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PRACTICE QUESTION Bells Ltd.

On 1 July 2014 Bells Ltd acquires 80 per cent of the equity capital of Torquay Ltd at a cost of
$2 million. All assets of Torquay Ltd were fairly stated, and the total shareholders funds of
Torquay Ltd were $2.2 million, as follows:
Share capital $1 500 000
Retained earnings $700 000
$2 200 000
As at 30 June 2016 (that is, two years after the date of acquisition) the financial statements of
the two companies are as follows:
Bells Ltd Torquay Ltd
($000) ($000)
Detailed reconciliation of opening and closing retained
earnings
Sales revenue 480 115
Cost of goods sold (100) (40)
Other expenses (80) (15)
Other revenue 70 25
Profit before tax 370 85
Tax expense 60 30
Profit for the year 310 55
Retained earnings30 June 2015 1 000 800
1 310 855
Dividends paid (160) (30)
Dividend declared (40) (10)
Retained earnings30 June 2016 1 110 815
Statement of financial position
Shareholders equity
Retained earnings 1 110 815
Share capital 4 000 1 500
Current liabilities
Accounts payable 20 30
Dividends payable 40 10
Non-current liabilities
Loans 600 250
Total of liabilities and equity 5 770 2 605
Current assets
Cash 150 25
Accounts receivable 242 175
Dividends receivable 8
Inventory 500 300
Non-current assets
Land 1 400 1 105
Plant 1 870 1 300
Accumulated depreciation (400) (300)
Investment in Torquay Ltd 2 000
Total assets 5 770 2 605

Other information
The management of Bells Ltd values any non-controlling interest in Torquay Ltd at fair
value.
During the current financial year Torquay Ltd pays management fees of $10 000 to Bells
Ltd. This item is included in other expenses and income.
During the current financial year Bells Ltd sold inventory to Torquay Ltd at a price of $30
000. The inventory cost Bells $22 000 to produce. Fifty per cent of this inventory is still
on hand with Torquay Ltd at the end of the financial year. (Hint: as this unrealised profit
relates to sales made by Bells Ltd then no adjustments are necessary when calculating
non-controlling interests in Torquay Ltd.)
During the current financial year Torquay Ltd sold inventory to Bells Ltd at a price of $20
000. The inventory cost Torquay Ltd $14 000 to produce. Forty per cent of this inventory
is still on hand with Bells Ltd at the end of the financial year. (Hint: as this unrealised
profit relates to sales made by Torquay Ltd then adjustments will be necessary when
calculating non-controlling interests in Torquay Ltd.)
In the preceding financial year, Torquay Ltd sold inventory to Bells Ltd at a price of $11
000. The inventory cost Torquay Ltd $8 000 to produce. At 30 June 2015, 20 per cent of
this inventory was still held by Bells Ltd. (Hint: this information will be used to create an
adjustment to non-controlling interests in Torquay Ltd.)
The management of Bells Ltd believe that goodwill acquired has subsequently been
impaired. It was impaired by $12 000 in the year to 30 June 2015, and by a further $12
000 in the year to 30 June 2016. (Hint: Because the non-controlling interest in Torquay is
being valued at fair value, then this will mean that the non-controlling interest will
incorporate a proportional share of goodwill. Therefore, any impairment in goodwill will
impact the non-controlling interest in Torquay Ltd.)
On 1 July 2015 Torquay Ltd sold an item of plant to Bells Ltd for a price of $45 000
when its carrying value in Torquay Ltds accounts was $25 000 (cost $50 000,
accumulated depreciation $25 000). This item of plant was being depreciated over a
further 10 years, with no expected residual value. (Hint: as this unrealised profit relates
to a sale of plant made by Torquay Ltd then adjustments will be necessary when
calculating non-controlling interests in Torquay Ltd.)
On 30 June 2016 the directors of Torquay Ltd declared and communicated to their
shareholders that they would pay a final dividend amounting to $10 000. (Hint: dividends
paid by Torquay will act to reduce the non-controlling interest in Torquay.)
The tax rate is 30 per cent.
REQUIRED
Prepare the consolidated financial statements of Bells Ltd and its controlled entity for the
reporting period ending 30 June 2016.