Deegan5e Sm Ch31

8/20/2019 Deegan5e Sm Ch31

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Chapter 31

Further consolidation issues III: Accounting for indirect ownershipinterests

31.1 A direct ownership or equity interest arises when the parent entity itself has equity ownershipin another entity. An indirect interest, on the other hand, may be held by a parent entity over a

particular entity when an interest in that particular entity is held by another subsidiary of the parent entity, rather than the parent entity itself. For example, in the diagram below, theParent ntity has a direct ownership interest in A !td. "he parent entity also has an interest in#and control of$ % !td through its control of A !td. "he interest in % !td is indirect. %ycontrolling A #which controls % !td$, the parent entity consequently also controls % !td& even in the absence of any direct equity interests. "he Parent ntity's indirect interest in %!td would be ()* of +)*, or -*.

31.- e need to /now which part of minority interest is direct, and which part is indirect as somecalculations of minority interests only ta/e into account the direct interests, whereas other calculations for minority interest require /nowledge of both direct and indirect minorityinterests. "he general rules are that0

• urrent period profits are allocated to minority interests using the sum of direct and

indirect ownership interests.• Pre2acquisition balances of reserves #for example, retained earnings and revaluation

reserve$ are allocated to minority interests on the basis of direct ownership interestsonly.

• Post2acquisition movements in reserves are allocated on the basis of the sum of direct

and indirect ownership interests.

• ividends are allocated on the basis of direct ownership interests only.

31.3 4inority interests must be disclosed separately within the financial statements. Paragraph 33of AA5% 1- states0

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 3121


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Minority interests shall be presented in the consolidated balance sheet withinequity, separately from the parent shareholders’ equity. Minority interests in the

profit or loss of the group shall also be separately disclosed.

31.8 A sequential acquisition is deemed to occur when the parent entity acquires its interest inthe intermediate subsidiary before the intermediate subsidiary acquires its interest in theother subsidiary. %y contrast, a non2sequential acquisition occurs when the parent entityacquires its interest in the intermediate subsidiary after the intermediate subsidiary acquiresits interest in the other subsidiary

9n a sequential acquisition, the consolidated financial statements will be accounted for in thesame manner as when acquisitions occur simultaneously. For example the parent entity'sinterest in the intermediate subsidiary will be eliminated first #against pre2acquisition capitaland reserves with resultant goodwill or discount being recognised$, and then theintermediate subsidiary's interest in the other subsidiary will be eliminated.

9n a non2sequential acquisition, the situation where the parent entity acquires its control of

the intermediate subsidiary #which we will refer to as :rganisation %$ after the intermediatesubsidiary acquired its interest in another subsidiary #which we will refer to as :rganisation$, we need to consider the value of both :rganisation % and :rganisation . "he value of :rganisation %'s investment in :rganisation will be affected by post2acquisition profitsand reserve movements in :rganisation . "herefore, :rganisation A's investment in:rganisation % must also be eliminated against :rganisation A's share of the owners' equityof the % ;roup #:rganisation % plus :rganisation $ as at the date of :rganisation A'sinvestment. "he profits earned by :rganisation , after :rganisation % acquired its interestin :rganisation , but prior to :rganisation A's acquisition of the % ;roup are treated as

part of the pre2acquisition reserves of :rganisation %, and therefore eliminated onconsolidation.


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31.@ "he ownership structure can be summarised as follows #the bro/en arrow represents theindirect ownership interest of the parent entity$0

"he consolidated financial statements would show the dividends that are flowing away fromthe economic entity. 9n this case this would represent the dividends paid by the parent entity#3)) )))$, plus the dividends paid to the direct minority interests of % !td #() )))$, andthe dividends paid to the direct minority interests of !td #-) )))$, giving total dividendsto be shown in the consolidated financial statements of 8)) ))).

31. #i$ A !td, as the ultimate parent entity, would be part of the economic entity.

#ii$ % !td is controlled by A !td through A !td's direct ownership interest. % !td would be part of the economic entity.

#iii$ !td is controlled by A !td through A !td's direct ownership interest. !td would be part of the economic entity.

#iv$ !td is controlled by A !td as a result of A !td controlling % !td, which in turncontrols !td. A !td's ownership interest in !td is indirect. !td would be part

of the economic entity.

#v$ !td is controlled by A !td as a result of A !td controlling !td, which in turncontrols !td #it is assumed that an ownership of 7) per cent would guaranteecontrol$. A !td's ownership interest in !td is indirect. !td would be part of theeconomic entity.

#vi$ Although !td would arguably have significant influence over F !td #F !td would beconsidered to be an associate$, it is not clear that !td would be able to control F!td. Bence, F !td would not be considered to be part of the economic entity.

31.( "he ownership structure can be diagrammatically represented as follows0



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"he amount of dividends to be shown in the consolidated financial statements would be17@ ))), which is the dividends paid by the parent entity #1-) )))$, plus the directminority interest in the dividends paid by oogee !td #).3) C () ))) D -8 )))$, plus thedirect minority interests in the dividends paid by lovelly !td #).-) C @) ))) D 1- )))$.

31.+ "he investments in the subsidiaries are eliminated against the subsidiaries' pre2acquisitioncapital and reserves using only the direct ownership interests held in the subsidiaries. irectand indirect ownership interests are used to allocate interests in post2acquisition movements

in the shareholders' funds of the subsidiaries.

31.1) B Ltd C Ltd D Ltd E LtdA !td's interestirect @)* )* & & 9ndirect & & 8(* 37.(*E

4inority interest 8)* 3)* -)* 3)* & & 3-*EE 38.-*EEE

1))* 1))* 1))* 1))*

E #).@ C ).( C ).@$ #). C ).1$

EE ).8 C ).(

EEE #).3 C ).1$ #).8 C ).( C ).@$ #).- C ).@$

31.11 onsolidation adGustments

1. r 5hare capital 1 -)) )))r Hetained earnings 3@) )))r ;oodwill 88) )))

r 9nvestment in % !td - ))) )))



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limination of investment in % !td.

-. r 5hare capital +@) )))r Hetained earnings 8() )))r ;oodwill 1@) )))

r 9nvestment in !td 1 @)) )))

limination of investment in !td.

3. r ;oodwill impairment loss (( )))r Accumulated amortisation 2 ;oodwill (( )))

9mpairment of ;oodwill acquired in % !td.

8. r ;oodwill impairment loss 3- )))r Accumulated amortisation 2 ;oodwill 3- )))

9mpairment of ;oodwill acquired in !td.

7. r ividend income @) )))r ividend proposed @) )))

limination of A's share of the dividends paid by % !td.

@. r ividend income 3@ )))r ividend proposed 3@ )))

limination of A's share of the dividends paid by !td.

. r ividend payable @) )))r ividend receivable @) )))

"o eliminate amount receivable by A !td from % !td.

(. r ividend payable 3@ )))r ividend receivable 3@ )))

"o eliminate amount receivable by A !td from !td.



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Eliminations andadjustments Consolidated

A Ltd B Ltd C Ltd Dr Cr statement!!! !!! !!! !!! !!! !!!

9ncome statementProfit before tax 1 ))) 1@) -)) @)7, 3@@

((3, 3-8 1188"ax 78) 7) () @)Profit after tax 8@) 11) 1-) 88Hetained earnings3) Iune -))( - ))) @)) ()) 3@)1

8()- - 7@)- 8@) 1) +-) 3)38

ividends proposed 8)) 1)) @) @)7, 3@@ 8@8

%alance sheet5hareholders' equityHetained earnings3) Iune -))+ - )@) @1) (@) - 7)5hare capital ( ))) - ))) 1 @)) 1 -))1

+@)- + 88)

urrent liabilitiesAccounts payable 38) () 8-)ividends payable 8)) 1)) @) @), 3@( 8@8

=on2current liabilities!oans ()) 7)) & 1 3))11 @)) 3 -+) - 7-) 18 1+8

urrent assetsash 7+) 8 -)) (@8Accounts receivable -7) 37) 8)) 1 )))ividends receivable @) 3@ & @), 3@( & 9nventory 1 ))) @)) ()) - 8))

=on2current assets!and 8 )) & 8)) 7 1))Plant 3 ))) @3) -) 8 37)

9nvestment in % !td - ))) & - )))

1

& 9nvestment in !td 1 @)) 1 @))- & ;oodwill & & & 88)1

1@) -@))

Accumulated amort. 2goodwill

JJJJJ JJJJJ JJJJJ ((3

3-8#1-)$

11 @)) 3 -+) - 7-) 3 (7- 3 (7- 18 1+8

e need to determine total minority interests. 4inority interests are determined as follows0 B LtdC Ltd

Parent entity interestirect @)*9ndirect


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4inority interestirect 8)*8)*9ndirect


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Consolidated alance sheet of A Ltd and its susidiariesas at 3! $une %!!&

Consolidated

Assetsash (@8 )))Accounts receivable 1 ))) )))9nventory - 8)) )))!and 7 1)) )))Plant and equipment #net$ 8 37) )));oodwill @)) )))less Accumulated impairment losses #1-) )))$"otal assets 18 1+8 )))

LiailitiesAccounts payable 8-) )))ividends payable 8@8 )))!oans 1 3)) )))"otal liabilities - 1(8 )))

2et assets 1- )1) )))

Hepresented by0

hareholder4s e5uit#6arent entit# "inorit#interest interest

5hare capital ( ))) ))) 1 88) ))) + 88) )))Hetained earnings 2 3) Iuly -))+ #x$ - ))( ))) 7@- ))) - 7) )))

1) ))( ))) - ))- ))) 1- )1) )))

2otes to and forming part of the consolidated accounts6arent entit# "inorit#

interest interest Consolidated

2ote 7: 8etained earningsHetained earnings 21 Iuly -))( - ))) ))) 7@) ))) - 7@) )))Profit after income tax 8)( ))) @@ ))) 88 )))Final dividend #8)) )))$ #@8 )))$ #8@8 )))$Hetained earnings 2 3) Iune -))+ - ))( ))) 7@- ))) - 7) )))

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 312(


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31.1- Calculation of direct and indirect interests in Bells Ltd and .or5ua# LtdBells Ltd .or5ua# Ltd

Parent entity interestirect )*9ndirect


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31.13 As we /now from hapter 31, there are a number of steps to ta/e. e need to0

• provide the consolidation wor/sheet Gournal entriesM

• calculate minority interestsM.

• post the consolidation Gournal entries to the wor/sheetM and

• prepare the consolidated financial statements from the consolidation wor/sheet andutilise the calculation of minority interests to disclose the minority interests contributionto profits, and the minority interests in share capital and reserves.

Consolidation worsheet journal entries

8ecognition of the fair -alue adjustmentAt the date of lovelly !td's acquisition of %ronte !td the carrying amount of the plant andequipment was less than their fair value. 5o that we can correctly calculate goodwill onacquisition we must put through a revaluation adGustment as at the date of acquisition beforewe eliminate the investment against the pre2acquisition capital and reserves of the acquired

subsidiary. As we explained in hapter 1+, when an entity revalues its non2current assets a taxeffect is created, which needs to be recognised in accordance with AA5% 11- N9ncome"axes'.

#a$ r Accumulated depreciation -(( )))r 4achinery -(( )))r 4achinery 71- )))r Hevaluation reserve 71- )))

#b$ r Hevaluation reserve 173 @))r eferred tax liability


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5hare capital at acquisition date, 1 Iuly -))7 @8) ))) 3(8 )))Hetained earnings at acquisition date,1 Iuly -))7 1 -() ))) @( )))Hevaluation reserve 37( 8)) -17 )8)

1 3@ )8)9nvestment in %ronte !td 1 @() )))

;oodwill on consolidation 31- +@)

#e$ r 5hare capital 3(8 )))r Hetained profits 2 1 Iuly -))( @( )))r Hevaluation reserve -17 )8)r ;oodwill 31- +@)r 9nvestment in %ronte !td 1 @() )))

Impairment of goodwill *relating to purchase of Bronte Ltd # Clo-ell# Ltd+#f$ r Hetained profits 2 1 Iuly -))(

#previous years' accumulated impairment$ 17- +@)

r Accumulated impairment losses 2 goodwill 17- +@)

#g$ r 9mpairment loss 2 goodwill #the impairmentloss recognised in -))+$ -) )))

r Accumulated impairment losses 2 goodwill -))))

Eliminate in-estment in Clo-ell# Ltd against "aroura Ltd;s share of Bronte Ltd;s

owners; e5uit# at in-estment datelovelly !td 4aroubra !td

)* interest

5hare capital at acquisition date 2 1 Iuly -))7 - -8) ))) 1 7@( )))Hetained earnings at acquisition date 2 1 Iuly -))7 +@) ))) @- )))

- -8) )))9nvestment in lovelly !td - @8) )));oodwill on consolidation 8)) )))

#h$ r 5hare capital 1 7@( )))r Hetained profits 2 1 Iuly -))( @- )))r ;oodwill 8)) )))

r 9nvestment in lovelly !td - @8) )))

Impairment of goodwill in %!!& *relating to purchase of Clo-ell# Ltd# "aroura Ltd+#i$ r 9mpairment loss 2 goodwill #8)) ))) O

--) )))$ 1() )))r Accumulated impairment losses 2 goodwill 1() )))

Elimination of intercompan# salesAs part of the consolidation adGustments and eliminations we need to eliminate the intragroupsales because, from the perspective of the economic entity, no sales have in fact occurred."his will ensure that we do not overstate the turnover of the economic entity.

ale of in-entor# from Bronte Ltd to "aroura Ltd



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#G$ r 5ales ( ))) )))r ost of goods sold ( ))) )))

nder the periodic inventory system, the above credit entry would be to purchases, whichwould ultimately lead to a reduction in cost of goods sold. #ost of goods sold equalsopening inventory plus purchases less closing inventory, hence any reduction in purchases

leads to a reduction in cost of goods sold.$Elimination of unrealised profit in closing in-entor#9n this case, the unrealised profit in closing inventory amounts to 8() ))), which representsthe profit on the total sales multiplied by the proportion of sales still on hand, that is #( )))))) 2 @ 8)) )))$ x 3) per cent. 9n accordance with AA5% 1)- N9nventories', we must valuethe inventory at the lower of cost and net realisable value. Bence on consolidation we mustreduce the value of recorded inventory, as the amount shown in the accounts of 4aroubra!td exceeds what the inventory cost the economic entity.

#/$ r ost of goods sold 8() )))r 9nventory 8() )))

nder the periodic inventory system, the above debit entry would be to closing inventory 2 profit and loss. e increase cost of goods sold by the unrealised profit in closing inventory because reducing closing inventory effectively increases cost of goods sold. "he effect of theabove entries is to adGust the value of inventory so that it reflects the cost of the inventory tothe group.

Consideration of the ta7 paid or pa#ale on the sale of in-entor# that is still held withinthe groupFrom the group's perspective, 8() ))) has not been earned. Bowever, from %ronte !td'sindividual perspective #as a separate legal entity$, the full amount of the sale has been earned."his will attract a tax liability in %ronte !td's accounts of 188 ))) #3)* of 8() )))$.Bowever, from the group's perspective, some of this will represent a prepayment of tax, as

the full amount has not been earned by the group even if %ronte !td is obliged to pay the tax.

#l$ r eferred tax asset 188 )))r 9ncome tax expense 188 )))

!"#$% %%% x &% per cent'

Consideration of opening in-entor#

e are told that %ronte !td's opening inventory included goods purchased from lovelly !tdfor 1 -() ))). "hese goods originally cost lovelly !td 1 +@) ))). Bence, unli/e thesituation where opening inventory might include unrealised profit, in this case openinginventory was acquired at less that the cost incurred by the selling entity, the loss on sale

being @() ))). At issue is whether we need to ma/e an adGustment. "o the extent that this

inventory was sold at less than cost, and if this sales price reflected a reduction in the netrealisable value of the inventory, then this loss could be considered to be realised within theeconomic entity and no adGustment on consolidation would be required. "his can becontrasted with the situation where opening inventory includes unrealised profit. 9n such acase an adGustment would be necessary, as the chapter indicates. For example, if it wasassumed that %ronte !td's opening inventory include goods purchased from lovelly for, say,- -() ))) #instead of 1 -() )))$, then the adGusting entry would be0

r Hetained earnings 2 1 Iuly -))( --8 )))r 9ncome tax expense +@ )))r ost of sales 3-) )))

Again, it is emphasised that this adGustment is not required in this example and this additional Gournal entry is provided merely for the purposes of illustration

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 3121-


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Adjustments for intragroup sale of factor# uilding:n 3) Iune -))+ 4aroubra !td sold a factory building to lovelly !td for 3 -)) ))) whenits carrying value in 4aroubra !td's accounts was - 7-) ))) #cost of 3 @)) ))),accumulated depreciation of 1 )() )))$. "he building was being depreciated over a further

18 years, with no expected residual value.

8e-ersal of profit recognised on sale of asset and reinstatement of cost and accumulateddepreciation"he result of the sale of the factory building to lovelly !td is that the profit of @() ))) 2the difference between the sales proceeds of 3 -)) ))) and the carrying amount of - 7-)))) 2 will be shown in 4aroubra !td's financial statements. Bowever, from the economicentity's perspective there has been no sale and, therefore, no gain on sale given that there has

been no transaction with a party external to the group. "he following entry is necessary sothat the accounts will reflect the balances that would have applied had the intragroup sale notoccurred.

#n$ r Profit on sale of plant @() )))r Plant 8)) )))r Accumulated depreciation 1 )() )))

"he result of this entry is that the intragroup profit is removed and the asset and accumulateddepreciation account reverts to reflecting no sales transaction. "he profit of @() ))) will berecognised progressively in the consolidated financial report of the economic entity byadGustments to the amounts of depreciation charged by lovelly !td in its accounts. As theservice potential or economic benefits embodied in the asset are consumed, the @() )))

profit will be progressively recognised from the economic entity's perspective.

Impact of ta7 on profit on sale of factor# uildingFrom 4aroubra !td's individual perspective it would have made a profit of @() ))) on thesale of the building and this gain would have been taxable. At a tax rate of 3) per cent, -)8))) would be payable by 4aroubra !td. Bowever, from the economic entity's perspective,no gain has been made, which means that the related Ntax expense' must be reversed and arelated deferred tax benefit be recognised. A deferred tax asset is recognised because, fromthe economic entity's perspective, the amount paid to the "ax :ffice represents a prepaymentof tax.

#o$ r eferred tax asset -)8 )))

r 9ncome tax expense -)8 )))

As the sale of the factory building occurred on consolidation date, there are no consolidationwor/sheet Gournal entries required to adGust the depreciation of the factory building.

Di-idends paid and proposede eliminate the dividends paid within the group. :nly the dividends paid to parties outsidethe entity #to the investors in the parent entity and to the direct minority interests$ are to beshown in the consolidated accounts.

limination of interim dividend #paid by %ronte !td to lovelly !td$#p$ H ividend revenue #88) ))) x ).@$ -@8 )))



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H 9nterim dividend -@8 )))

limination of final dividend #declared by lovelly !td to 4aroubra !td$#q$ H ividend revenue #3@) ))) x ).$ -7- )))

H Final dividend -7- )))

limination of intragroup debt0 4aroubra !td's share of lovelly !td's declared finaldividend#r$ H ividend payable #3@) ))) x ).$ -7- )))

H ividend receivable -7- )))

Baving completed the consolidation adGustments and eliminations we can now calculate theminority interests in current period's profits and in share capital and reserves. e will need toconsider direct and indirect ownership interests.



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Calculation of direct and indirect interests in Clo-ell# Ltd and Bronte LtdClo-ell# Ltd Bronte Ltd

Parent entity interestirect )*

9ndirect


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Clo-ell# Ltd Bronte Ltd .otal "I"inorit# interest in profits for #ear ending 3! $une %!!& Heported profit after income tax expense #from the unadGustedaccounts of the separate entities$ @- ))) @( ))) Ad(ustment relating to inventory

nrealised profit in closing inventory #8() )))$"ax effect of unrealised profit in closing inventory 188 )))

Fair value ad(ustment epreciation adGustment due to revaluing factory buildings to fair value #3- )))$"ax effect of depreciation adGustment due to revaluing factory buildings + @))

ntragroup dividendsividend revenue from within the group #paid by %ronte !td to lovelly !td$ #-@8 )))$

Goodwill impairment in organisation controlled by intermediate subsidiary #-) )))$ -______AdGusted profit after income tax expense 3(( ))) 8)+ @))4inority interest in adGusted profit after income tax expense #direct and indirect$ 3)* 7(*4inority interest in adGusted profit after income tax expense 11( )!! %39 '(, 3'3 &(,9f we loo/ at the above calculations we see that they are the same form of adGustments that we made inhapter 3), which concentrated on minority interests. "he only difference is that we have made anadGustment for the dividends received by lovelly !td from %ronte !td, and we have also madeadGustments for the impairment loss pertaining to the goodwill acquired in %ronte !td #which isadGusted against the profits of lovelly !td as lovelly !td acquired the goodwill in %ronte !td$.Calculation of minorit# interest in *opening+ retained profits 1 $ul# %!!,

Heported retained earnings 2 1 Iuly -))( 1 +-) ))) - @() ))) Pre-investment portion +@) ))) 1 -() )))

4inority interest percentage #direct interests only$ 3)* 8)*4inority interest in pre2investment retained profit2 1 Iuly -))( %,, !!! '1% !!! ,!!

Post-investment portion +@) ))) 1 8)) )))epreciation adGustment due to revaluing factory buildingsto fair value #in relation to the previous 3 years$ #+@ )))$

"ax effect of depreciation adGustment due to revaluing factory buildings -( ())9mpairment loss 2 goodwill #relating to purchase of %ronte by lovelly !td$ #17- +@)$ JJJJJJJJ AdGusted post2investment retained profitKemL1 Iuly -))( () )8) 1 33- ())

4inority interest in adGusted post2investment retained profit #direct and indirect$ 3)* 7(*4inority interest in adGusted post2investment retained profit 2 1 Iuly -))( %)% 11% 993 !%) 1 !1' 13(Calculation of minorit# interest in di-idends nterim dividend -88) ))) 4inority interest in

dividends #direct only$ 3)* 8)*4inority interest in interim dividends 19( !!! *19(

Final dividend 3@) ))) -4inority interest in dividends #direct only$ 3)* 8)*4inority interest in final dividends 1!, !!! *1!,

.otal minorit# interest in retained earnings as at 3! $une %!!& 1 ,,' 1!)

Calculation of minorit# interest in share capital5hare capital - -8) ))) @8) )))4inority interest in share capital #direct only$ 3)* 8)*4inority interest in share capital (9% !!! %'( !!! &%,

Calculation of minorit# interest in re-aluation reser-eHeported revaluation reserve 2 2Add

Asset revaluation due to revaluing factory buildings to fair value at investment date 2 71- )))"ax effect of revaluing factory buildings to fair value 2 #173 @))$AdGusted pre2investment revaluation reserve 2 37( 8))4inority interest in adGusted pre2investment revaluation reserve #direct only$ 3)* 8)*

"inorit# interest in adjusted pre=in-estment re-aluation reser-e = 183 3@) 183 3@).otal minorit# interest in closing share capital and reser-es % &'( )()A review of the above calculations reinforces the following0

• urrent period profits are allocated using the sum of direct and indirect ownership interests.

• Pre2acquisition balances of reserves #in this example retained earnings and revaluation reserve$ are allocated on the basis

of direct ownership interests only.

• Post2acquisition movements in reserves are allocated on the basis of the sum of direct and indirect ownership interests.

• ividends are allocated on the basis of direct ownership interests only.

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 3121@


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Consolidation worsheet as at 3! $une %!!&

"aroura Ltd

Clo-ell#Ltd

BronteLtd

Dr Cr Consolidated

"inorit#

5ales 3) ))))))

1@ ))))))

18 ))))))

( ))))))#G$

7- ))) )))

ost ofgoods sold

-8 8)))))

13 )8))))

11 @)))))

8())))#/$

( ))))))#G$

81 7-) )))

;ross profit 7 @)) ))) - +@) ))) - 8)))))

1) 8() )))

epreciationxpense

#7-) )))$ #-)) )))$ #- )))$ 3- )))#c$ #(-8 )))$

9mpairmentloss ;oodwill

2 2 2 -) )))#g$1())))#i$

#-)) )))$

:ther

expenses

#- +-

)))$

#1 +)8

)))$

#1)8(

)))$

#7 +-8 )))$

ividendrevenue

-7- ))) -@8 ))) 2 -@8)))#)$-7-)))#p$

2

;ain on saleof factory

@() ))) 2 2 @())))#m$

2

Profit beforetax

3 )8) ))) 1 1-))))

1 -())))

3 73- ))) 373 +@(

9ncome taxexpense

#1 -1@)))$

#88( )))$ #71-)))$

+ @))#d$188 )))#l$

-)8 )))#n$

#1 (1( 8))$

6rofit afterta7

1 (-8 ))) @- ))) @( ))) 1 13 @))

Hetained profit 2 1 Iuly-))(

- (() ))) 1 +-) ))) - @())))

+@ )))#c$@()))#e$17-+@)#f$@-)))#h$

-( ())#d$ 7 (1+ (8) 1 (1713@

9nterim

dividend

#7)) )))$ 2 #88)

)))$

-@8 )))#o$ #@@ )))$ #1@

)))$Final dividend #1 )8)

)))$ #3@))))$

2 -7- )))#p$ #1 18( )))$ #1)()))$

8etainedprofit = 3!$une %!!&

3 1@8 ))) - -3- ))) 3 ))()))

7 )+ 88) 1 ((71)8

5hare capital 13 -)))))

- -8))))

@8) ))) 3(8)))#e$1 7@()))#h$

18 1-( ))) +-( )))

Hevaluation

reserve

2 2 2 173

@))#b$-17

71- )))#a$ 183 3@) 183 3@)



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)8)#e$.otal sharee5uit#

1@ 3@8)))

8 8-)))

3@8()))

1+ +() ())

LiailitiesAccounts

payable

3 @8) ))) - (@) ))) 1-@

)))

@ )))

ividends payable

1 )8) ))) 3@) ))) 2 -7-)))#q$

1 18( )))

eferred taxliability

2 22

3( 8))#d$ 173 @))#b$ 117 -))

.otal

e5uities

-1 )88)))

@+- ))) 8 +-8)))

-+ )-) )))

Assetsash 3)8 ))) -8 ))) 18( ))) 8@ )))Accountsreceivable

@(( ))) -)( ))) -- ))) 1 1@( )))

ividendsreceivable -7- ))) 2 2 -7- )))#q$ 2

9nventory 8 8)) ))) 1 @) ))) - ()))))

8() )))#/$ ( 8() )))

!and - (() ))) 8-) ))) (8) ))) 8 18) )))Plant andequip

1) 8)))))

-)) ))) 1 88))))

71-)))#a$8)))))#m$

-(( )))#a$ 1+ @@8 )))

Accum.depreciation

#7-) )))$ #3 @)))))$

#7@)))$

-(()))#a$

1-( )))#c$1 )()

)))#m$

#7 @1@ )))$

9nvestment inlovelly !td

- @8) ))) 2 2 - @8))))#h$

2

9nvestment in%ronte !td

2 1 @())))

2 1 @())))#e$

2

;oodwill 2 2 2 31-+@)#e$8)))))#h$

1- +@)

Accum.impairment

loss

17- +@)#f$-) )))#g$

1() )))#i$

#37- +@)$

eferred taxasset

2 2 2 188)))#l$-)8)))#n$

38( )))

"otal assets -1 )88)))

@+- ))) 8 +-8)))

1@ ((+@)

1@ (( +@) -+ )-) ))) - +7@8@8

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 3121(


19/24

/e can now prepare the consolidated financial statements0

Consolidated income statement of "aroura Ltd and its susidiariesfor the #ear ended 3! $une %!!&

5ales 7- ))) )))ost of goods sold 81 -)) )));ross profit 1) ()) )))epreciation expense (-8 )))9mpairment loss 2 goodwill -)) ))):ther expenses 7 +-8 )))Profit before income tax expense 3 (7- )))9ncome tax expense 1 +18 8))Profit after income tax expense 1 +3 @))Profit after income tax attributable to minority interest 373 +@(Profit after income tax attributable to parent entity interest 1 7(3 @3-

Consolidated alance sheet of "aroura Ltd and its susidiariesas at 3! $une %!!&

Consolidated

Assetsash 8@ )))Accounts receivable 1 1@( )))9nventory ( 8() )))!and 8 18) )))Plant and equipment 1+ @@8 )))less Accumulated depreciation #7 @1@ )))$;oodwill 1- +@)less Accumulated impairment losses #37- +@)$eferred tax asset 38( )))"otal assets -+ )-) )))

LiailitiesAccounts payable @ )))ividends payable 1 18( )))eferred tax liability 117 -))"otal liabilities + )3+ -))

2et assets 1+ +() ())

Hepresented by0


5hare capital 13 -)) ))) +-( ))) 18 1-( )))

Hevaluation reserve 2 183 3@) 183 3@)Hetained earnings 2 3) Iuly -))+ #x$ 3 (-8 33@ 1 ((7 1)8 7 )+ 88)1 )-8 33@ - +7@ 8@8 1+ +() ())



2ote 7: 8etained earningsHetained earnings 21 Iuly -))( 3 () )8 1 (17 13@ 7 7+7 (8)Profit after income tax 1 7(3 @3- 373 +@( 1 +3 @))9nterim dividend #7)) )))$ #1@ )))$ #@@ )))$Final dividend #1 )8) )))$ #1)( )))$ #1 18( )))$Hetained earnings 2 3) Iune -))+ 3 (-8 33@ 1 ((7 1)8 7 )+ 88)

31.18 "he consolidation Gournal entries required to revalue the building of %ronte !td as at the dateof lovelly !td's acquisition #the same date as that used in >uestion 31.13$, to eliminate

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 3121+


20/24

lovelly !td's investment in %ronte !td and to recognise the impairment loss will be the sameas those provided at entries #a$ to #g$ in the solution to >uestion 31.13 and therefore theywill not be repeated here. Bowever, changes will be required in relation to the elimination of 4aroubra !td's investment in lovelly !td.

Eliminate in-estment in Clo-ell# Ltd against "aroura Limited ;s share of Clo-ell#

Ltd;s owners; e5uit# at in-estment datelovelly !td 4aroubra !td

)* interest

5hare capital at acquisition date 2 1 Iuly -))@ - -8) ))) 1 7@( )))Hetained earnings at acquisition date 2 1 Iuly -))@ 1 3@) ))) +7- )))

)hare of post-acquisition retained earnings of *ronte +td attributable to lovelly +td prior to Maroubra +td’s acquisition of lovelly +td 9ncrease in retained earnings of %ronte !td from 3)Iune -))7 to 3) Iune -))@ D #1 8() ))) O1 -() )))$ x @) per cent 1-) ))) (8 )));oodwill impairment in %ronte !td to 3) Iune -))@ #1(3 @()$ #1-( 7@$

- 87 8-89nvestment in lovelly !imited - @8) )));oodwill on consolidation 1@8 7@

#h$ r 5hare capital 1 7@( )))r Hetained earnings 2 1 Iuly -))( +) 8-8r ;oodwill 1@8 7@r 9nvestment in lovelly !td - @8) )))

9n the previous wor/ed example we recognised an impairment loss on the goodwill acquiredin lovelly !td because the carrying amount of goodwill was greater than its recoverableamount. Bowever, in this example, because the recoverable amount of goodwill as at 3) Iune-))+ is deemed to be --) ))), which is greater than its carrying amount, no consolidationentry is required to recognise an impairment loss.

"he balance of the Gournal entries #G$ to #r$ are the same as in the previous wor/ed exampleand therefore will not be repeated here.

As we /now, we need to calculate the minority interests share in profits and capital andreserves. "he calculations underta/en in >uestion 31.13 for the minority interest's share of current period's profits, share capital, and dividends apply equally here. Bowever, we willneed to recalculate the minority interests' share of retained earnings as at 3) Iune -))( #thatis, opening retained earnings$.

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 312-)


21/24

Calculation of minorit# interest in *opening+ retained profits 1 $ul# %!!,Clo-ell# Bronte .otalLtd Ltd "I

Heported retained earnings 2 1 Iuly -))( 1 +-) ))) - @() )))

Pre-investment portion 1 3@) ))) 1 -() ))) Ad(ustments9mpairment loss 2 goodwill #relating to purchase of%ronte !td by lovelly !td$ #1(3 @()$ JJJJJJJJ

1 1@ 3-) 1 -() )))4inority interest in pre2investment retained profit O1 Iuly -))( #direct interests only$ 3)* 8)*4inority interest in pre2investment retained arnings to 1Iuly -))( 37- (+@ 71- ))) ,() ,&(

Post-investment portion 7@) ))) 1 8)) )))

Ad(ustmentsepreciation adGustment due to revaluing factory buildings to fair value #in relation to the previous 3 years$ #+@ )))$

"ax effect of depreciation adGustment due to revaluingfactory buildings -( ())

nrealised profit in opening inventory #last year's closing inventory$ #3-) )))$"ax effect of unrealised profit in opening inventory +@ ))) 2AdGusted post2investment retained profitKemL1 Iuly -))( 33@ ))) 1 33- ())4inority interest in adGusted post2investment retainedearnings 2 1 Iuly -))( #direct and indirect$ 3)* 7(*

4inority interest in adGusted post2investment retainedearnings 2 1 Iuly -))( 1)) ()) 3 )-8 ,93 ,%)

"otal minority interest in adGusted retained profit 2 1 Iuly -))( 1 93, 9%!

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 312-1


22/24

Consolidation worsheet as at 3! $une %!!&

"aroura Ltd

Clo-ell#Ltd

BronteLtd

Dr Cr Consolidated

"inorit#

5ales 3) ))))))

1@ ))))))

18 ))))))

( ))))))#G$

7- ))) )))

ost ofgoods sold

-8 8)))))

13 )8))))

11 @)))))

8())))#/$

( ))))))#G$3-))))#m$

81 -)) )))

;ross profit 7 @)) ))) - +@) ))) - 8)))))

1) ()) )))

epreciationxpense

#7-) )))$ #-)) )))$ #- )))$ 3- )))#c$ #(-8 )))$

9mpairmentloss ;oodwill

2 2 2 -) )))#g$ #-) )))$

:therexpenses

#- +-)))$

#1 +)8)))$

#1)8()))$

#7 +-8 )))$

ividendrevenue

-7- ))) -@8 ))) 2 -@8)))#p$-7-)))#q$

2

;ain on saleof factory

@() ))) 2 2 @())))#n$

2

Profit beforetax

3 )8) ))) 1 1-))))

1 -())))

8 )3- ))) 8-1 1@(

9ncome tax

expense

#1 -1@

)))$

#88( )))$ #71-

)))$

+@

)))#m$

+ @))#d$

188 )))#l$-)8 )))#o$

#1 +18 8))$

6rofit afterta7

1 (-8 ))) @- ))) @( ))) - 11 @))

Hetainedearnings 2 1Iuly -))(

- (() ))) 1 +-) ))) - @())))

+@ )))#c$@()))#e$17-+@)#f$+)8-8#h$

--8)))#m$

-( ())#d$ 7 3@) 81@ 1 3(-)

9nterimdividend

#7)) )))$ 2 #88))))$

-@8 )))#p$ #@@ )))$ #1@)))$

Final dividend #1 )8))))$

#3@))))$

2 -7- )))#q$ #1 18( )))$ #1)()))$

8etainedearnings = 3!$une %!!&

3 1@8 ))) - -3- ))) 3 ))()))

7 @78 )1@ 1 (7(((

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 312--


23/24

5hare capital 13 -)))))

- -8))))

@8) ))) 3(8)))#e$1 7@()))#h$

18 1-( ))) +-( )))

Hevaluation

reserve

2 2 2 173

@))#b$-17)8)#e$

71- )))#a$ 183 3@) 183 3@)

.otal share

e5uit#

1@ 3@8)))

8 8-)))

3@8()))

1+ +-7 3@

LiailitiesAccounts

payable3 @8) ))) - (@) ))) 1-@

))) @ )))

ividends payable

1 )8) ))) 3@) ))) 2 -7-)))#r$

1 18( )))

eferred tax

liability

2 2

2

3( 8))#d$ 173 @))#b$ 117 -))

.otale5uities

-1 )88)))

@+- ))) 8 +-8)))

-( +@8 7@

Assetsash 3)8 ))) -8 ))) 18( ))) 8@ )))Accountsreceivable

@(( ))) -)( ))) -- ))) 1 1@( )))

ividendsreceivable

-7- ))) 2 2 -7- )))#r$ 2

9nventory 8 8)) ))) 1 @) ))) - ()))))

8() )))#/$ ( 8() )))

!and - (() ))) 8-) ))) (8) ))) 8 18) )))Plant andequip

1) 8)))))

-)) ))) 1 88))))

71-)))#a$8)))))#n$

-(( )))#a$ 1+ @@8 )))

Accum.depreciation

#7-) )))$ #3 @)))))$

#7@)))$

-(()))#a$

1-( )))#c$1 )())))#n$

#7 @1@ )))$

9nvestment inlovelly !td

- @8) ))) 2 2 - @8))))#h$

2

9nvestment in

%ronte !td

2 1 @()

)))

2 1 @()

)))#e$

2

;oodwill 2 2 2 31-+@)#e$1@87@#h$

8 73@

Accum.impairmentloss

17- +@)#f$-) )))#g$

#1- +@)$

eferred taxasset

2 JJJJJJJ

2 JJJJJJ

2 JJJJJJ

188)))#l$-)8

)))#o$

JJJJJJJ 38( )))

JJJJJJJ JJJJJJ

"otal assets -1 )88)))

@+- ))) 8 +-8)))

1@ ((+@)

1@ (( +@) -+ +@8 7@ - +8-8(

5olutions 4anual t6a Australian Financial Accounting 76e by raig eegan 312-3


24/24

/e can now prepare the consolidated financial statements0

Consolidated income statement of "aroura Ltd and its susidiariesfor the #ear ended 3! $une %!!&

5ales 7- ))) )))ost of goods sold 81 -)) )));ross profit 1) ()) )))epreciation expense (-8 )))9mpairment loss 2 goodwill -) ))):ther expenses 7 +-8 )))Profit before income tax expense 8 )3- )))9ncome tax expense 1 +18 8))Profit after income tax expense - 11 @))Profit after income tax attributable to minority interest 8-1 1@(Profit after income tax attributable to parent entity interest 1 @+@ 83-

Consolidated alance sheet of "aroura Ltd and its susidiariesas at 3! $une %!!&

Consolidated

Assetsash 8@ )))Accounts receivable 1 1@( )))9nventory ( 8() )))!and 8 18) )))Plant and equipment 1+ @@8 )))less Accumulated depreciation #7 @1@ )))$;oodwill 8 73@less Accumulated impairment losses #1- +@)$eferred tax asset 38( )))"otal assets -( +-7 3@

LiailitiesAccounts payable @ )))ividends payable 1 18( )))eferred tax liability 117 -))"otal liabilities + )3+ -))

2et assets 1+ +-7 3@

Hepresented by0


5hare capital 13 -)) ))) +-( ))) 18 1-( )))Hevaluation reserve 2 183 3@) 183 3@)Hetained earnings 2 3) Iuly -))+ #x$ 3 ( 1-( 1 (7 ((( 7 @78 )1@

1@ +( 1-( - +8 -8( 1+ +-7 3@



2ote 7: 8etained earningsHetained earnings 21 Iuly -))( 3 @-1 @+@ 1 3( -) 7 3@) 81@Profit after income tax 1 @+@ 83- 8-1 1@( - 11 @))9nterim dividend #7)) )))$ #1@ )))$ #@@ )))$Final dividend #1 )8) )))$ #1)( )))$ #1 18( )))$

Hetained earnings 2 3) Iune -))+ 3 ( 1-( 1 (7 ((( 7 @78 )1@

5 l i 4 l 6 A li Fi i l A i 76 b i 31 -8

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