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b)PK Ltd acquires a block of land on 1 January 2013 for $200 000 in cash. Due to
increased housing demand in the area, the land has a market value of $290 000 on 30 June
2014. However, the market value falls to $140 000 on 30 June 2016.
Required: Provide journal entries to record the revaluations on 30 June 2014 and 30
June 2016.
30 June 2014
Dr Land 90 000
Cr Revaluation surplus 90 000
30 June 2016
Dr Revaluation surplus 90 000
Dr Loss on revaluation of land 60 000
Cr Land 150 000
Question - 3 (Impairment of N-C Assets)
a)How should be the reversal of an impairment loss be accounted for?
b)Azalea Ltd has determined that its China division is a cash-generating unit. The carrying
amounts of the assets at 30 June 2015 are as follows (Total $540 000):
Factory $210,000
Land $150,000
Equipment $120,000
Machinery $60,000
Azalea Ltd calculated the Value in Use of the division to be $510,000 and Fair Values less
Cost to Sell (net selling price) of $480,000.
Required: Prepare the appropriate journal entries for the impairment loss, assuming
that the fair values less cost to sell of the land are:
I.$140,000
II.$145,000
If value in use is $510 000, then there is an impairment loss of $30 000. The allocation of
the impairment loss is as follows:
If the fair value less costs to sell of the land is $140 000, then the journal entry to record
the impairment loss is:
b)Tamarama Ltd acquires 100 per cent of Bronte Ltd on 1 July 2017. Tamarama Ltd pays
the shareholders of Bronte Ltd the following:
Cash $70,000
Plant and equipment Market value $250,000; carrying amount in the books of
Tamarama Ltd $170,000
Land Market value $300,000; carrying amount in the books of
Tamarama Ltd $200,000
There are also legal fees of $35,000 involved in acquiring Bronte Ltd.
On 1 July 2017 Bronte Ltd’s statement of financial position shows total assets of $700,000
and liabilities of $300,000. The fair value of the assets is $800,000.
Required: Has any goodwill been acquired and, if so, how much?
Cash $70 000
Plant and equipment $250 000
Land $300 000
$620 000
Fair value of net assets acquired:
Asset $800 000
Less Liabilities $300 000
$500 000
Goodwill $120 000
Question - 5 (Accounting for Joint Arrangements)
a)Does the required accounting treatment for a venture’s interest in a jointly controlled
operation differ from the requirements for an interest in a jointly controlled entity and, if
so, how do these requirements differ?
b)On 1 July 2018 Mineral Ltd enters into a joint venture arrangement with Ore Ltd. Both
venture commit themselves to a contractual arrangement in which Mineral Ltd contributes
machinery and Ore Ltd contributes cash of $2.5 million. The joint venture is not
undertaken through a separate entity and is considered to be a jointly controlled operation.
The machinery contributed by Mineral Ltd has a carrying value of $2 million and a fair
value of $2.5 million.
All current and future contributions are to be based on a 50:50 split, as are the future
distributions of output. The relevant tax rate is 30 per cent.
Required: Provide the journal entries to account for the ventures’ contributions.
Journal entries in the books of Mineral Ltd
1 July 2018
Dr Cash 1,250,000
Cr Machinery 1,000,000
Cr Profit on sale of machinery 250,000
Mineral Ltd could elect to revalue its remaining proportional interest in the machinery within its own
accounts
Dr Machinery 250,000
Cr Revaluation surplus 250,000
1 July 2018
Dr Machinery 1,250,000
Cr Cash 1,250,000
Question - 6 (Accounting for Equity Investments)
a)Explain the cost method and the fair value method of accounting.
b)On 1 July 2018 Ma Ltd acquires a 25 per cent interest in Pa Ltd for a cash consideration
of $375,000. On the date of the acquisition, the assets of Pa Ltd are reported at fair value.
The share capital and reserves of Pa Ltd at the date of acquisition are:
Additional information:
• For the year ending 30 June 2019, Pa Ltd record an after-tax profit of $80,000,
from which it pays a dividend of $30,000.
• For the year ending 30 June 2020, Pa Ltd records an after-tax profit of $100,000,
from which it pays a dividend of $50,000.
• On 30 June 2020, Pa Ltd revalues its land upwards by $70,000.
• The tax rate is 30 per cent.
• Ma Ltd has a number of subsidiaries.
Required: Prepare the journal entries under both the cost and the equity method of
accounting for the investment in Pa Ltd for the year ending 30 June 2020 (that is, two
years after acquisition).
Cost method—30 June 2020 entries
Dr Cash 12 500
Cr Dividend revenue 12 500
Liabilities
Accts pay. 60 000 60 000
Prov LSL 30 000 – 30 000 (30 000)
Prov war’ty 40 000 40 000 (40 000)
Loan pay. 400 000 400 000
530 000 460 000
Net assets 730 000 540 000
Temporary differences at period end 80 000 270 000 (10 000) (200 000)
Income tax adjustments 24 000 81 000 207 000 (60 000) 210 000
Question 9
On 1 July 2017 Anderson Ltd acquires 70 per cent of the equity capital of Thruster Ltd at a cost of $4 million. At the date of
acquisition all assets of Thruster Ltd are fairly stated, and the total shareholders’ fund of Thruster Ltd are $4.4 million consisting of:
Share Capital $3 000 000
Retained Earnings 1 400 000
4 400 000
As at 30 June 2019 (two years after the date of acquisition) the financial statements of the two companies are as follows:
Anderson Thruster Anderson Thruster Ltd
Ltd Ltd Ltd
(‘000) (‘000) (‘000) (‘000)
Detailed reconciliation of opening Statement of financial
and closing retained earnings position
Shareholders’ equity
Sales revenue 800 200 Retained earnings 2 220 1 630
Cost of goods sold (200) (80) Share capital 8 000 3 000
Other expenses (120) (60) Current liabilities
Accounts payable 120 80
Other revenue 310 85
Non-current liability
Profit 790 145 Loans 1 200 500
Tax 170 35 11 540 5 210
Profit after tax 620 110 Current assets
Retained earnings – 30 June 2018 2 000 1 600 Cash 300 50
Account Receivable 500 350
2 620 1 710
Inventory 1 000 600
Dividend paid (400) (80) Non-current assets
Retained earnings – 30 June 2019 2 220 1 630 Land 2 800 2 210
Plant 2 940 2 000
Investment in Thruster Ltd 4 000 -
11 540 5 210
Example – 3 (cont.)
Additional information:
The management of Anderson Ltd measures any non-controlling
interest in Thurster Ltd at a fair value.
During the 2019 financial Thruster Ltd sells of $45,000 of inventory
to Anderson Ltd. At year end, Anderson Ltd has sold all this
inventory.
The tax rate is 30 per cent.
Required:
Prepare consolidated journal entries.
Amount of Goodwill attributeSolution
to the non-controlling interests:
Impairment of goodwill
In the absence of information about the impairment of goodwill we will assume
that there has been no impairment of goodwill, and hence no adjustment is
necessary.
Example – 3: Solution (cont.)
Dividends paid
We eliminate the dividends paid within the group. Only the dividends
paid to parties outside the entity (to the non-controlling interests and
to the shareholders of the parent entity) are to be shown in the
consolidated financial statements – in particular, in the consolidated
statement of changes in equity.
Retained earnings – since acquisition ($1 600 000 - 200 000 60 000
$1 400 000)
iii. Non-controlling interest in the current period’s profit and
movements in reserves in the current period
Profit for the year 110 000
Profit Thruster contributed to the economic entity 110 000 33 000
Dividends paid by Thruster Ltd (80 000) (24 000)
1 783 286
Solution (cont.)
a)A judgement is handed down in the Victorian Supreme Court on 15 July 2018 in relation
to a 2017 product liability case brought by a customer against the company. This judgement
renders the company liable for court costs and compensation totalling $240,000.
b)On 14 July 2018 the Commonwealth government enacts legislation altering the company
income tax rate from 39 per cent to 42 per cent for all income tax returns from 1 July 2018.
c)On 28 July 2018 the company’s country warehouse is destroyed by fire. The total carrying
value of the warehouse, which was uninsured, is $350,000.
d)On 2 August 2018 the financial cost of inventory shipped from overseas is determined.
The inventory was received in June 2018 and the cost was estimated for accounting
purposes. The revised cost is $900,000 greater than the prior estimate.
e)On 16 July 2018 the company enters into a contract to purchase 25 per cent of the issued
capital of competitor XYZ Ltd for $750,000.
Required: Discuss the appropriate accounting treatment of the above events assuming
all amounts are materials for financial statements purposes.