ACC706 ACCOUNTING THEORY

Question 3 (30 Marks)

On 1 July 2013, Samwell Ltd acquired 100% of the share capital of Gilly Ltd ( cum div)
for $810,000. Gilly Ltd’s balance sheet on acquisition date included:
Dividend payable $10,000

Retained earnings 200,000

Share capital 500,000

General reserve 50,000

At acquisition date, all of Gilly Ltd’s net assets were recorded at fair value
except for:
Carrying amount Fair

Inventory $34,000 $40

Land 67,000 75

Contingent liability – 10

Buildings (Cost $96,000) 67,200 78

Additional Information:
2013. a) The dividend payable at acquisition date was subsequently paid in August
2013.
2014. b) The revalued inventory was sold during the year ended 30 June 2014.c) The
contingent liability identified on the acquisition of Gilly Ltd still existed at 30 June
2017.d) The revalued land was sold during the year ended 30 June 2017 for
$42,000.
2015. e) The revalued buildings were still held at 30 June 2017 being depreciated on
the straight line basis at 10% p.a.
2016. f) Since acquisition, goodwill has been impaired by $4,000. $1,500 of this
impairment occurred during the year ended 30 June 2017.
2017. g) Of the management fee revenues earned by Samwell Ltd during the year
ended 30 June 2017, $12,000 was collected from Gilly Ltd.
2018. h) Gilly Ltd’s inventory balance at 1 July 2016 included an item previously
purchased from Samwell Ltd. This inventory had been sold by Samwell Ltd to Gilly
Ltd at a profit of $4,000.
2019. i) During the year ended 30 June 2017, Gilly Ltd sold a quantity of inventory to
Samwell Ltd for $18,000. This inventory had originally cost Gilly Ltd $12,000 with
25% of this inventory still being held by Samwell Ltd at 30 June 2017.
2020. j) All dividends paid/declared by Samwell Ltd during the year ended 30 June 2017
was from post-acquisition profits.
1. k) Financial statements for the year ended 30 June 2017 are reproduced below:
Samwell Ltd Gi

Sales $5,220,000 $2,

 Cost of goods sold (4,070,000) (2,2

Gross profit 1,150,000 46

Dividend revenue 92,000

Interest revenue – 2

Management fees revenue 25,000

Other income 30,000

Depreciation expense (180,000) (8

Finance costs (91,000) (3

Other expenses (284,000) (3

Profit before income tax 742,000 32

Income tax expense (202,000) (8

Profit after tax 540,000 23

Retained earnings at (01/07/16) 695,000 32

Interim dividend paid (70,000) (3

Final dividend declared (140,000) (6

Retained earnings at (30/06/17) 1,025,000 46

Share capital 800,000 50

General reserve 210,000 5

Total equity 2,035,000 1,0

Trade and other payables 413,000 13

Dividend payable 140,000 6

Loan from Gilly Ltd

(8% per year, interest payable 31 December)
250,000
 Mortgage loan 1,453,000 40

Deferred tax liabilities 90,000

Total liabilities 2,346,000 59

Total liabilities and equity 4,381,000 1,6

Cash 194,000 11

Trade and other receivables 72,000 3

Dividends receivable 60,000

Inventory 750,000 44

Land 770,000 25

Buildings 1,500,000 78

Accumulated depreciation buildings (320,000) (49

Plant and equipment 790,000 45

Accumulated depreciation plant and equipment (235,000) (21

Investment in Gilly Ltd 800,000

Loan to Samwell Ltd

(8% per year, interest payable 31 December)
– 25

Total Assets 4,381,000 1,6

Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date. (2
marks)
2. Prepare the consolidation journal entries for Samwell Ltd immediately after
acquisition on 1 July 2013. (6 marks)
3. Prepare the consolidation journal entries for Samwell Ltd as at 30 June 2017. (14
marks)
4.Prepare the consolidation worksheet for the preparation of the consolidated
financial statements by Samwell Ltd as at 30 June 2017. (8 marks)
(Source: adapted from Arthur, N., Luff, L., Keet, P. Accounting for
corporate combinations and associations (7e), Pearson Education, Australia.)
Question 4 (40 marks)
Part A (30 marks)
On 1 January 2013, Petyr Ltd acquired 80% of the share capital of Sansa Ltd for
$4,400,000. At acquisition date, Sansa Ltd’s balance sheet included:
 Share capital $5,000,000

Retained profits 350,000

General reserve 50,000

At acquisition date, all of Sansa Ltd’s net assets were recorded at fair value
except for:
Carrying Amount Fair

Equipment (cost $67,000) $50,000 $58

Additional information:
1. a) Petyr Ltd adopts the
partial goodwill method.
2. b) The revalued
equipment was still held
at 30 June 2017, being
depreciated on the
straight-line basis over
5 years.
3. c) On 1 January 2016,
Sansa Ltd sold an item
of equipment to Petyr
Ltd, recognising a gain
of $22,000 on the sale.
This equipment was still
held at 30 June 2017
and at the time of the
sale it was estimated
that it would have a
further useful life of 10
years.
4. d) During the year
ended 30 June 2017,
Sansa Ltd sold a
quantity of inventory to Petyr Ltd for $28,000. Sansa Ltd received a gain of $8,500
on the sale and Petyr Ltd still held 25% of this inventory at 30 June 2017.
5. e) During the year ended 30 June 2017, Petyr Ltd sold an item of plant to Sansa
Ltd at a gain of $80,000. This machinery was held as inventory in the books of
Sansa Ltd at 30 June 2017.
6. f) Financial statements for the year ended 30 June 2017 are reproduced below:
Petyr Ltd Sans

Sales $3,283,750 $1,80

Cost of goods sold (1,490,000) (1,46

Gross profit 1,793,750 340

 Gain on sale of plant 80,000

Other income 16,250

Depreciation expense (320,000) (240

Other expenses (180,000) (130

Profit (loss) before income tax 1,390,000 (30,

Income tax expense/income (440,000) 10,

Profit (loss) after tax 950,000 (20,

Retained earnings at 01/07/16 1,100,000 600

Dividends paid (500,000)

Dividend declared – (25,

Trans. from general reserve – 15,

Retained earnings at 30/06/17 1,550,000 570

Share capital 7,000,000 5,00

General reserve – 35,

Total Equity 8,550,000 5,60

Current tax liability 480,000

Other liabilities 960,000 855

Borrowings – 1,50

Deferred tax liability –

Total Liabilities 1,440,000 2,35

Total liabilities and equity 9,990,000 7,96

Inventory 420,000 543

Other current assets 930,000 2,18

 Property, plant and equipment 4,210,000 1,99

Accumulated depreciation (1,050,000) (800

Investments 5,400,000 3,58

Deferred tax asset 80,000 460

Total assets 9,990,000 7,96

Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date. (2
marks)
2. Prepare the consolidation journal entries for Petyr Ltd at 1 January 2013,
immediately after acquisition. (4 marks)
3. Prepare the consolidation journal entries for Petyr Ltd as at 30 June 2017. (16
marks)
4.Prepare the consolidation worksheet for the preparation of the consolidated
financial statements by Petyr Ltd as at 30 June 2017. (8 marks)(Source: adapted
from Arthur, N., Luff, L., Keet, P. Accounting for corporate combinations and
associations (7e), Pearson Education, Australia.)
Part B (10 marks)
On 1 July 2017, Tywin Ltd acquired 75% of the shares (cum div.) of Shae Ltd for
$120,500. At this date the equity of Shae Ltd consisted of:
Share capital $ 40,00

General reserve 3,000

Retained earnings 25,000

At the date of the business combination, all the identifiable assets and liabilities of Shae
Ltd had carrying amounts equal to their fair values except for:
Carrying amount Fair

Plant (cost $60,000) $40,000 $5

Inventory 25,000 31

Receivables 33,000 30
Additional information:
1. a) One of the liabilities of Shae Ltd at 1 July 2017 was a dividend payable of
$5,000.
2. b) The tax rate is 30%
Required:
1. Prepare the acquisition analysis as at acquisition date using the partial goodwill
method. Show all workings. (2 marks)
2. Prepare the acquisition analysis as at acquisition date using the full goodwill
method and the fair value of the non-controlling interest at the date of acquisition is
$20,000.
Show all workings. (3 marks)