On 1 January 2015 Sydney Ltd acquired 80% of the issued voting shares of Albury Ltd for a cash payment of $3,000,000. At the date of acquisition, the share capital and retained profits of Albury were as follows: Share Capital $2,000,000 Retained Profits $1,200,000 During the year ended 31 December 2017 Albury Ltd sold inventory to Sydney Ltd for $1,400,000 being a mark-up of 40% on the cost of the inventory to Albury Ltd


2021 T1 AFM505 ASSIGNMENT 1:

Value:

Submission date:

40 marks (20% of unit mark)
01 April, 2021

Assessment criteria:

While this assignment relates to the following three learning outcomes (LOs) of the unit:

1.demonstrate a broad and coherent understanding of advanced issues in financial accounting with depth in corporate group structures with subsidiaries and distinguish it from extended group structures with associate and joint arrangements, and how to read and interpret/analyse contemporary financial reports for them underpinning accounting standards (AASBs), and apply to business-related contexts;

2.demonstrate professional knowledge of consolidated financial statements, in particular preparing consolidation journals, worksheet and statement of comprehensive income (Profit and Loss) and statement of financial position (Balance Sheet);

4.use a range of cognitive and communication skills to review, analyse, consolidate and synthesise relevant accounting information drawn from financial statements in order to demonstrate critical thinking and judgement in solving complex business-related problems;

5.work independently and/or collaboratively to plan and execute tasks to enhance professional knowledge and skills in advanced financial accounting;

You are expected to demonstrate the ability to produce, describe, analyse, and/or explain the underlying concepts and accounting frameworks to which the assignment questions are linked. The following marking criteria and weightings will be used:

•Completion of acquisition analysis under the method(s) suggested and preparation of appropriate journal entries after the acquisition. (10%);

•Preparation of appropriate consolidation journal entries and worksheet for consolidation (60%); and

•Adequate discussion on the specified topic or issue raised by providing relevant and reasonable opinions/comments. There must have sufficient analysis of reporting practices of the selected companies/entities in compliance with the relevant accounting standards along with a solid comparison between the companies. Also requires logical flow from introduction to conclusion according to academic standards of essay writing. (30%)

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Question 1 (20 marks)

The following financial statements of L Ltd and its subsidiary Y Ltd have been extracted from their financial records at 31 December 2020.

L Ltd Y Ltd
Statement of Comprehensive Income $ $
Sales revenue 670 000 480 000
Inventory 1 January 2020 86 000 32 000
Purchases 470 000 235 000
Inventory 31 December 2020 92 000 29 000
Cost of sales 464 000 238 000
Gross profit 206 000 242 000
Other income 47 500
Dividends received 21 000
Management fee 26 500
Total income 253 500 242 000
Expenses 152 000 179 000
Administration expenses 26 400 38 700
Depreciation 24 500 36 800
Management fee paid 26 500
Other expenses 101 100 77 000
Profit before tax 101 500 63 000
Taxation 41 200 25 200
Profit for the year 60 300 37 800
Dividends paid 55 200 30 000
Retained earnings for year 5 100 7 800

Statement of Financial Position
Assets
Investment in Y Ltd 289 000
Land and buildings 224 000 326 000
Plant & machinery – book value 214 100 217 000
Accounts receivable 59 400 62 300
Inventory 92 000 29 000

878 500 634 300
Equity and liabilities
Contributed capital 350 000 200 000
Revaluation surplus 45 000
Retained earnings 324 500 202 800
Long term loan 108 000 116 000
Accounts payable 54 700 45 300
Taxation payable 41 300 25 200

878 500 634 300

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Additional information:

(i)On 1 July 2017, L Ltd acquired 70% of the issued capital of Y Ltd. At that date the equity of Y Ltd was as follows:

Contributed equity $200 000
Retained earnings $138 000
Revaluation surplus $32 000

At the date of acquisition, all assets are considered to be fairly valued.

(ii)During the year ended on 31 December 2020, L Ltd made sales to Y Ltd amounting to $65 000. L Ltd made a mark-up of 25% on cost.

(iii)Of the inventory Y Ltd has on hand at 31 December 2020, $12 000 was purchased from L Ltd.

(iv)During the year ended on 31 December 2020, Y Ltd sold goods to L Ltd amounting to $32 000. Y Ltd sold the goods to L Ltd at a gross profit of 20% on cost.

(v)Of the inventory L Ltd has on hand at 31 December 2020, $33 600 was purchased from Y Ltd.

Of the inventory L Ltd had on hand at 31 December 2019, $41 760 was purchased from Y Ltd.

(vi)At 31 December 2020, the directors were of the opinion that goodwill acquired on the acquisition of Y Ltd had been impaired by $ 3 000.

(vii)Income tax rate is 40%.

Required:

(a)Following the fair value/full goodwill method, complete the acquisition analysis on 1 July 2017 for L Ltd’s investment in Y Ltd as required by AASB 3 and AASB10 and determine the amount of goodwill or gain on bargain purchase.

(b)Prepare the acquisition journal entries on 1 July 2017 under the fair value/full goodwill method.

(c)Prepare all consolidated journal entries including non-controlling interest for the year ended 31 December 2020 for consolidation purpose of L Ltd and Y Ltd under the fair value/full goodwill method.

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Question 2: (8 marks)

On 1 January 2015 Sydney Ltd acquired 80% of the issued voting shares of Albury Ltd for a cash payment of $3,000,000. At the date of acquisition, the share capital and retained profits of Albury were as follows:

Share Capital $2,000,000
Retained Profits $1,200,000

During the year ended 31 December 2017 Albury Ltd sold inventory to Sydney Ltd for $1,400,000 being a mark-up of 40% on the cost of the inventory to Albury Ltd. At 31 December 2017 Sydney held in stock some of the inventory sold to it by Albury Ltd. The inventory was stated in Sydney Ltd.’s accounting records at $210,000. The company income tax rate is 30%. Goodwill has not been impaired.

Required:

Complete the spreadsheet below.

Consolidation worksheet for 31 December 2017
Sydney Albury Dr Ref Cr Group
$’000 $’000 $’000 $’000 $’000
Sales Revenue 5,500 cr 3,440 cr
Opening Inventory 360 dr 280 dr
Purchases 2,450 dr 1,980 dr
Closing Inventory 470 cr 420 cr
Other Expenses 1,260 dr 740 dr
Dividend Revenue 750 cr —
Income Tax Expense 1,060 dr 344 dr
Dividends Paid 1,600 dr 400 dr
Retained Profits for the
year 2017 -10 dr 116 cr
Inventory 470 dr 420 dr
Other Current Assets 1,720 dr 1,056 dr
Investment in Albury 3,000 dr —
Goodwill — —
Other Investments 1,500 dr —
Other non-current assets 12,800 dr 6,340 dr
19,490 7,816
Deferred Tax Assets — —
Loans 5,460 cr 1,340 cr
Other Liabilities 3,200 cr 1,600 cr
Share Capital 4,000 cr 2,000 cr
General Reserve 3,400 cr 1,500 cr
Opening Retained Profits
(1/1/2017) 3,440 cr 1,260 cr
Retained Profits for the
year 2017 -10 dr 116 cr
19,490 7,816
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Question 3: (12 marks)

Report Writing on ‘Financial Reporting Disclosures in Australian Corporate Sector’ (Word length: maximum 1 200 words and at least 3 references)

Collect recently published annual reports (up to year-end 31 December 2020) for two Australian parent companies listed in the Australian Stock Exchange (ASX). The company web-sites can be obtained from the web-site of the ASE at http://www.asx.com.au/asx/research/listedCompanies.do?coName=Q or any other online resources. Identify their ‘consolidated financial statements’ reported in the annual reports.

Briefly summarise on: Briefly summarise on goodwill method followed, revaluation of assets, impairment of goodwill, non-controlling interests (NCI) and their sharing of any goodwill if applicable.

Critically evaluate the financial reporting and disclosure followed by each parent company whether consistent with the requirements of the AASB3 and AASB10 for the users of general purpose financial reports. In your essay, identify the strengths and weaknesses of their reporting and disclosure as well as major differences along with your recommendations how to minimise reporting and disclosure gaps between them.

Attach a scanned copy of the ‘consolidated financial statements’ (i.e. consolidated statement of comprehensive income and consolidated statement of financial position) only. No need to attach ‘Notes’, which should be part of your analysis.

NOTE: Presentation and referencing are important. Word limit will be strictly enforced with conventional flexibility of 10% +/- and penalty will be imposed for exceeding the limit. Do not attach the entire annual report to avoid penalty.

Specific and descriptive criteria to follow:

(1)There must be an introduction and conclusion section and references, if any, and a scanned copy of the ‘consolidated financial statement’ attached for both group of companies.

(2)There must be a very brief discussion of the selected listed groups of companies (i.e. parents) and their subsidiaries operating activities.

(3)Adequate discussion on consolidated financial statements components taken care of in the process of preparing in accordance with AASB3 and AASB10. A better understanding of concepts as well as group statements is expected.

(4)There must be an analysis of reporting practices as in point (3) above whether AASB3 and AASB10 are properly followed or not. The strengths and weaknesses of reporting should be identified from the users’ perspective. In evaluating reporting practices, any relevant comment or recommendation should be taken into account.

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(5)The reporting practices of both groups of companies as in point (3) above must be compared with a decision which group is in compliance with respective AASBs than the other and why and how more compliance is achievable. In evaluating reporting practices, any relevant comment or recommendation for each group should be taken into account.

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