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Act305 Corporate Accounting System - Assessment Answers

Write a report to Bill, advising him how the control requirements of AASB 10 apply in each of the above investments. State, for each investment, where the control rests, citing and explaining how the relevant paragraphs of AASB10 apply, and whether Bill should include the results of the investments within the consolidated accounts explaining the reasons for your decision.
The report should take the format of a formal business report, written by your firm with yourself as lead author. Marks will be awarded for presentation style and an appropriate business format.

Answer:

In Response to Question 1

The consolidated financial statements were prepared to account for the Small Ltd interest ad buyout in the Fry Ltd joint venture agreement (Cassar, Ittner and Cavalluzzo 2015). The inter corporate investment was classified as Investment in Associates and the same will be accounted by the company through fair value through profit and loss where the small ltd would report any kind of share of income, share of depreciation or amortization or intergroup sales and transactions under the income statements and the balance sheet of the company will shows and reflect the true and fair market value taking into account the dividends and other forms of balance of the income statement in the company’s financial report (Adcock 2016).

Income Statement

Year 2018

Year 2019

Year 2020

Share of Income (30%)

   

Profit before Tax

80,000

70,000

60,000

Taxation at 30%

-30,000

-25,000

-20,000

Profit After Tax

50,000

45,000

40,000

Share of Income (30%)

15,000

13,500

12,000

Balance Sheet [Investment in Fry Limited]

Year 2018

Year 2019

Year 2020

Beginning Value of Investment

50,000

41,000

50,000

Add: Share of Income (30%)

15,000

13,500

12,000

Subtract: Share of Dividend

   

Stake at Company

30%

30%

30%

Dividend for the year

80,000

15,000

10,000

Total Share of Dividend

24000

4500

3000

Ending Value of Investment

41,000

50,000

59,000

Consolidated Financial Statements

In the Books of Small Ltd/Calculation of Goodwill

Particulars

Amount($)

Purchase Price (30% Stake)

50,000

Share Capital

30,000

Retained Earnings

120,000

Total Share Capital

150,000

30% Stake

45000

Goodwill (Purchase Price- Fair Market Value)

5,000

Journal Entries in the Books of Small Ltd

Date

Particulars

Amount($)

Amount($)

1.07.17

Fry Ltd A/c…..Dr

50,000

 
 

To Cash/Bank A/c

 

50,000

 

(Being Investment done in Fry Ltd Company)

30.06.18

Bank A/c……Dr

24,000

 
 

To Interest/Dividend A/c

 

24,000

 

(Being Dividend Received from Fry Ltd Company)

  

30.06.18

To Interest/Dividend A/c

24,000

 
 

To Profit/Loss Account

 

24,000

 

Being Interest Transferred to Income Statement Account)

30.06.19

Bank A/c……Dr

4,500

 
 

To Interest/Dividend A/c

 

4,500

 

(Being Dividend Received from Fry Ltd Company)

  

30.06.19

To Interest/Dividend A/c

4,500

 
 

To Profit/Loss Account

 

4,500

 

Being Interest Transferred to Income Statement Account)

30.06.20

Bank A/c……Dr

3,000

 
 

To Interest/Dividend A/c

 

3,000

 

(Being Dividend Received from Fry Ltd Company)

  

30.06.20

To Interest/Dividend A/c

3,000

 
 

To Profit/Loss Account

 

3,000

Being Interest Transferred to Income Statement Account)

In Response to Question 2

Rock Bottom Pvt Ltd

Assets

Liabilities

Particulars

Amount($)

Particulars

Amount($)

Amount($)

Payable %

Land and Building

7,500,000

Secured Creditors

9,000,000

9,000,000

100%

Other Assets

6,750,000

Receiver Costs

150,000

150,000

100%

  

Liquidating Expenses

600,000

600,000

100%

  

Staff Wages Payable

900,000

900,000

100%

  

Staff Leave Entitlement

150,000

150,000

100%

  

Unsecured Bank Overdraft

750,000

750,000

100%

  

Director's Wage Payable

450,000

450,000

100%

  

Unsecured Trade Payables

2,400,000

2,250,000

93%

  

Local Government Rates

300,000

0

0%

  

Taxes Payable

1,050,000

0

0%

  

Dividends Payable

450,000

0

0%

Total Assets Market Value

14,250,000

Total Liabilities Market Value

16,200,000

14,250,000


The total amount of value recognized from the company Rock Bottom Ply ltd when the company was declared insolvent was around 14.25 million dollars however the total liabilities of the company were around 16.20 million dollars the deficit amount was around 1.95 million dollars in order to settle off and clear all the liabilities of the company (Giang and Hai 2017). The liabilities of the companies were ranked according to the nature of account and the percentage or the extent of the amount till which the liability will be paid off (Gary et al. 2016).

In Response to Question 3

The use of partial goodwill was used in the case of this sum and since the company Blake Ltd acquired around 80% of the investment in Seven Ltd the same was recorded in the company’s balance sheet at the amount which is around 306,160 (He, Lu and Ongena 2016). The amount and the method of accounting used for accounting of the inter corporate investment was the use of Business Combination method under which the income and the total value of the group company acquired is reported in the consolidated financial statement and in the balance sheet of the parent company minority interest if any is shown in the balance sheet (Goyal et al. 2018).

Partial Goodwill Method (In the books of Blake Ltd)

Particulars

Amount($)

Amount($)

Purchase Consideration Paid

306160

Total Fair Market Value

  

Share Capital

172,000

 

Retained Earnings

146,200

 

Fair Market Value of Seven Ltd

 

318,200

Total Stake at Seven Ltd

80%

 

Fair Value of Acquisition

 

254560

Total Goodwill

 

51600

Minority Interest

20%

 

Total Minority Interest

 

63640

Workings of Blake Ltd

Amount($)

Intra Group Sales Evaluation

 

Total Sales Made to Seven Ltd from Black Ltd

55,900

Sales done by Seven Ltd

44,720

Percentage of Goods Unsold

25%

Share of Unrealized Profit

 

[25% of 55,900]

13,975

Closing Inventory Evaluation

Amount($)

Closing Inventory of Seven Ltd from Black Ltd

10,320

Costs for Blake Ltd

8,256

Profit from the Transaction

2,064

Tax Rate

30%

Net Profit from the Transaction

1444.8

Goodwill Calculation

Amount($)

Carrying Value of the Asset

306,160

less: Goodwill Impairment Charges

19350

Total Carrying Value of Goodwill

286,810

Impairment Charges Recognized in Income Statement

2,580

Plant and Machinery

Amount($)

Purchase Consideration Paid by Seven Ltd

99,760

Cost Price

116,100

Accumulated Depreciation

46,440

Carrying Value in Blake Ltd

69,660

Profit in the Books of Blake Ltd

30,100

Taxation Rate

30%

Net Profit on sale of Assets

21070

Journal Entries in the Books of Black Ltd

Date

Particulars

Amount($)

Amount($)

1.07.17

Seven Ltd A/c…..Dr

3,06,160

 
 

To Cash/Bank A/c

 

3,06,160

(Being Investment done in Seven Ltd Company)

Income Statement

Amount($)

Income from Seven Ltd

86,688

Impairment of Goodwill

-2,580

Share of Unrealised Profits

-13,975

Profit from sale of Inventory

1,445

Profit from sale of Assets

21,070

Total Income

92,648

Balance Sheet

Amount($)

Beginning Value of Assets

3,06,160

Add: Income

92,648

Subtract: Share of division

79,980

Ending Value

3,18,828

Less: Minority Interest @20%

63765.6

Total Net Value

2,55,062

Reconciliation of opening and closing retained earnings

Blake Ltd ($)

Seven Ltd ($)

Sales revenue

5,93,400

4,98,800

Cost of goods sold

-3,99,040

-2,04,680

Gross profit

1,94,360

2,94,120

Dividends revenue from Seven Ltd

63,984

---

Management fee revenue

22,790

---

Profit on sale of plant

30,100

---

Expenses

  

Administrative expenses

-26,488

-33,282

Depreciation

-21,070

-48,848

Management fee expense

---

-22,790

Other expenses

-86,946

-66,220

Profit before tax

1,76,730

1,22,980

Tax expense

-52,890

-36,292

Profit for the year

1,23,840

86,688

Retained earnings-30 June 2017

2,74,684

2,05,712

Dividends paid

-1,18,164

-79,980

Retained earnings-30 June 2018

2,80,360

2,12,420

Statements of financial position

  

Shareholders' equity

  

Retained earnings

2,80,360

2,12,420

Share capital

3,01,000

1,72,000

Current liabilities

  

Accounts payable

47,042

39,818

Tax payable

35,518

21,500

Non-current liabilities

  

Loans

1,49,210

99,760

 

8,13,130

5,45,498

Current assets

  

Accounts receivable

51,084

53,578

Inventory

79,120

24,940

Non-current assets

  

Land and buildings

1,92,640

2,80,360

Plant -at cost

2,57,871

3,05,988

Accumulated depreciation

-73,745

-1,19,368

Investment in Seven Ltd

3,06,160

 
 

8,13,130

5,45,498

In Response to Question 4

Case Study (A)

The Finance director of Northern Australia Global Investment (NAGIL), Mr. Bill Handy should record the transactions in accordance with the AASB 10 standards where the company should report the consolidated financial statements with the group or acquired company that is Struggle Ltd (Lestari and Riyadi 2018).

The loan given to the Struggle Ltd could not be recovered and henceforth the company classified its existing debt holders as equity stakeholders of the company. The consolidated net profit/loss of the Struggle Company then should be reported in the balance sheet of the company and the arising profit and loss from the company should be reported in the income statement of the company (Libby 2017).

The reasons for the decisions of the investment is based on the fact that the company will have to classify the investment as Minority Passive and the reconciliation will e done through the use of the fair value through profit and loss account. The reporting elements under the same would be as if the items in the balance sheet would be reported as fair market value and the interest income or the realized gain or unrealized gain or loss will be reported in the income statement as per the IFRS.

Case Study (B)

The Northern Australia Global Investment should report the investment with the Very Big Company Ltd (VBCL) as a perspective from the minority active perspective in this case of Interoperate Investment.

The investment in associate will be the case where the investor can extent influence on the nature of the operations of the company but cannot show any significant influence but there will be no control over the company (Nguyen and Nguyen 2018).

The reason for such an investment decision and divisions was due to the nature and the type of operations conducted and the type of transactions that were similar to the above justified base of classifications (Paugam, Astolfi and Ramond 2015).

Case Study (C)

The Case study will be reported as the case where the company will report the investment in a consolidated basis as the company enjoys a considerable amount and the amount should be consolidated with the parent company. The consolidated net profit will be shown in the income statement of the company and the balance sheet will shows a minority interest (Su and Wells 2018).

Case Study (D)

The Northern Australia Global Investments Ltd should the investment on a joint venture basis where the control is shared by two or more entities and the valuation method for the same is either equity or the proportionate consolidated method.

The reason for such an investment decision and divisions was due to the nature and the type of operations conducted and the type of transactions that were similar to the above justified base of classifications (Torkkeli and Kukkonen 2017).

Reference

Adcock, K., 2016. Healthways: A Financial Analysis and Recommendations (Doctoral dissertation, University of Mississippi).

Cassar, G., Ittner, C.D. and Cavalluzzo, K.S., 2015. Alternative information sources and information asymmetry reduction: Evidence from small business debt. Journal of Accounting and Economics, 59(2-3), pp.242-263.

Gary, R.F., Moore, J.A., Sisneros, C.A. and Terando, W.D., 2016. The impact of tax rate changes on intercorporate investment. Advances in accounting, 34, pp.55-63.

Giang, N.D. and Hai, N.X., 2017. Agency conflicts in inter-corporate asset sales.

Goyal, A., Muckley, C.B., Qian, J. and Tehranian, H., 2018. Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups.

He, Q., Lu, L. and Ongena, S., 2016. Who gains from credit granted between firms? Evidence from inter-corporate loan announcements made in China.

Lestari, S.D. and Riyadi, S., 2018. The Effect of Firm Size, Financial Leverage, and Profitability on Investment Opportunities Set Policy and Its Implications on Accounting Policy. Advanced Science Letters, 24(4), pp.2342-2346.

Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.

Nguyen, G. and Nguyen, H., 2018. Does Seller Status Matter in Inter-Corporate Asset Sales.

Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do purchase price allocations matter?. Journal of Accounting and Public Policy, 34(4), pp.362-391.

Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre and post IFRS adoption. Accounting Research Journal, (just-accepted), pp.00-00.

Torkkeli, A. and Kukkonen, M., 2017. Reforming capital gains taxation of intercorporate share realizations: a law and economics approach from a Nordic perspective. Nordic Tax Journal, 2017(1), pp.47-58.


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