ACCT 7104 Revision Exercise – With solutions
Part A – MCQ
Question 1
3 X Ltd has a wholly (100%) owned subsidiary, Y Ltd. If Y Ltd went into liquidation, X Ltd would be
entitled to:
a) 100% of any surplus of Y Ltd’s assets over its liabilities.
b) 100% of profits made by Y Ltd since its acquisition by X Ltd.
c) nothing.
d) none of the above.
Answer: A
Question 2
In substance, investments in equity securities may be classified as:
a) trading investments at fair value, where increments and decrements in the fair value of the
investments are recognised in the income statement.
b) available-for-sale investments.
c) equity investments in subsidiaries, associates and joint venture entities.
d) all of the above.
Answer: D
Question 3
Consolidation worksheet adjusting entries are recorded:
a)
in the general ledger of the parent entity.
b)
in the general ledger of the subsidiary.
c)
in the consolidation working papers.
d)
none of the above.
Answer: C
Question 4
During June 20X5, Cassius Ltd acquired all the issued capital of Cicero Ltd in exchange for 1,000,000
shares with a market value of $10 per share, $5 000 000 cash payable on June 30 20X5 plus a further
$6 050 000 payable on June 30 20X7. Assume an interest rate of 10%. A consultation fee of $1 000
000 was paid to an independent firm for their assistance in the acquisition. A special department was
set up in Cassius Ltd to oversee the acquisition and the estimated costs of this department that were
reliably attributable to the acquisition amounted to $300 000. The cost of acquisition was (rounded to
the nearest $1 000):
a) $21 300 000.
b) $21 050 000.
c) $22 350 000.
d) $20 000 000.
Answer: D (1,000,000 * 10 + 5,000,000 + 6,050,000/1.1^2 = $20,000,000)
Question 5
According to AASB 3, how is goodwill acquired in a business combination recognised?
a) As an asset, initially measured at cost
b)
As a contingent liability, initially measured at fair value
c)
As an asset, initially measured at fair value
d)
As an equity account, initially measured at cost
Answer: A
Question 6
A company records a gain on bargain purchase of $40 000 on the acquisition of a subsidiary.
Assuming there are no other tax adjustments for any companies, if the trading profit of the group
before tax were $140 000, and given a tax rate of 30%, the group income tax expense would be:
a) $42 000.
b) $54 000.
c) $30 000.
d) none of the above.
Answer: A (140,000 * 30% = 42,000)
Question 7
P Ltd lends $200 000 to its subsidiary S Ltd. At the end of the year, S Ltd has paid interest of $18 000
and owes a further $2 000. The required consolidation entry is:
a) Dr. Loan Payable
$200 000
Cr. Loan Receivable
$200 000
b) Dr. Loan Payable
$200 000
Cr. Loan Receivable
$200 000
Dr. Interest Revenue
$20 000
Cr. Interest Payable
$20 000
c) Dr. Loan Payable
$200 000
Cr. Loan Receivable
$200 000
Dr. Interest Revenue
$20 000
Cr. Interest Expense
$20 000
Dr. Accrued Interest Payable
$2 000
Cr. Accrued Interest Receivable
$2 000
d) Dr. Loan Receivable
$200 000
Cr. Loan Payable
$200 000
Dr. Interest Revenue
$20 000
Cr. Interest Expense
$20 000
Dr. Accrued Interest Payable
$2 000
Cr. Accrued Interest Receivable
$2 000
Answer: C
Question 8
Which of the following accounts CANNOT be altered by a consolidation adjusting entry?
a) Revenue
b) Accounts payable
c) Deferred tax asset
d) None of the above
Answer: D (All of these accounts can be altered by consolidation entries)
Question 9
A subsidiary that is 85% owned by its parent company pays a dividend of $110 000. On consolidation
the amount to be eliminated is:
a) $93,500.
b) $110,000.
c) $16,500.
d) not eliminated.
Answer: A (85% * 110,000 = $93,500)
Part B – Fill-in-the blank questions
QUESTION 1
Orca Ltd acquired 63% of the issued shares of Narwal Ltd on 1 July 20X2. During the 20X7 financial
year, Narwal Ltd paid an interim dividend for $45,000 and declared a final dividend for $96,000. The
final dividend was paid on 4 August 20X7. Orca Ltd recognises the dividend revenue when the
dividends are declared. During the 20X7 financial year, Orca Ltd paid an interim dividend of $56,000
and declared and paid a final dividend of $76,000.
Fill in the blank. DOT NOT include commas and dollar sign ($) in your answer. Present $1,000 as 1000.
Required:
Based on the information provided above, the amount of dividend revenue that should be eliminated on
consolidation is: ___________$
Answer – $88,830
Amount of dividend eliminated is 63% (45,000 + 96,000) = $88,830
QUESTION 2
Watermelon Ltd acquires 100% of the shares of Aroid Ltd in 6 July 20x2 for a cash payment of
$3,700,000. In the financial year ended June 20X5, the following transactions occurred:
- Watermelon Ltd extends a loan of $1,500,000 to Aroid Ltd in April 20X5, with interest rate of
8% per annum
- Aroid Ltd sells $10,000 worth of inventory to Watermelon Ltd with a mark-up of 50% on costs,
and all remained in Watermelon Ltd’s ending inventory at the year end.
- Watermelon Ltd records a total revenue of $56,000 for the year
Fill in the blank. DOT NOT include commas and dollar sign ($) in your answer. Present $1,000 as 1000.
Required:
Based on the information provided above, please fill the table below:
The amount of revenue contributed to the group by Watermelon Ltd is: ____________$
Answer – $26,000
Interest revenue to be eliminated – 1,500,000 * 8% * 3/12 = 30,000
Unrealised profit on inventory – 10,000 * 50% = $5,000, but this is not included in Watermelon’s profit
Revenue after eliminating interest revenue = 56,000 – 30,000 = $26,000
Orca
Narwal
63%
QUESTION 3
Ritty Ltd is a manufacturer of motor vehicles and is listed on the Australian Stock Exchange (ASX). Its
existing group structure is as such: Ritty Ltd has 60% ownership in Max Ltd and 20% ownership in
Jerome Ltd, and Max Ltd also has 30% ownership in Jerome Ltd. For this year, Jerome made a net
profit after tax of $8,000. During the year, Jerome Ltd also sold inventories to Ritty Ltd, and the
unrealised profit element in respect of these inventories unsold by Ritty Ltd at the yearend is $1,500.
The corporate tax rate is 30%.
Fill in the blank. DOT NOT include commas and dollar sign ($) in your answer. Present $1,000 as 1000.
Round your answer to the nearest dollars.
Required:
Based on the information provided above, please fill the table below:
The net profit after tax that is attributable to the non-controlling interest in Jerome Ltd at the yearend is
_________$
Answer – $4,309
Max Ltd
Jerome Ltd
Parent interest
Direct
60%
20%
Indirect
0%
18%
Non-controlling interest
Direct
40%
50%
Indirect
0%
12%
100%
100%
NCI memorandum account
NCI
Jerome
Ltd
%
$
Profit (loss) for the year
8,000
Less: Unrealised profit in closing
inventory - sales to Robin Ltd
(1,500)
Add:
Tax effect
450
Realised net profit after tax
6,950
Direct NCI + Indirect NCI
62%
4,309
Part C – Problem-solving question
Amps Ltd has made successful takeovers of Battery Ltd and Car Ltd, two entities with operations
complementary to those of Amps Ltd. All the issued shares of Battery Ltd were acquired on 1 January
20X1 for $8.1million and all the issued shares of Car Ltd were acquired on 4 June 20X2 for $2.1million.
At the respective acquisition dates, the identifiable assets and assumed liabilities of the two entities
were not materially different from their fair values. The shareholders’ equity balances of the two entities
at the respective dates that Amps Ltd obtained control are as follows:
Battery Ltd Car Ltd
$'000 $'000
Issued capital 4,000 3,000
Retained earnings (Accumulated losses) 2,400 (1,100)
6,400 1,900
The statements of comprehensive income, changes in equity and financial position of Amps Ltd and
its two subsidiaries for the year ended 31 December 20X4 are as follows:
Statement of Comprehensive Income for year ended 31 December 20X4
Amps Ltd Battery
Ltd Car Ltd
$'000 $'000 $'000
Sales revenue 6,500 3,420 2,860
Cost of sales:
Opening inventories 1.1.X4 (880) (640) (790)
Purchases
(3,200) (1,880) (1,210)
Closing inventories 31.12.X4 950 720 780
Gross profit 3,370 1,620 1,640
Other expenses (780) (220) (180)
Dividend revenue 1,100 - -
Profit before tax 3,690 1,400 1,460
Tax expense (970) (410) (430)
Profit for the year 2,720 990 1,030
Other comprehensive income
- - -
Total comprehensive income for the year
2,720 990 1,030
Amps Ltd
Statement of changes in equity for the year ended 31 December 20X4
Issued Retained Total
Capital Earnings Equity
$'000 $'000 $'000
Balance at 1.1.X4
8,000 6,200 14,200
Profit for the year
2,720
Other comprehensive income
-
Total comprehensive income
2,720 2,720
Transactions with Amps Ltd shareholders
Dividend paid
(1,000) (1,000)
Balance at 31.12.X4
8,000 7,920 15,920
Battery Ltd
Statement of Changes in Equity for the year ended 31 December 20X4
Issued Retained Total
Capital Earnings Equity
$'000 $'000 $'000
Balance at 1.1.X4
4,000 4,600 8,600
Profit for the year
990
Other comprehensive income
-
Total comprehensive income
990 990
Transactions with Battery Ltd shareholders
Dividend paid
(500) (500)
Balance at 31.12.X4
4,000 5,090 9,090
Car Ltd
Statement of Changes in Equity for the year ended 31 December 20X4
Issued Retained Total
Capital Earnings Equity
$'000 $'000 $'000
Balance at 1.1.X4
3,000 1,200 4,200
Profit for the year
1,030
Other comprehensive income
-
Total comprehensive income
1,030 1,030
Transactions with Car Ltd shareholders
Dividend paid
(600) (600)
Balance at 31.12.X4
3,000 1,630 4,630
Statements of Financial Position at 31 December 20X4
Amps Ltd Battery
Ltd Car Ltd
$'000 $'000 $'000
Assets
Current assets
Inventories 950 720 780
Other current assets 1,750 1,820 880
Total current assets 2,700 2,540 1,660
Non-current assets
Investments 10,200 - -
Other non-current assets 6,390 8,860 4,200
Total non-current assets 16,590 8,860 4,200
Total assets 19,290 11,400 5,860
Liabilities
Current liabilities
Current taxes payable
870 550 330
Other liabilities 2,500 1,760 900
Total current liabilities 3,370 2,310 1,230
Total liabilities 3,370 2,310 1,230
Net assets 15,920 9,090 4,630
Equity
Issued capital 8,000 4,000 3,000
Retained earnings 7,920 5,090 1,630
Total equity 15,920 9,090 4,630
Additional Information:
• Intragroup sales for 20X4 are as follows:
Cost Transfer Price
$'000 $'000
Intragroup sales of inventories
Sales by Battery Ltd to Amps Ltd during 20X4
450
790
Sales by Car Ltd to Amps Ltd during 20X4
880
1,120
• Inventories held by Amps Ltd from intragroup sales is as follows:
Cost Transfer Price
$'000 $'000
As at 1 January 20X4
Purchased from Battery Ltd 110 150
Purchased from Car Ltd 125 275
As at 31 December 20X4
Purchased from Battery Ltd 80 210
Purchased from Car Ltd 230 440
• An impairment loss of $300 000 relating to the goodwill arising on the acquisition of Battery
Ltd was recognised during the year ended 31 December 20X3. The directors of Amps Ltd
believe that the goodwill relating to the acquisition of Battery Ltd has been impaired by a further
$120 000 during the year ended 31 December 20X4. Impairment losses for goodwill arising on
the acquisition of Car Ltd have not been recognised in any of the previous year’s consolidated
financial statements. The directors of Amps Ltd are of the opinion that an impairment loss will
not be recognised in relation to its investment in Car Ltd in its separate or consolidated financial
statements for the year ended 31 December 20X4.
• The company income tax rate is 30%.
Required
1. Prepare all necessary consolidation journal entries.
2. Prepare the consolidated statements of comprehensive income, changes in equity and
financial position of the Amps Ltd group for the year ended 31 December 20X4 as required
by AASB 10.
Solution
Acquisition analysis for Amps Ltd's investments in Battery Ltd and Car Ltd
Battery Ltd on
1.1.X1
Car Ltd on
4.6.X2
$'000 $'000
$'000 $'000
Consideration transferred
Purchase consideration
8,100
2,100
Identifiable assets and liabilities assumed as recorded
represented by
Issued capital
4,000
3,000
Retained earnings (Accumulated losses) 2,400
(1,100)
Identifiable assets and liabilities assumed at fair value 6,400
1,900
Interest acquired by Amps Ltd 100% (6,400)
100% (1,900)
Goodwill on acquisition
1,700
200
Consolidation worksheet - 31 December 20X4
Amps
Ltd Battery Ltd Car Ltd
Adjustments
Consolidated
and
eliminations
Entity
$'000 $'000 $'000 $'000 Ref $'000 $'000
Sales revenue 6,500 3,420 2,860 790 f
10,870
1,120 g
Cost of sales:
Opening inventories 1.1.X4 (880) (640) (790)
h 40 (2,120)
j 150
Purchases
(3,200) (1,880) (1,210)
f 790 (4,380)
g 1,120
Closing inventories 31.12.X4 950 720 780 130 l
2,110
210 n
Gross profit 3,370 1,620 1,640
6,480
Impairment loss - Goodwill - - - 120 b
(120)
Other expenses (780) (220) (180)
(1,180)
Dividend revenue 1,100 - - 500 d
-
600 e
Profit before tax 3,690 1,400 1,460
5,180
Tax expense (970) (410) (430) 12 i/m 39 (1,765)
45 k/o 63
Profit for the year 2,720 990 1,030
3,415
Retained earnings at 1.1.X3 6,200 4,600 1,200 2,400 a/c 1,100 10,267
300 b
40 h/i 12
150 j/k 45
Dividend paid (1,000) (500) (600)
d 500 (1,000)
e 600
Retained earnings at 31.12.X3 7,920 5,090 1,630
12,682
Issued capital 8,000 4,000 3,000 4,000 a
8,000
3,000 c
Total equity 15,920 9,090 4,630
20,682
Current taxes payable
870 550 330
1,750
Other liabilities 2,500 1,760 900
5,160
Total equities and liabilities 19,290 11,400 5,860
27,592
Inventories 950 720 780
l 130 2,110
n 210
Other current assets 1,750 1,820 880
4,450
Investments 10,200 - -
a 8,100 -
c 2,100
Goodwill on acquisition - - - 1,700 a
200 c
1,900
Accumulated impairment losses - - -
b 420 (420)
Deferred tax assets - - - 39 m
102
63 o
Other non-current assets 6,390 8,860 4,200
19,450
Total assets 19,290 11,400 5,860 15,419
15,419 27,592
Consolidation journal entries - 31 December 20X4
(a)
Elimination of cost of investment in Battery Ltd against acquired capital and
retained earnings.
$'000 $'000
Dr. Issued capital
4,000
Dr. Retained earnings at 1.1.X4
2,400
Dr. Goodwill on acquisition
1,700
Cr. Investments
8,100
(b)
Recognition of impairment loss on goodwill relating to Battery Ltd for both
previous and current financial years.
$'000 $'000
Dr. Impairment loss - Goodwill (current year)
120
Dr. Retained earnings at 1.1.X4 (previous year)
300
Cr.
Accumulated impairment losses
420
(c)
Elimination of cost of investment in Car Ltd against acquired capital and
retained earnings.
$'000 $'000
Dr. Issued capital
3,000
Dr. Goodwill on acquisition
200
Cr. Retained earnings at 1.1.X4
1,100
Cr. Investments
2,100
(d)
Elimination of intragroup dividends paid by Battery Ltd during 20X4.
$'000 $'000
Dr. Dividend revenue
500
Cr. Dividend paid
500
(e)
Elimination of intragroup dividends paid by Car Ltd during 20X4.
$'000 $'000
Dr. Dividend revenue
600
Cr. Dividend paid
600
(f)
Elimination of intragroup sales from Battery Ltd to Amps Ltd during 20X4.
$'000 $'000
Dr. Sales revenue
790
Cr. Cost of sales - Purchases
790
(g)
Elimination of intragroup sales from Car Ltd to Amps Ltd during 20X4.
$'000 $'000
Dr. Sales revenue
1,120
Cr. Cost of sales - Purchases
1,120
(h)
Elimination of unrealised profit in the opening inventories of Amps Ltd,
purchased
from Battery Ltd, i.e. $150,000 - $110,000 = 40,000.
$'000 $'000
Dr. Retained earnings at 1.1.X4
40
Cr. Cost of sales - inventories 1.1.X4
40
(i)
Recognition of tax effect relating to the elimination of unrealised profit in
opening inventories of Amps Ltd purchased from Battery Ltd,
i.e. 30% x $40,000 = $12,000.
$'000 $'000
Dr. Tax expense
12
Cr.
Retained earnings at 1.1.X4
12
(j)
Elimination of unrealised profit in the opening inventories of Amps Ltd,
purchased from Car Ltd, i.e. $275,000 - $125,000 = 150,000.
$'000 $'000
Dr. Retained earnings at 1.1.X4
150
Cr. Cost of sales - inventories 1.1.X4
150
(k)
Recognition of tax effect relating to the elimination of unrealised profit in
opening inventories of Amps Ltd purchased from Car Ltd,
i.e. 30% x $150,000 = $45,000.
$'000 $'000
Dr. Tax expense
45
Cr.
Retained earnings at 1.1.X4
45
(l)
Elimination of unrealised profit in the closing inventories of Amps
Ltd
purchased from Battery Ltd, i.e. $210,000 - $80,000 = $130,000.
$'000 $'000
Dr. Cost of sales - inventories 31.12.X4
130
Cr. Inventories
130
(m)
Recognition of tax effect relating to the elimination of unrealised profit in
closing inventories of Amps Ltd purchased from Battery Ltd,
i.e. 30% x $130,000 = $39,000.
$'000 $'000
Dr. Deferred tax assets
39
Cr. Tax expense
39
(n)
Elimination of unrealised profit in the closing inventories of Amps Ltd
purchased from Car Ltd, i.e. $440,000 - $230,000 = $210,000.
$'000 $'000
Dr. Cost of sales - inventories 31.12.X4
210
Cr. Inventories
210
(o)
Recognition of tax effect relating to the elimination of unrealised profit in
closing inventories of Amps Ltd purchased from Car Ltd,
i.e. 30% x $210,000 = $63,000.
$'000 $'000
Dr. Deferred tax assets
63
Cr. Tax expense
63
Amps Ltd Group
Consolidated statement of comprehensive income for year ended 31
December 20X4
Consolidated
$'000
Sales revenue 10,870
Cost of sales:
Opening inventories 1.1.X4 (2,120)
Purchases
(4,380)
Closing inventories 31.12.X4 2,110
Gross profit 6,480
Impairment loss - Goodwill (120)
Other expenses (1,180)
Profit before tax 5,180
Tax expense (1,765)
Profit for the year 3,415
Other comprehensive income
-
Total comprehensive income for the year
3,415
Amps Ltd Group
Statement of changes in equity
for the year ended 31 December 20X4
Issued Retained Total
Capital Earnings Equity
$'000 $'000 $'000
Balance at 1.1.X4
8,000 10,267 18,267
Profit for the year
3,415
Other comprehensive income
-
Total comprehensive income
3,415 3,415
Transactions with Amps Ltd shareholders
Dividend paid
(1,000) (1,000)
Balance at 31.12.X4
8,000 12,682 20,682
Amps Ltd Group
Consolidated statement of financial position as at 31 December 20X4
Consolidated
$'000
Assets
Current assets
Inventories 2,110
Other current assets 4,450
Investments -
Total current assets 6,560
Non-current assets
Goodwill on acquisition 1,900
Accumulated impairment losses (420)
Deferred tax assets 102
Other non-current assets 19,450
Total non-current assets 21,032
Total assets 27,592
Liabilities
Current liabilities
Current taxes payable
1,750
Other liabilities 5,160
Total current liabilities 6,910
Total liabilities 6,910
Net assets 20,682
Equity
Issued capital 8,000
Retained earnings 12,682
Total equity 20,682
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