Topic 7 Tutorial Solutions

AYN417
Topic 7: Consolidations Basic Principles

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Tutorial questions
Cheaprt18:Q2,3470suSdy
Cheaprt19:Q,45680P. 1*
Chapter 18
2. What is meant by the term control?
An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.
3. For what purposes are the consolidated financial statements prepared?
Possible objectives are:
- Supply of relevant information
- Supply of comparable information
- Accountability of management
- Reporting of risks and benefits
4. What are the key elements of control?
There are 3 key elements:
- Power over the investee
- Exposure or rights to variable returns from the parents involvement with the
subsidiary
- The ability to use the power over the subsidiary to affect the amount of the
parents returns.
7. Explain the link between power and returns
A parent must have the ability to use its power over the investee to affect the returns
received from the investee. The parent must be able to use its power to increase the
benefits and limit its losses from the subsidiarys activities. If the investor has power in
that it has the majority voting power in the investee, but all the operating decisions
have already been established in the constitution of the investee, then the investor
does not have control over the investee.
10.
Are only those entities in which another entity owns more than 50% of
the issued shares classified as subsidiaries?
No. The criterion for consolidation is not based on percentage ownership, but rather it
is based on the concept of control. However, when the percentage interest is below
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50%, judgement on the existence of control is required. In forming this judgement, the
accountant has to rely on evidence to form an opinion. Control is possible when there
is less than 50%. Likewise control may not be evident with more than 50%.
AYN417
Case Study 4

Voting interest widely held
Source: Adapted from Case III issued by the FASB as a part of its
Consolidations project.
41%
Mickey Ltd
Mouse Ltd
Mickey Ltd
NCI
41%
59% - widely held
A)
If the NCI is widely held then it may be argued that Mickey Ltd has the capacity to
control Mouse Ltd based on the limited potential for the NCI to outvote Mickey Ltd in
determining the directors of Mouse Ltd.
However, other factors should also be considered, such as:
- historical attendance at AGMs of Mouse Ltd
- interest groups such as Green groups within the NCI
- geographical distribution of NCI
If the NCI were tightly held would the decision be any different?
The other key factor in the definition is the returns criterion. A parent must have the
rights to variable returns from the control exercised as well as the ability to use
power to affect returns.
In this case, many of the key policy decisions seem to have been set by contract:
- must purchase 90% of TV shows from Mickey Ltd
- terms & conditions of supply determined by Mickey Ltd
- limited rights to engage in other businesses
- provision of marketing services
- lease of rental space.
Hence even if the NCI could dominate the Board of Mouse Ltd, there is not much they
can change to increase or modify their benefits. Mickey Ltd is therefore running the
business. The NCI are simply investors.
B)
Whether the ownership of Mouse Ltds shares comes from acquisition on the open
market or acquisition at incorporation of the company is not of interest as it has no
effect on the determination of control.
AYN417
Chapter 19
1. Explain the purpose of the pre-acquisition entries in the preparation of
consolidated financial statements.
The purpose of the pre-acquisition entry is to:
- prevent double counting of the assets of the economic entity
- prevent double counting of the equity of the economic entity
- recognise any goodwill/gain on bargain purchase
A simple example such as that below could be used to illustrate these points:
A Ltd has acquired all the issued shares of B Ltd. The balance sheets of both
companies immediately after acquisition are as follows:
Share
capital
Reserves
$200
Share
capital
Reserves
100
300
Shares in B
Ltd
Cash
$100
50
150
150
--
150
300
Cash
150
150
The balance of the Shares in B Ltd account can be changed to introduce goodwill/
gain on bargain purchase amounts.
4. If the subsidiary has recorded goodwill in its records at acquisition date,
how does this affect the preparation of the pre-acquisition entries?
Discuss:
- the difference between internally generated and acquired goodwill, and how the
goodwill can be internally generated to the subsidiary but acquired by the
parent
- the effects on the worksheet in relation to the goodwill eg if the subsidiary has
recorded goodwill of $50 and the parent acquires all the shares in a subsidiary
for $4,050 when the equity of the subsidiary is $3,950
Parent
Goodwill
Subsidiar
y
50
Total
Dr
50
Cr
100
Group
150
In calculating the net fair value of the identifiable assets and liabilities acquired, there
must be an adjustment for the unidentifiable asset, goodwill, to calculate the goodwill
acquired by the group. The goodwill acquired, but not recorded, is recognised in the
business combination valuation entries. The pre-acquisition entries will eliminate the
BCVR as pre-acquisition equity.
On consolidation, the adjustment columns in the worksheet contain the adjustment
necessary so that the group goodwill is shown in the consolidated balance sheet. This
amount is the total of the goodwill recognised by the subsidiary at acquisition date
and the goodwill recognised on consolidation. This equals the total goodwill acquired
by the parent in its acquisition of the subsidiary.
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5. Explain how the existence of a bargain purchase affects the preacquisition entries, both in the year of acquisition and in subsequent
years.
Explain the meaning of and accounting for a bargain purchase as per AASB 3
Year of acquisition:
Bargain purchase is shown in the pre-acquisition entry as a gain.
Subsequent years:
The bargain purchase is subsumed into the opening balance of retained earnings. It
reduces the balance recorded by the subsidiary as the parent paid less for the
subsidiary than the fair value of the identifiable assets and liabilities of the subsidiary.
6. At the date the parent acquires a controlling interest in a subsidiary, if
the carrying amounts of the subsidiarys assets are not equal to fair
value, explain why adjustments to these assets are required in the
preparation of the consolidated financial statements.
AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary
be shown at fair value. The standard-setters believe that the fair value of the assets
and liabilities provides the most relevant information to users.
Even though the standard refers to an allocation of the cost of a business combination,
the standard does not require the identifiable assets and liabilities acquired to be
recorded at cost. The only asset acquired that is not measured at fair value is goodwill.
The fair value approach is emphasised by the required accounting for any bargain
purchase on combination. It is not accounted for as a reduction in the fair values of the
identifiable assets and liabilities acquired such that these items are recorded at cost.
Instead, the fair values are unchanged and the excess is recognised as a gain.
8. What is the purpose of the business combination valuation entries?
The purpose of these entries is to make consolidation adjustments so that in the
consolidated balance sheet the identifiable assets, liabilities and contingent liabilities
of the subsidiary are reported at fair value. This is to fulfil step 3 of the acquisition
method required to account for business combinations by AASB 3.
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 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.
AYN417
Question 19.4
Worksheet entries at acquisition date and in subsequent
year, no fair value/carrying amount differences at acquisition date, bargain
purchase
A: Consideration of $153,000
Acquisition analysis at 1 July 2016:
Purchase Consideration
Less Net fair value of identifiable assets and
liabilities
Share capital
General reserve
Retained earnings
153,00
0
80,00
0
30,00
0
40,00
0
Goodwill acquired
150,00
0
3,000
Worksheet entries at 1 July 2016:

Business combination valuation entries
Pre-acquisition entries
Goodwill
BCVR
(recognition of goodwill on
consolidation BCVR)
Retained earnings (1/7/16)
Share capital
General reserve
BCVR
Shares in Robert Ltd
(pre-acquisition elimination entry)
DR
3,000
CR
3,000
40,000
80,000
30,000
3,000
153,000
Worksheet entries at 30/6/2017 (note we wouldnt be doing consolidation as at 1/7/2017)

The entries are the same as those above.
Goodwill
BCVR
(recognition of goodwill on
consolidation BCVR)
Share capital
General reserve
BCVR
DR
3,000
CR
3,000
40,000
80,000
30,000
3,000
153,000
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B: Consideration of $148,000
Less Net fair value of identifiable assets and
liabilities
Share capital
General reserve
Retained earnings
148,00
0
80,00
0
30,00
0
40,00
0
Gain on bargain purchase
150,00
0
2,000

Share capital
General reserve
DR
40,000
80,000
30,000
CR
2,000
148,000
Worksheet entries at 30/6/2017

Retained earnings (1/7/16)*
Share capital
General reserve
DR
38,000
80,000
30,000
CR
148,000
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*40,000 - $2,000 gain on bargain purchaseC: Consideration of $145,000 and

recorded goodwill of $4000
Less Net fair value of identifiable assets and liabilities
Share capital
General reserve
Retained earnings
Goodwill
145,000
80,000
30,000
40,000
(4,000)
146,000
1,000

BCVR
Goodwill
(to derecognise goodwill recorded by sub on
consolidation)
DR
4,000
CR
4,000
Share capital
General reserve
BCVR
DR
40,000
80,000
30,000
CR
4,000
1,000
145,000
Worksheet entries at 30/6/2017

BCVR
Goodwill
(to derecognise goodwill recorded by sub on
consolidation)
DR
4,000
CR
4,000
Retained earnings (1/7/16)*
Share capital
General reserve
BCVR
* 40,000 1,000 gain on bargain purchase
DR
39,000
80,000
30,000
CR
4,000
145,000
AYN417
Question 19.6
entries

Business combination valuation entries, pre-acquisition

Share capital
Retained earnings
BCVR for FVA Patent net of tax (72-60) = 12,000 x (1-30%)
BCVR for FVA Plant (48-40) = 8,000 x (1-30%)
BCVR for FVA Inventory (28-21.6) = 6,400 x (1-30%)
Goodwill
174,800
80,000
68,800
8,400
5,600
4,480
167,280
7,520
Worksheet entries at 1 July 2016

Inventory
Deferred tax liability
BCVR
DR
6,400
1,920
4,480
Patent
BCVR
12,000
Accumulated depreciation equipment

Equipment
Business combination valuation reserve
40,000
Goodwill
BCVR
CR
3,600
8,400
32,000
2,400
5,600
7,520
7,520
Share capital
BCVR
Shares in Jeff Ltd
DR
68,800
80,000
26,000
CR
174,800
AYN417
Worksheet entries at 30 June 2017

The entries at 30 June 2017 are affected by:
- the sale of the inventory
- the depreciation of the plant
- the impairment of the goodwill
Cost of sales
Income tax expense
Transfer from BCVR
DR
6,400
CR
1,920
4,480
Patent
BCVR
12,000

Equipment
BCVR
40,000
3,600
8,400
32,000
2,400
5,600
Depreciation expense
Accumulated depreciation
(10% x ($48,000-$40,000)
800

Income tax expense
(30% x $800)
240
800
240
Goodwill
BCVR
7,520
Impairment loss goodwill

Accum. impairment losses goodwill
1,200
7,520
1,200
The pre-acquisition entries are affected by:
-
transfer from business combination valuation reserve to RE of $4 480 (sale

of inventory in the current year) &
transfer from RE to GR in the current year of $20 000

Share capital
BCVR
Shares in Jeff Ltd
BCVR: 5 600 [plant] + 4 480 [inventory] + 8 400 [patent]
+ 7 520 [goodwill] = 26 000
DR
68,800
80,000
26,000
CR
174,800
AYN417
General reserve
Transfer from RE to general reserve
Transfer from BCVR to RE
BCVR
20,000
20,000
4,480
4,480
*Alternative BCVR entry for Equipment

DR
CR
40,000
Equipment
40,000
Equipment
8,000
2,400
5,600
The above BCVR entry demonstrates the 2 steps for the recognition of a change in fair
value on consolidation.
1. Write back all of the accumulated depreciation for the asset at date of
acquisition.
2. Recognise the increase/decrease to the assets fair value with the tax effect.
From these 2 journal entries it is easier to see that the depreciation adjustments then
required at the end of each year for consolidation purposes are based on $8,000
increase to fair value. That is, the additional amount of the asset that needs to be
depreciated. In this question: $8,000/10 years = $800 per year.
AYN417
Question 19.9
Business combination valuation entries, pre-acquisition
entries for multiple years
Acquisition analysis at 1 January 2016:
(Nb. textbook details date as 1 June 2016, but this should be 1 January)
Share capital
Reserves
Retained earnings
FVA Plant 2,000 x (1-30%)
FVA Inventory 4,000 x (1-30%)
Goodwill
72,000
50,000
12,500
5,000
1,400
2,800
71,700
300

Accumulated depreciation plant
Plant
BCVR
DR
20,000
CR
18,000
600
1,400
(1/2 x $1,000 p.a.)
500

Income tax expense
(30% x $500)
150
Cost of sales
Income tax expense
Transfer from BCVR
3,600
500
150
1,080
2,520
This entry relates to 90% of the inventory that has been sold by 30 June 2016.
(COS = 90% of $4,000 FV Adj = $3,600)
Inventory
BCVR
400
120
280
This entry relates to 10% of the inventory still on hand at 30 June 2016.
(Inventory = 10% of $4,000 FV Adj = $400)
Goodwill
BCVR
300
300
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Share capital
Reserves
BCVR *
Shares in Colin Ltd
* (BCVR = $1,400 (plant) + $2,520 (inventory) + $280
(inventory) + $300 (goodwill) = $4,500)
BCVR
(This relates to the inventory that has been sold during the
year)
DR
5,000
50,000
12,500
4,500
CR
72,000
2,520
2,520

Plant
BCVR
(This relates to 1 years of depreciation 1 yr current,
year prior period)
DR
20,000
CR
18,000
600
1,400
1,000
500
1,500

Income tax expense
(30% x amounts in above depreciation entry)
450
Cost of sales
Income tax expense
Transfer from BCVR
400
Goodwill
BCVR
300
300
150
120
280
300
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Retained earnings (1/7/16) ($5,000 acq. date + 2,520
DR
7,520
CR
inventory)
Share capital
Reserves
BCVR
Shares in Colin Ltd
(BCVR = $1,400 (plant) + $280 (sold inventory) + $300
(goodwill) = $1,980)
BCVR
(This relates to the inventory that has been sold during
the year)
50,000
12,500
1,980
72,000
280
280
AYN417
Question 19.11*
Consolidation worksheet
Please note error in the text: The Transfer Darren Ltd made from retained earnings at 1
July 2014 to a general reserve should be for $3,000; not $3,600.
Net fair value of identifiable assets and liabilities
of Darren Ltd
Consideration transferred
= ($54,000 + $36,000 +
$18,000) (equity)
+ $2,000 (1 30%) (BCVR
inventory)
+ $1,500 (1 30%) (BCVR
plant)
= $110,450
= $110,000
= $450
THE WORKSHEET ENTRIES AT 30 JUNE 2015 ARE:

Ref Detail
1
Plant and machinery
2
(1/5 x $1,500 FV Adj)
Income tax expense
(30% x $300)
Cost of sales
Income tax expense
Transfer from business combination valuation reserve
DR
7,500
CR
6,000
450
1,050
300
300
90
90
1,800
540
1,260
This entry relates to 90% of the inventory that has been sold by
30 June 2015.
(COS = 90% of $2,000 FV Adj = $1,800)
Inventory
This entry relates to 10% of the inventory still on hand at 30 June
2015.
(Inventory = 10% of $2,000 FV Adj = $200)
200
60
140
AYN417
Pre-acq elimination entry.

The entry at 30 June 2015 is affected by:
- sale of inventory
- transfer to general reserve of $3,000
5

Share capital
Asset revaluation surplus
Shares in Darren Ltd
(BCVR = $1,050 (plant) + $1,260 (inventory) + $140
(inventory) = $2,450)
DR
36,000
54,000
18,000
2,450
CR
450
110,000
Transfer from business combination reserve to RE

(This relates to the inventory that has been sold during the
year)
1,260
General reserve
Transfer to general reserve
3,000
1,260
3,000
For your reference but not required in the question - The Pre-acquisition
entries as at 1 July 2014:
DR
CR
36,000
Share capital
54,000
18,000
2,450
450
Shares in Darren Ltd
110,000
AYN417
THE WORKSHEET AT 30 JUNE 2015:

Ethan
Ltd
Profit before tax
Darre
n
Ltd
120,000 12,500
132,500
Income tax expense
(56,000) (4,200)
(60,200)
Profit
Retained earnings
(1/7/14)
Transfer from BCVR
Transfer to general
reserve
Retained earnings
(30/6/15)
Share capital
BCVR
64,000 8,300
80,000 36,000
72,300
116,000
0 (3,000)
(3,000)
144,000 41,300
185,300
360,000 54,000
-
414,000
-
54,000
2,450
10,000 3,000
18,500 20,000
13,000
38,500
3,000
18,000
532,50 118,30
0
0
42,500 13,000
650,80
0
55,500
575,00 131,30
0
0
706,30
0
541,78
0
450 55,920
60
597,70
0
160,000 20,000
360,000 125,60
0
(110,00 (33,00
0)
0)
55,000 18,700
110,000
-
180,000
485,600
180,000
6,000 479,600
(143,00
0)
73,700
110,000
7,500
575,00 131,30
0
0
706,30
0
124,6
00
General reserve
Asset revaluation
surplus
Liabilities
Land
Plant & machinery
Accum depreciation
Inventory
Shares in Darren
Total
Adjustments
Group
Dr
Re
Cr
f
300 2/5
450 130,850
1,800
3
2
90 (59,570
3
540
)
71,280
36,000
5
80,000
1,260
6/3
7
1,260
3,000
0
0
151,280
90
5
1
4
6
7
5
2/1
4
200
1/2
4
5
1,050
140
1,260
360,000
0
10,000
20,500
300 (135,80
0)
73,900
110,00
0
0
124,6 597,70
00
0
ETHAN LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2015
Profit before income tax
$130,850
Income tax expense
59,570
Profit for the period
$71,280
Other comprehensive income
Gains on revaluation of assets
7,000
Comprehensive income
$78,280
AYN417
AYN417

ETHAN LTD
Consolidated Statement of Changes in Equity
for financial period ending 30 June 2015
Comprehensive income for the period
$78,280
Retained earnings at 1 July 2014
Profit for the period
Retained earnings at 30 June 2015
$80,000
71,280
$151,280
Share capital at 1 July 2014

Share capital at 30 June 2015
$360,000
$360,000
Asset revaluation surplus at 1 July 2014

Increments
Asset revaluation surplus at 30 June
2015
$13,500
7,000
$20,500
General reserve at 1 July 2014

General reserve at 30 June 2015
$10,000
$10,000
ETHAN LTD
Consolidated Statement of Financial Position as at 30 June 2015
Current Assets
Inventories
$73,900
Non-current Assets
Property, plant and equipment:
Land
180,000
Plant & machinery
$479,600
(135,800)
343,800
Total Non-current Assets
523,800
Total Assets
Equity
Share capital
Retained earnings
General reserve
Total Equity
Liabilities
Total Equity and Liabilities
$597,70
0
$360,000
151,280
10,000
20,500
541,780
55,920
$597,70
0

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AYN417

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

Worksheet entries at 1 July 2016:

Worksheet entries at 30/6/2017 (note we wouldnt be doing consolidation as at 1/7/2017)

Topic 7: Consolidations Basic Principles

Gain on bargain purchase

Worksheet entries at 1 July 2016:

Worksheet entries at 30/6/2017

Topic 7: Consolidations Basic Principles

*40,000 - $2,000 gain on bargain purchaseC: Consideration of $145,000 and

Worksheet entries at 1 July 2016:

Worksheet entries at 30/6/2017

Topic 7: Consolidations Basic Principles

Acquisition analysis at 1 July 2016:

Worksheet entries at 1 July 2016

Accumulated depreciation equipment

Topic 7: Consolidations Basic Principles

Worksheet entries at 30 June 2017

Accumulated depreciation equipment

Deferred tax liability

Impairment loss goodwill

transfer from business combination valuation reserve to RE of $4 480 (sale

Retained earnings (1/7/16)

Topic 7: Consolidations Basic Principles

*Alternative BCVR entry for Equipment

Topic 7: Consolidations Basic Principles

Worksheet entries at 30 June 2016

Deferred tax liability

Topic 7: Consolidations Basic Principles

Worksheet entries at 30 June 2017

Deferred tax liability

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

THE WORKSHEET ENTRIES AT 30 JUNE 2015 ARE:

Topic 7: Consolidations Basic Principles

Pre-acq elimination entry.

Retained earnings (1/7/14)

Transfer from business combination reserve to RE

Topic 7: Consolidations Basic Principles

THE WORKSHEET AT 30 JUNE 2015:

Profit before tax

Income tax expense

Topic 7: Consolidations Basic Principles

Topic 7: Consolidations Basic Principles

Share capital at 1 July 2014

Asset revaluation surplus at 1 July 2014

General reserve at 1 July 2014

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