounted for in the separate books, meaning only that

value introduced into the group will need to be tax effect accounted. In this example,

it states “30% company income tax rate”, so tax effects will need to be accounted for

as well.

Group profit is reduced by the additional depreciation and hence group tax

expense is reduced.

The CA of the asset is reduced by the additional depreciation and

hence the DTL is reversing over the remaining life of the asset. Fair Value Adjustments on consolidation: Example 1 16 c)

Consolidation Journals ($000)

30 June 20X8 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation Worksheet – SOFP at 30 June 20X8 ($000) Bill Ltd Ben

Ltd Eliminations Group Assets Dr Cr Cash 700 260 960 Accounts receivable 850 240 1,090 Investment in Ben Ltd 2,500 (4) 2,500 --- Plant – at cost 2,250 1,000 700 (2) (1) 200 3,750 Accum depn – plant (1,000) (300) 200 (1) (5) 87.50 (1,187.5) Land 500 400 200 (2) 1,100 Goodwill --- --- 590 (4) 590 Total Assets 5,800 1,600 6,302.50 Tax Effects of FV Adjustments: Example 1 17 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation Worksheet – SOFP at 30 June 20X8 ($000) Bill Ltd Ben

Ltd Eliminations Group Liabilities Dr Cr Accounts payable 700 100 800 Non-current borrowings 900 -- 900 Deferred tax liability -- -- 26.25 (3) (6) 270 243.75 Total Liabilities 1,600 100 1,943.75 Net Assets 4,200 1,500 4,358.75 Tax Effects of FV Adjustments: Example 1 18 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation Worksheet – SOFP at 30 June 20X8 ($000) Bill Ltd Ben Ltd Eliminations Group Shareholders’ Equity Issued capital 3,800 1,000 1,000 (4) 3,800.00 Retained earnings 400 500 280 87.50 (4) (5) (6) 26.25 558.75 Revaluation Surplus --- --- 630 270 (4) (2) (3) 900 --- Total Equity 4,200 1,500 3,983.75 3,983.75 4,358.75 Tax Effects of FV Adjustments: Example 1 19 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Based on E3.6 of Textbook Arthur Luff Keet 7th Edition (Italics highlights changes to the question) Noah Ltd & Ark Ltd - Worked example 2 20 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B To increase its market share, Noah Ltd acquired all the ordinary share capital of Ark Ltd on 1 July 20X3. Noah Ltd offered 2 shares for every 3 shares held in Ark Ltd. The Fair value of a Noah Ltd share at the

date of acquisition was $2.00. At acquisition date, the shareholders’ equity of Ark’s Ltd was: $ Issued capital (3,000,000 shares) 1,200,000 Retained earnings at 1.7.X3 1,600,000 General reserve 500,000 Total equity 3,300,000 Consolidation adjusting journals including

disposal of land restated to fair value

(E3.6 amended) 21 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Ark Ltd prepares its accounts under the cost basis of valuation for all

assets, and uses straight-line depreciation for all depreciable assets in

line with the Noah Group. All of Noah Ltd’s assets and liabilities are carried at fair value from 1

July 20X3 to 30 June 20X6. All of Ark Ltd’s assets and liabilities are carried at fair value on 1 July

20X3, except where identified otherwise below. Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 22 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B On 1 July 20X3, land with a fair value of $1 400 000 was carried at a

cost of $800 000 in Ark Ltd’s accounting records. The land was

subsequently sold by Ark Ltd to an external party on 30 June 20X6 for

$1 800 000 cash.

Further, Plant was being carried on 1 July 20X3 that had been bought

on 1 January 20X3 with an original cost of $1 000 000, when it was

deemed to have a useful life of 5 years with no salvage value based on

straight-line depreciation.

At the date of Noah Ltd’s acquisition of the

shares of Ark Ltd, this Plant had a fair value of $1 200 000. There was

no change to the deemed useful life from the date of purchase because

of this transaction. The company income tax rate is 30%. Consolidation adjusting journals including

disposal of land restated to fair value

(E3.6 amended) 23 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B During June 20X3 a customer of Ark Ltd commenced legal proceedings

for the alleged provision of faulty goods. Noah Ltd’s legal advisors have

advised that, if the court decision goes against Ark Ltd, damages

estimated at $50,000 could be awarded against Ark Ltd.

Noah Ltd has accepted this amount to be a reliable estimate of the fair

value of Ark Ltd’s contingent liability for damages. Any damages will be

deductible for tax purposes. To date the claim has not been settled. Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 24 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B An impairment loss of $30 000 relating to the goodwill arising on the

acquisition of Ark Ltd was recognised during the year ended 30 June

20X5. The directors of Noah Ltd believe that the goodwill relating to the

acquisition of Ark Ltd has been impaired by a further $40 000 during the

year ended 30 June 20X6. Required: Prepare the consolidation adjusting journal entries for the Noah Ltd

group (a) at 1 July 20X3, and

(b) at 30 June 20X6. Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 25 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals including

disposal of land restated to fair value

(E3.6 amended) DOR 1 DOR 2 Noah PY = R/E CY = I/S 01/07/20X3 100% 2N:3A issued

capital 01/07/20X3 30/06/20X4 30/06/20X5 30/06/20X6 Ark DOA 26 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 1 July 20X3 a) Write back accumulated depreciation to restate plant at carrying value: Accumulated depreciation 100,000 Plant 100,000 (Depreciation calculated as 1,000,000 /10 year useful life for ½ a year – 1/1 to

30/6X3) b) Increase land and plant to fair value at 1/7/20X3 and recognise deferred tax

liability: Land 600,000

Revaluation Surplus 420,000 Deferred Tax Liability 180,000

Plant 300,000 Revaluation Surplus 210,000 Deferred Tax Liability 90,000

Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 27 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 1 July 20X3 c) Recognise the contingent liability at fair value at 1/7/20X3 and recognise deferred tax asset: Revaluation Surplus 35,000 Deferred tax asset 15,000 Liability – legal damages 50,000 d) Eliminate the pre-acquisition equity against investment asset and recognise goodwill at date

of acquisition: Issued Capital 1,200,000 Revaluation Surplus* 595,000 General Reserve 500,000 Retained Earnings 1 July 20X3

1,600,000 Goodwill 105,000 Investment in Subsidiary 4,000,000 * Land (b) 420,000 + Plant (b) 210,000 – Contingent liabilities (c) 35,000 = $595,000 Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 28 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 a) Write back accumulated depreciation to restate plant at carrying value: Accumulated depreciation 100,000 Plant 100,000 b) Increase land and plant to fair value at 1/7/20X3 and recognise deferred tax

liability: Land 600,000

Revaluation Surplus 420,000 Deferred Tax Liability 180,000

Plant 300,000 Revaluation Surplus 210,000 Deferred Tax Liability 90,000

Consolidation adjusting journals including

disposal of land restated to fair value

(E3.6 amended) 29 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 c) Recognise the contingent liability at fair value at 1/7/20X3 and recognise deferred tax asset: Revaluation Surplus 35,000 Deferred tax asset 15,000 Liability – legal damages 50,000 d) Eliminate pre-acquisition equity against the investment asset and recognise goodwill: Issued Capital 1,200,000 Revaluation Surplus* 595,000 General Reserve 500,000 Retained Earnings 1 July 20X5

1,600,000 Goodwill 105,000 Investment in Subsidiary 4,000,000 * Land (b) 420,000 + Plant (b) 210,000 – Contingent liabilities (c) 35,000 = $595,000 Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 30 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 e)

Decrease Ark’s recorded gain on disposal and income tax expense as shown

below: Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) Ark Ltd Group Adjustment Proceeds of sale 1,800,000 1,800,000 Less cost of acquisition 800,000 1,400,000 Gain on disposal 1,000,000 400,000 Decrease 600,000 Income tax expense 30% 300,000 120,000 Decrease 180,000 Gain on Disposal of Land (CY P&L) 600,000 Land (BS) 600,000 Deferred Tax Liability (BS) 180,000 Income Tax Expense (CY P&L) 180,000 31 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 For consolidations on/after 1 July 20X6 adjustment (e) will become: Retained earnings opening balance 420,000 Revaluation surplus 420,000 Without this consolidation adjustment, the elimination adjustment would

need changing, which is not allowed until the subsidiary is derecognised. Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 32 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 f) Depreciation CAJ’s support FVA Plant – increase in value beyond book value

$300,000 Useful life 1 January 20X3 when plant purchased 5 years At date of subsidiary acquisition (1 July 20X3),

remaining useful life = 4.5 years Note: question states “no change to the deemed useful life” Therefore, additional depreciation required in CFS per annum = 300,000/4.5 = $66,667 pa 1 current year in income statement

= $

66,667 additional 2 prior years in opening retained earnings = $133,333 additional Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 33 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 f) Depreciation CAJ’s (preferred method) All years from date of acquisition to date of reporting: Depreciation expense (CY P&L) 66,667 Retained earnings 1 July 20X5 133,333 Accumulated depreciation (B/S) 200,000 Deferred tax liability (B/S) 60,000 Income tax expense (CY P&L) 20,000 Retained earnings 1 July 20X5 40,000 Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 34 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 Journal f) from above could be summarised as follows:

(non-preferred method) Depreciation (CY P&L) 66,667 Deferred tax liability (BS) 60,000 Retained earnings 1 July 20X5

93,333* Income tax expense (CY P&L) 20,000 Accumulated depreciation (BS) 200,000 * Retained earnings is net of tax effect of depreciation in prior years. Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 35 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples CRICOS code 00025B Consolidation adjusting journals at 30 June 20X6 g) Consolidation adjustment to recognise the

goodwill impairment of $30,000

in the year ended

June 30 20X5 and $40,000 in the year ended June

30 20X6: Retained Earnings 1 July 20X5 30,000 Goodwill Impairment Loss (CY P&L) 40,000 Accumulated impairment - Goodwill 70,000 Consolidation adjusting journals including

disposal of land restated to fair value (E3.6 amended) 36 ACCT3103 Lecture 4 – Fair Value Adjustments – Worked Examples 51作业君版权所有

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