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ACCT6005 Solution to Practice Exercise for Assessment 2
This is the solution to Practice Exercise based on Tutorial Question 11.7. Solutions for Chapter
11 Practice Questions 11.9, 11.10 and 11.11 are on Blackboard, in Module 2.
Practice Exercise based on Tutorial Question 11.7
On 1 July 2018, Fluffy Ltd acquired all the issued shares of Glider Ltd. Fluffy Ltd paid $30 000 in
cash and 20 000 shares in Fluffy Ltd valued at $3 per share. At this date, the equity of Glider Ltd
consisted of $66 000 share capital and $6000 retained earnings.
At 1 July 2018, all the identifiable assets and liabilities of Glider Ltd were recorded at amounts
equal to their fair values except for:
The plant was considered to have a further 5-year life. The patents were sold for $120 000 to an
external entity on 18 August 2018. The inventory was all sold by 30 June 2019.
Additional information
(a) Fluffy Ltd sells certain raw materials to Glider Ltd to be used in its manufacturing process.
At 1 July 2019, Glider Ltd held inventory sold to it by Fluffy Ltd in the previous year at a
profit of $600. During the 2019–20 year, Fluffy Ltd sold inventory to Glider Ltd for $21 000.
None of this was on hand at 30 June 2020.
(b) Glider Ltd also sells items of inventory to Fluffy Ltd. During the 2019–20 year, Glider Ltd
sold goods to Fluffy Ltd for $4500. At 30 June 2020, inventory which had been sold to Fluffy
Ltd at a profit of $300 was still on hand in Fluffy Ltd’s inventory.
(c) On 1 July 2019, Glider Ltd sold an item of plant to Fluffy Ltd for $15 000. This plant had a
carrying amount in the records of Glider Ltd of $14 000 at time of sale. This type of plant is
depreciated at 10% p.a. on cost.
(d) On 1 January 2019, Fluffy Ltd sold an item of inventory to Glider Ltd for $18 000. The
inventory had cost Fluffy Ltd $16 000. This item was classified by Glider Ltd as plant. Plant
of this type is depreciated by Glider Ltd at 20% p.a.
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(e) On 1 March 2020, Glider Ltd sold an item of plant to Fluffy Ltd. Whereas Glider Ltd
classified this as plant, Fluffy Ltd classified it as inventory. The sales price was $9000 which
included a profit to Glider Ltd of $1500. Fluffy Ltd sold this to another entity on 31 March
for $9900.
(f) The tax rate is 30%.
At 30 June 2020, the financial information for the two companies was provided in the
consolidation worksheet template on next page.
Required
a) Prepare a consolidation worksheet for the preparation of the consolidated financial
statements of Fluffy Ltd at 30 June 2020.
b) Prepare Consolidated Statement of Changes in Equity, Consolidated Statement of
Financial Performance and Consolidated Statement of Financial Position for Fluffy Ltd
Group at 30 June 2020.
Answer
a) Prepare a consolidation worksheet for the preparation of the consolidated financial
statements of Fluffy Ltd at 30 June 2020.
Acquisition Analysis
At 1 July 2018:
Net fair value of identifiable assets and liabilities of Glider Ltd
= $66 000 + $6 000 (equity)
+ $4 500 x (1 – 30%) (inventory)
+ $15 000 x (1 – 30%) (patents)
+ $3 000 x (1 – 30%) (plant)
| = = = |
$72 000 + $3 150 + $10 500 + $2 100 = $87 750 $30 000 + $3 x 20 000 = $90 000 $90 000 – $87 750 = $2 250 |
Consideration transferred Goodwill |
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Business combination valuation entries:
| 30/6 Accumulated depreciation | Dr | |
| 2020 | Plant | Cr |
| Deferred tax liability | Cr | |
| Business combination valuation reserve | Cr | |
| Depreciation expense | Dr | |
| Retained earnings (1/7/19) | Dr | |
| Accumulated depreciation (1/5 x $3000 p.a. for 2 years) Deferred tax liability |
Cr | |
| Dr | ||
| Income tax expense | Cr | |
| Retained earnings (1/7/19) | Cr |
30 000
27 000
900
2 100
600
600
1 200
360
180
180
| Goodwill Business combination valuation reserve |
Dr |
2 250
Cr 2 250
Pre-acquisition entries:
At 1/7/18:
| Retained earnings (1/7/18) | Dr |
| Share capital | Dr |
| Business combination valuation reserve * | Dr |
| Shares in Glider Ltd (* $3 150 + $10 500 + $2 100 + $2 250) At 30/6/20: Retained earnings (1/7/19)* |
Cr |
| Dr | |
| Share capital | Dr |
| Business combination valuation reserve ** | Dr |
| Shares in Glider Ltd | Cr |
6 000
66 000
18 000
90 000
19 650
66 000
4 350
90 000
(* = $6000 + $3 150 + $10 500; ** = $2 100 + $2 250)
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Sales and profit in closing inventory: (a) & (b)
Sales revenue Dr 21 000
Cost of sales Cr 21 000
Sales revenue Dr 4 500
Cost of sales Cr 4 200
Inventory Cr 300
Note: Under Periodic the above entry would be:
Sales revenue Dr 4 500
Purchases Cr 4500
Closing inventory Dr 300
Inventory Cr 300
Deferred tax asset (30% x $300) Dr 90
Income tax expense Cr 90
Profit in opening inventory of Glider Ltd: (a)
Retained earnings (1/7/19) Dr 420
Income tax expense (30% x 600) Dr 180
Cost of sales Cr 600
Note: Under Periodic the above entry would be:
Retained earnings (1/7/19) Dr 420
Income tax expense Dr 180
Opening inventory Cr 600
Sale of plant (current period): (c)
Proceeds on sale of plant Dr 15 000
Carrying amount of plant sold Cr 14 000
Plant Cr 1 000
Deferred tax asset (30% x $1 000) Dr 300
Income tax expense Cr 300
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| Accumulated depreciation – plant | Dr | 100 |
| Depreciation expense (10% x $1 000) Income tax expense |
Cr | 30 |
| Dr | ||
| Deferred tax asset (30% x $100) | Cr | |
| Sale of inventory classified as plant (prior period): (d) | ||
| Retained earnings (1/7/19) | Dr | 1 400 |
| Deferred tax asset | Dr | 600 |
| Plant | Cr | |
| Accumulated depreciation | Dr | 600 |
| Depreciation expense | Cr | |
| Retained earnings (1/7/19) | Cr | |
| (20% x $2 000 p.a. for 1.5 years, 1/1/2019 – 30/6/2020) | ||
| Income tax expense (30% x $400) | Dr | 120 |
| Retained earnings (1/7/19) | Dr | 60 |
| Deferred tax asset (30% x $600) | Cr | |
| Sale of plant classified as inventory (current period): (e) | ||
| Proceeds on sale of plant | Dr | 9 000 |
| Carrying amount of plant sold * | Cr | |
| Cost of sales (closing inventory) (* = $9 000 – $1 500) |
Cr |
100
30
2 000
400
200
180
7 500
1 500
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Consolidation Worksheet at 30 June 2020
| Fluffy Ltd |
Glider Ltd |
Adjustments | Group | ||||
| Dr | Cr | ||||||
| Sales revenue | 64 500 | 78 000 | 3 3 |
21 000 4 500 |
117 000 | ||
| Cost of sales | 30 900 | 46 350 | 21 000 4 200 600 1 500 |
3 3 4 7 | 49 950 | ||
| Gross profit | 33 600 | 31 650 | 67 050 | ||||
| Trading expenses | 4 800 | 9 000 | 13 800 | ||||
| Office expenses | 7 950 | 4 050 | 12 000 | ||||
| Depreciation | 1 800 | 3 900 | 1 | 600 | 100 400 |
5 6 | 5 800 |
| Total expenses | 14 550 | 16 950 | 31 600 | ||||
| Profit from trading | 19 050 | 14 700 | 35 450 | ||||
| Proceeds from sale of plant |
9 000 | 15 000 | 5 7 |
15 000 9 000 |
0 | ||
| Carrying amount of plant sold |
7 500 | 14 000 | 14 000 7 500 |
5 7 | 0 | ||
| Gain/(loss) on sale of machinery |
1 500 | 1 000 | 0 | ||||
| Profit before tax | 20 550 | 15 700 | 35 450 | ||||
| Income tax expense | 11 100 | 7 300 | 4 5 6 |
180 30 120 |
180 90 300 |
1 3 5 | 18 160 |
| Profit | 9 450 | 8 400 | 17 290 | ||||
| Retained earnings (1/7/19) |
48 000 | 31 500 | 1 2 4 6 6 |
600 19 650 420 1 400 60 |
180 200 |
1 6 | 57 750 |
| Retained earnings (30/6/20) |
57 450 | 39 900 | 75 040 | ||||
| Share capital | 96 000 | 66 000 | 2 | 66 000 | 96 000 | ||
| BCVR | — | — | 2 | 4 350 | 2 100 2 250 |
1 1 | 0 |
| Total equity | 153 450 | 105 900 | 171 040 |
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| Liabilities | |||||||
| Current liabilities | 21 100 | 10 500 | 31 600 | ||||
| Deferred tax liability | 11 000 | 15 000 | 1 | 360 | 900 | 1 | 26 540 |
| Total liabilities | 32 100 | 25 500 | 58 140 | ||||
| Total equity and liabilities |
185 550 | 131 400 | 229 180 |
| Fluffy Ltd |
Glider Ltd |
Adjustments | Group | ||||
| Dr | Cr | ||||||
| Plant | 57 000 | 107 250 | 27 000 1 000 2 000 |
1 5 6 | 134 250 | ||
| Accumulated depreciation |
(18 300) | (33 450) | 1 5 6 |
30 000 100 600 |
1 200 | 1 | (22 250) |
| Intangibles | 12 000 | 11 100 | 23 100 | ||||
| Shares in Glider Ltd | 90 000 | – | 90 000 | 2 | 0 | ||
| Deferred tax asset | 8 100 | 9 450 | 3 5 6 |
90 300 600 |
30 180 |
5 6 | 18 330 |
| Inventory | 28 500 | 24 600 | 300 | 3 | 52 800 | ||
| Receivables | 8 250 | 12 450 | 20 700 | ||||
| Goodwill | 0 | 0 | 1 | 2 250 | 2 250 | ||
| Total assets | 185 550 | 131 400 | 177 210 | 177 210 | 229 180 |
Remember: COGS = Opening inventory + purchases – Closing inventory
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b) Prepare Consolidated Statement of Changes in Equity, Consolidated Statement of
Financial Performance and Consolidated Statement of Financial Position for Fluffy Ltd
Group at 30 June 2020.
Consolidated Statement of Changes in Equity
| Fluffy Ltd Group Consolidated Statement of Changes in Equity for the period ending 30 June 2020 |
|
| $ | |
| Retained earnings (1/7/19) | 57 750 |
| Add: Profit | 17 290 |
| Retained earnings (30/6/20) | $75 040 |
Consolidated Statement of Financial Performance
| Fluffy Ltd Group Consolidated Statement of Financial Performance for the period ending 30 June 2020 |
|
| $ | |
| Sales revenue | 117 000 |
| Less: Costs of sales | (49 950) |
| Gross profit | 67 050 |
| Expenses | |
| Trading expenses | (13 800) |
| Office expenses | (12 000) |
| Depreciation | (5 800) |
| Total expenses | (31 600) |
| Profit before tax | 35 450 |
| Income tax expense | (18 160) |
| Profit | $17 290 |
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Consolidated Statement of Financial Position
| Fluffy Ltd Group Consolidated Statement of Financial Position as at 30 June 2020 |
||
| $ | ||
| Assets | ||
| Current Assets | ||
| Inventories | 52 800 | |
| Receivables | 20 700 | |
| Total current assets | 73 500 | |
| Non-current Assets | ||
| Plant | 134 250 | |
| Less: Accumulated depreciation | (22 250) | 112 000 |
| Intangibles | 23 100 | |
| Deferred tax asset | 18 330 | |
| Goodwill | 2 250 | |
| Total non-current assets | 155 680 | |
| Total Assets | $229 180 | |
| Liabilities | ||
| Current Liabilities | ||
| Current liabilities | 31 600 | |
| Total current liabilities | 31 600 | |
| Non-current Liabilities | ||
| Deferred tax liability | 26 540 | |
| Total non-current liabilities | 26 540 | |
| Total Liabilities | 58 140 | |
| Equity | ||
| Share capital | 96 000 | |
| Retained earnings (30/6/20) | 75 040 | |
| Total Equity | 171 040 | |
| Total Liabilities and Equity | $229 180 |
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