Question

Part a:

Nixon Ltd holds 55 per cent of the voting rights of Lumix Ltd. Harvey Ltd has 40 per cent of the voting rights of Lumix Ltd as well as an option to acquire half of Nixon's voting rights. The option is exercisable for the next two years at a fixed price that is out of the money but not too much (and is expected to remain so for that two-year period). Nixon has been exercising its votes and is actively directing the relevant activities of Lumix Ltd.

Which investor (Nixon Ltd or Harvey Ltd) has control over Lumix Ltd? Justify your response by referring to AASB 10 Consolidated Financial Statements?

Part b:

The following intragroup transactions between Max Ltd and Mini Ltd occurred during the financial year ended 30 June 2020:

(i) Mini Ltd paid rent of $45,000 to Max Ltd.

(ii) Mini Ltd sold inventory which had an original cost of $220,000 to Max Ltd. Mini Ltd had recorded a $120,000 profit before tax on this transaction. Max Ltd still had one third of this inventory on hand at 30 June 2020.

(iii) On 1 July 2019, Max Ltd sold a motor vehicle to Mini Ltd for $30,000. The cost and accumulated depreciation of the motor vehicle at the date of sale were $50,000 and $30,000 respectively. The motor vehicle is assessed as havinga remaining usefullife of five years from the date of sale and zero residual value at the end of the useful life.

Prepare the consolidated journal entries for the above intragroup transactions as at 30 June 2020. Assume an income tax rate of 30%. Narrations are not required

Answer 1

Answer to part (a):

As per AASB 10 Nixon Ltd has control over Lumix Ltd.

Justification as per AASB 10- Consolidated FInancial Statement:

As per AASB 10, an investor controls an investee if investors has all the following:

(a) Power over the investee

(b) exposure, or rights, to variable returns from its involvement with the investee

(c) Ability to use its power over the investee

In the question it is mentioned that  Nixon Ltd hold 55 % of voting rights of Lumix Ltd and Harvey Ltd hold 40%.

even if Harvey Ltd has an option to buy half of share of Nixon Ltd but they cant buy it because they are out the money. Further Nixon Ltd is also exercising its votes and direct relevant activities of Lumix Ltd.

Therefore Nixon Ltd is controlling Lumix Ltd.

Answer to part (b):

Journal Entries

Max Ltd Dr 88,333

Mini Ltd Cr 88,333