Question

Question 1:

On 1 July 2015, I Ltd. acquired a 30% interest in one of its suppliers, G Ltd., at a cost of 13,650. The directors of I Ltd. believe they exert 'significant influence' over G Ltd. The equity of G Ltd. at acquisition was:

Share capital (20000 shares) $20,000

Retained earnings $10,000

All the identifiable assets and liabilities of G Ltd. at 1 July 2015 were recorded at fair value except for some depreciable non-current assets with a fair value of $15,000 greater than carrying amount. These depreciable non-current assets are expected to have a 10-year life.

Additional information:

a) At 30 June 2017, I Ltd. had inventory costing $100,000 (in 2016: $60,000) on hand which had been purchased from G Ltd. A profit before tax of $30,000 (in 2016: $10,000) had been made on the sale.

b) All dividends may be assumed to be out of the profit for the current year. Dividend revenue is recognised when declared by directors.

c) Information about income and changes in equity of G Ltd. as at 30 June 2017 was:

Profit before tax		$360,000
Income tax expense		$180,000
Profit		$180,000
Retained earnings at 1/7/16		$55,000
		$235,000
Dividend paid	$60,000
Dividend declared	$50,000	$110,000
Retained earnings at 30/6/17		$125,000

  

  

d) The equity of G Ltd. at 30 June 2017 was:

Share capital                                                    $20,000

Asset revaluation reserve                                $30,000

Retained earnings                                           $125,000

The asset revaluation reserve arose from a revaluation of freehold land made at 30 June 2017. The tax rate is 30%.

Required:

Assume I Ltd. does prepare consolidated financial statements. Prepare the equity-accounting consolidation adjusting entries required in I Ltd.’s consolidated financial statements for the year ended 30 June 2017. Estimate the carrying value of I Ltd.’s investment in G Ltd. for the year ended 30 June 2017.

Question 2:

The following information relates to M Ltd.

Operating Segment	Revenue $	Results (Profits/(Losses) $	Total assets $
Mining	7,800	3,230	8,000
Manufacturing	9,200	(1,510)	9,040
Chemicals	1,500	(260)	2,500
Agriculture	1,200	120	900
General corporate	-	-	3,000
Total segment	$19,700	$1,580	$23,440

Required:      

Identify the reportable segments for M Ltd with reference to AASB 8.

Question 3:

On 1 July 2016 T Ltd enters into a joint venture arrangement with S Ltd establishing an incorporated B Ltd. company Both venturers commit themselves to a contractual arrangement in which T Ltd contributes plant and machinery with a fair value of $40million; S Ltd contributes cash of $20million and land with a fair value of $20million, which is considered to be a good site for the extraction of minerals. The cash that is contributed is used partly to acquire some additional machinery at a cost of $14million, with the balance of the cash on hand to meet operational requirements.

Additional information:

The machinery contributed by T Ltd has a book value of $42million (cost $60million; accumulated depreciation $18million), and a fair value of $40million

The land contributed by S Ltd has a book value of $16million and a fair value of $20million

All current and future contributions are to be based on a 50:50 split, as are the future distributions of output.

For the year ending 30 June 2017, the joint venture prepares the following balance sheet, cash flow statement and statement of production costs. To date, no minerals have been removed, although the venturers do consider that economically recoverable reserves exist. All production costs have been transferred to an asset account called deferred exploration and evaluation expenditure in anticipation of amortising the asset as production commences.

Statement of Costs of Production (For year ending 30 June 2017)

$000
Direct Costs: Wages Materials Other costs Management fees	1 600 1 200 400 1 200 4 400

Statement of Cash Flows (For year ending 30 June 2017)

	$000	$000
Cash Flows from Operations: Payments Wages Materials Other costs Management fees Cash Flows from Investing Activities: acquisition of machinery Cash Flows from Financing Activities: from joint venturer – S Ltd Cash on hand 30 June 2017	1 400 1 000 400 400	(3 200) (14 000) 20 000 2 800

Joint Venture Balance Sheet (As at 30 June 2017)

	$000
Current Assets: Cash on hand Deferred exploration and evaluation expenditure Non-current Assets: Plant and machinery Land Total Assets Less: Current Liabilities Accounts payable Net Assets Represented by: Interests of venturers T Ltd S Ltd	2 800 4 400 54 000 20 000 81 200 1 200 80 000 40 000 40 000 80 000

Required:      

Prepare the Journal entries in the records of T Ltd. and S Ltd. for the year ended 30 June 2017 in accordance with equity method of accounting.

Answer 1

Solution

Estimate of carrying value of I.Ltd in G Ltd as on 30.06.17 is 47,750.

EQUITY ACCOUNTING CONSOLIDATION ENTRIES.

The Initial investment in equity capital of G Ltd 13,650

The CALCULATION OF RETAINED EARNINGS.

As on 31.06.2017 $ 1, 25,000

Less: W.D.V of Non Current Assets in excess 12,000

Of fair value.

Net Earnings as on 30.06.17 $ 1, 13,000

30 % share of I.Ltd $ 33,900

Carrying value is initial amount invested in equity share capital plus adjusted share of retained earnings.

Since I.Ltd will be holding less than 50 % shares, therefore consolidation system of subsidiary company with that of holding the company will not apply.

Revaluation Reserve is not a part of retained earnings & hence has been excluded.