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Chapter 31

Further consolidation issues III: Accounting for indirect ownership


interests
31.1

A direct ownership or equity interest arises when the parent entity itself has equity ownership
in another entity. An indirect interest, on the other hand, may be held by a parent entity over a
particular entity when an interest in that particular entity is held by another subsidiary of the
parent entity, rather than the parent entity itself. For example, in the diagram below, the
Parent Entity has a direct ownership interest in A Ltd. The parent entity also has an interest in
(and control of) B Ltd through its control of A Ltd. The interest in B Ltd is indirect. By
controlling A (which controls B Ltd), the parent entity consequently also controls B Ltd
even in the absence of any direct equity interests. The Parent Entitys indirect interest in B
Ltd would be 80% of 90%, or 72%.

31.2

We need to know which part of minority interest is direct, and which part is indirect as some
calculations of minority interests only take into account the direct interests, whereas other
calculations for minority interest require knowledge of both direct and indirect minority
interests. The general rules are that:
Current period profits are allocated to minority interests using the sum of direct and
indirect ownership interests.
Pre-acquisition balances of reserves (for example, retained earnings and revaluation
reserve) are allocated to minority interests on the basis of direct ownership interests
only.
Post-acquisition movements in reserves are allocated on the basis of the sum of direct
and indirect ownership interests.
Dividends are allocated on the basis of direct ownership interests only.

31.3

Minority interests must be disclosed separately within the financial statements. Paragraph 33
of AASB 127 states:

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-1

Minority interests shall be presented in the consolidated balance sheet within


equity, separately from the parent shareholders equity. Minority interests in the
profit or loss of the group shall also be separately disclosed.
31.4

A sequential acquisition is deemed to occur when the parent entity acquires its interest in
the intermediate subsidiary before the intermediate subsidiary acquires its interest in the
other subsidiary. By contrast, a non-sequential acquisition occurs when the parent entity
acquires its interest in the intermediate subsidiary after the intermediate subsidiary acquires
its interest in the other subsidiary
In a sequential acquisition, the consolidated financial statements will be accounted for in the
same manner as when acquisitions occur simultaneously. For example the parent entitys
interest in the intermediate subsidiary will be eliminated first (against pre-acquisition capital
and reserves with resultant goodwill or discount being recognised), and then the
intermediate subsidiarys interest in the other subsidiary will be eliminated.
In a non-sequential acquisition, the situation where the parent entity acquires its control of
the intermediate subsidiary (which we will refer to as Organisation B) after the intermediate
subsidiary acquired its interest in another subsidiary (which we will refer to as Organisation
C), we need to consider the value of both Organisation B and Organisation C. The value of
Organisation Bs investment in Organisation C will be affected by post-acquisition profits
and reserve movements in Organisation C. Therefore, Organisation As investment in
Organisation B must also be eliminated against Organisation As share of the owners equity
of the B Group (Organisation B plus Organisation C) as at the date of Organisation As
investment. The profits earned by Organisation C, after Organisation B acquired its interest
in Organisation C, but prior to Organisation As acquisition of the B Group are treated as
part of the pre-acquisition reserves of Organisation B, and therefore eliminated on
consolidation.

[NOTE: Solution for Question 31.5 to come]

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31-2

31.6

The ownership structure can be summarised as follows (the broken arrow represents the
indirect ownership interest of the parent entity):

The consolidated financial statements would show the dividends that are flowing away from
the economic entity. In this case this would represent the dividends paid by the parent entity
($300 000), plus the dividends paid to the direct minority interests of B Ltd ($80 000), and
the dividends paid to the direct minority interests of C Ltd ($20 000), giving total dividends
to be shown in the consolidated financial statements of $400 000.
31.7

31.8

(i)

A Ltd, as the ultimate parent entity, would be part of the economic entity.

(ii)

B Ltd is controlled by A Ltd through A Ltds direct ownership interest. B Ltd would
be part of the economic entity.

(iii)

C Ltd is controlled by A Ltd through A Ltds direct ownership interest. C Ltd would
be part of the economic entity.

(iv)

D Ltd is controlled by A Ltd as a result of A Ltd controlling B Ltd, which in turn


controls D Ltd. A Ltds ownership interest in D Ltd is indirect. D Ltd would be part
of the economic entity.

(v)

E Ltd is controlled by A Ltd as a result of A Ltd controlling C Ltd, which in turn


controls E Ltd (it is assumed that an ownership of 50 per cent would guarantee
control). A Ltds ownership interest in E Ltd is indirect. E Ltd would be part of the
economic entity.

(vi)

Although E Ltd would arguably have significant influence over F Ltd (F Ltd would be
considered to be an associate), it is not clear that E Ltd would be able to control F
Ltd. Hence, F Ltd would not be considered to be part of the economic entity.

The ownership structure can be diagrammatically represented as follows:

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31-3

The amount of dividends to be shown in the consolidated financial statements would be


$156 000, which is the dividends paid by the parent entity ($120 000), plus the direct
minority interest in the dividends paid by Coogee Ltd (0.30 $80 000 = $24 000), plus the
direct minority interests in the dividends paid by Clovelly Ltd (0.20 $60 000 = $12 000).
31.9

The investments in the subsidiaries are eliminated against the subsidiaries pre-acquisition
capital and reserves using only the direct ownership interests held in the subsidiaries. Direct
and indirect ownership interests are used to allocate interests in post-acquisition movements
in the shareholders funds of the subsidiaries.

31.10
A Ltds interest
Direct
Indirect
Minority interest

B Ltd

C Ltd

D Ltd

E Ltd

60%

70%

48%

35.8%*

40%

100%

30%

100%

20%
32%**
100%

30%
34.2%***
100%

* (0.6 0.8 0.6) + (0.7 0.1)


** 0.4 0.8
*** (0.3 0.1) + (0.4 0.8 0.6) + (0.2 0.6)
31.11 Consolidation adjustments
1.

Dr
Dr
Dr
Cr

Share capital
Retained earnings
Goodwill
Investment in B Ltd

1 200 000
360 000
440 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

2 000 000

31-4

Elimination of investment in B Ltd.


2.

Dr
Dr
Dr
Cr

Share capital
Retained earnings
Goodwill
Investment in C Ltd

960 000
480 000
160 000
1 600 000

Elimination of investment in C Ltd.


3.

Dr
Cr

Goodwill impairment loss


Accumulated amortisation - Goodwill

88 000
88 000

Impairment of Goodwill acquired in B Ltd.


4.

Dr
Cr

Goodwill impairment loss


Accumulated amortisation - Goodwill

32 000
32 000

Impairment of Goodwill acquired in C Ltd.


5.

Dr
Cr

Dividend income
Dividend proposed

60 000
60 000

Elimination of As share of the dividends paid by B Ltd.


6.

Dr
Cr

Dividend income
Dividend proposed

36 000
36 000

Elimination of As share of the dividends paid by C Ltd.


7.

Dr
Cr

Dividend payable
Dividend receivable

60 000
60 000

To eliminate amount receivable by A Ltd from B Ltd.


8.

Dr
Cr

Dividend payable
Dividend receivable

36 000
36 000

To eliminate amount receivable by A Ltd from C Ltd.

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31-5

Income statement
Profit before tax

A Ltd
$000

B Ltd
$000

C Ltd
$000

1 000

160

200

Tax
Profit after tax
Retained earnings
30 June 2008

540
460

50
110

80
120

2 000

600

800

Dividends proposed

2 460
400

710
100

920
60

Balance sheet
Shareholders equity
Retained earnings
30 June 2009
Share capital

2 060
8 000

610
2 000

860
1 600

Current liabilities
Accounts payable
Dividends payable
Non-current liabilities
Loans
Current assets
Cash
Accounts receivable
Dividends receivable
Inventory
Non-current assets
Land
Plant
Investment in B Ltd
Investment in C Ltd
Goodwill
Accumulated
goodwill

amort.

Eliminations and
adjustments
Dr
Cr
$000
$000
605, 366
883, 324

Consolidated

statement
$000

1144
670
474

3601
4802
605, 366

2 560
3034
464

2 570
1 200
9602

9 440

607, 368

420
464

340
400

80
100

60

800
11 600

500
3 290

2 520

1 300
14 194

590
250
60
1 000

74
350
36
600

200
400

800

864
1 000

2 400

4 700
3 000
2 000

400
720

630

1 600

_____

_____

_____

11 600

3 290

2 520

607, 368

2 0001
1 6002

4401
1602
3 852

883
324
3 852

5 100
4 350

600
(120)
14 194

We need to determine total minority interests. Minority interests are determined as follows:
B Ltd
C Ltd
Parent entity interest
Direct
Indirect [.70 x .80]

60%
36%

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31-6

Minority interest
Direct
40%
Indirect [.30 x .80]

40%
.
100%

24%
100%
B Ltd

C Ltd

Minority interest in profits for year ending 30 June 2009


$
Reported profit after income tax expense
110 000
Dividend revenue from within the group (paid by C Ltd to B Ltd)
(36 000)
Goodwill impairment in organisation controlled by intermediate subsidiary (60 000)
Adjusted profit after income tax expense
14 000
Minority interest in adjusted profit after income tax expense (direct and indirect) 40%
Minority interest in adjusted profit after income tax expense
5 600
Calculation of minority interest in (opening) retained profits 1 July 2008
Reported retained earnings - 1 July 2008
600 000
Minority interest percentage (direct interests only as all are pre-acquisition) 40%
Minority interest in pre-investment retained profit- 1 July 2008
240 000
Calculation of minority interest in dividends
Final dividend
100 000
Minority interest in dividends (direct only)
40%
Minority interest in interim dividends
(40 000)
Total minority interest in retained earnings as at 30 June 2009
Calculation of minority interest in share capital
Share capital
Minority interest in share capital (direct only)
40%
Minority interest in share capital
800 000
Total Minority Interests

$
120 000
_____-_
120 000
36%
43 200

66 000

800 000
40%
320 000

560 000

60 000
40%
(24 000)
2 000 000
40%
640 000

We can now prepare the consolidated financial statements.


Consolidated income statement of A Ltd and its subsidiaries
for the year ended 30 June 2009
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

Minority
Interests
$

$
1 144 000
670 000
474 000
66 000
408 000

31-7

(64 000)
562 000
1 600 000
1 440 000
2 002 000

Consolidated balance sheet of A Ltd and its subsidiaries


as at 30 June 2009
$
$

Consolidated
Assets
Cash
Accounts receivable
Inventory
Land
Plant and equipment (net)
Goodwill
less Accumulated impairment losses
Total assets

864 000
1 000 000
2 400 000
5 100 000
4 350 000
600 000
(120 000)
14 194 000

Liabilities
Accounts payable
Dividends payable
Loans
Total liabilities
Net assets

420 000
464 000
1 300 000
2 184 000

12 010 000

Represented by:
Shareholder's equity
Parent entity
interest
Share capital
Retained earnings - 30 July 2009 (x)

Minority
interest
8 000 000
2 008 000
10 008 000

1 440 000
562 000
2 002 000

9 440 000
2 570 000
12 010 000

Notes to and forming part of the consolidated accounts


Parent entity
interest
$
Note x: Retained earnings
Retained earnings -1 July 2008
Profit after income tax
Final dividend
Retained earnings - 30 June 2009

2 000 000
408 000
(400 000)
2 008 000

Minority
interest
$
560 000
66 000
(64 000)
562 000

Consolidated
$
2 560 000
474 000
(464 000)
2 570 000

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31-8

31.12

Calculation of direct and indirect interests in Bells Ltd and Torquay Ltd
Bells Ltd
Torquay Ltd
Parent entity interest
Direct
70%
Indirect [.70 x .80]
56%
Minority interest
Direct
Indirect [.30 x .80]

30%
.
100%

20%
24%
100%
Bells Ltd

Share capital at acquisition date, 1 July 2006


Retained earnings at acquisition date,1 July 2006
Revaluation reserve

Anglesea Ltd
70% interest
$
350 000
175 000
105 000
630 000
1 000 000
370 000
250 000
120 000
15 000
105 000

$
500 000
250 000
150 000

Investment in Bells Ltd


Purchased goodwill
Recoverable amount at 30 June 2009
Accumulated impairment to 30 June 2009
Impairment expense recognised in 2009
Impairment expense recognised to 30 June 2008
Torquay
Share capital at acquisition date, 1 July 2006
Retained earnings at acquisition date,1 July 2006
Revaluation reserve

Bells Ltd
80% interest
$
320 000
80 000
80 000
480 000
750 000
270 000
150 000
120 000
10 000
110 000

$
400 000
100 000
100 000

Investment in Bells Ltd


Purchased goodwill
Recoverable amount at 30 June 2009
Accumulated impairment to 30 June 2009
Impairment expense recognised in 2009
Impairment expense recognised to 30 June 2008

Minority interest in profits for year ending 30 June 2009


Reported profit after income tax expense
Dividend revenue from within the group (paid by Torquay Ltd to Bells Ltd)
Goodwill impairment in organisation controlled by intermediate subsidiary
Adjusted profit after income tax expense
Minority interest in adjusted profit after income tax expense (direct and indirect)
Minority interest in adjusted profit after income tax expense
Calculation of minority interest in (opening) retained profits 1 July 2008
Reported retained earnings - 1 July 2008
Pre-investment portion
Minority interest percentage (direct interests only)
Minority interest in pre-investment retained profit- 1 July 2008
Post-investment portion
Impairment loss - goodwill (relating to purchase of Torquay by Bells Ltd)
Minority interest in adjusted post-investment retained profit (direct and indirect)
Minority interest in adjusted post-investment retained profit<em>1 July 2008
Calculation of minority interest in dividends
Interim dividend
Minority interest in dividends (direct only)
Minority interest in interim dividends
Total minority interest in retained earnings as at 30 June 2009

Bells Ltd Torquay Ltd


$
$
150 000
60 000
(8 000)
(10 000)
_____-_
132 000
60 000
30%
44%
39 600
26 400
280 000
250 000
30%
75 000
30 000
(110 000)
(80 000)
30%
(24 000)

130 000
100 000
20%
20 000
30 000
______
30 000
44%
13 200

30 000
30%
(9 000)

10 000
20%
(2 000)

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31-9

Total MI
$

66 000

95 000

(10 800)

(11 000)
139 200

31.13 As we know from Chapter 31, there are a number of steps to take. We need to:

provide the consolidation worksheet journal entries;


calculate minority interests;.
post the consolidation journal entries to the worksheet; and
prepare the consolidated financial statements from the consolidation worksheet and
utilise the calculation of minority interests to disclose the minority interests contribution
to profits, and the minority interests in share capital and reserves.

Consolidation worksheet journal entries


Recognition of the fair value adjustment
At the date of Clovelly Ltds acquisition of Bronte Ltd the carrying amount of the plant and
equipment was less than their fair value. So that we can correctly calculate goodwill on
acquisition we must put through a revaluation adjustment as at the date of acquisition before
we eliminate the investment against the pre-acquisition capital and reserves of the acquired
subsidiary. As we explained in Chapter 19, when an entity revalues its non-current assets a tax
effect is created, which needs to be recognised in accordance with AASB 112 Income
Taxes.
(a) Dr
Cr
Dr
Cr

Accumulated depreciation
Machinery
Machinery
Revaluation reserve

288 000

(b) Dr
Cr

Revaluation reserve
Deferred tax liability [512 000 x .3]

153 600

288 000
512 000
512 000
153 600

Adjusting the carrying amount of the buildings will have implications for depreciation
expense. The depreciation expense will be based on the revised measure. Because the
subsidiary was acquired four years ago, and the fair value adjustment was initially made four
years ago, then four years adjustment to depreciation must be made. Three years
depreciation will be adjusted against opening retained earnings.
(c) Dr Depreciation expense ($512 000/16 for
the current year)
32 000
Dr Retained profits - 1 July 2008 ($512 000/16
x 3 for the previous 3 years)
96 000
Cr Accumulated depreciation ($512 000/16 x 4 years)
(d) Dr Deferred tax liability ($128 000 x 0.3)
Cr Income tax expense ($32 000 x 0.3 for the
current year)
Cr Retained profits - 1 July 2008 ($96 000 x
0.3 for the previous 3 years)

128 000

38 400
9 600
28 800

Eliminate investment in Bronte Ltd against Clovelly Ltds share of Bronte Ltds
owners equity at investment date
Bronte Ltd
Clovelly Ltd
60% interest
$
$
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31-10

Share capital at acquisition date, 1 July 2005


Retained earnings at acquisition date,1 July 2005

Revaluation reserve

640 000
1 280 000
358 400

384 000
768 000
215 040
1 367 040
1 680 000
312 960

Investment in Bronte Ltd


Goodwill on consolidation
(e) Dr
Dr
Dr
Dr
Cr

Share capital
Retained profits - 1 July 2008
Revaluation reserve
Goodwill
Investment in Bronte Ltd

384 000
768 000
215 040
312 960
1 680 000

Impairment of goodwill (relating to purchase of Bronte Ltd by Clovelly Ltd)


(f) Dr Retained profits - 1 July 2008
(previous years accumulated impairment)
152 960
Cr Accumulated impairment losses - goodwill
152 960
(g) Dr
Cr

Impairment loss - goodwill (the impairment


loss recognised in 2009)
20 000
Accumulated impairment losses - goodwill

20000

Eliminate investment in Clovelly Ltd against Maroubra Ltds share of Bronte Ltds
owners equity at investment date
Clovelly Ltd
Maroubra Ltd
70% interest
$
$
Share capital at acquisition date - 1 July 2005
2 240 000
1 568 000
Retained earnings at acquisition date - 1 July 2005 960 000
672 000
2 240 000
Investment in Clovelly Ltd
2 640 000
Goodwill on consolidation
400 000
(h) Dr
Dr
Dr
Cr

Share capital
Retained profits - 1 July 2008
Goodwill
Investment in Clovelly Ltd

1 568 000
672 000
400 000
2 640 000

Impairment of goodwill in 2009 (relating to purchase of Clovelly Ltdby Maroubra Ltd)


(i) Dr Impairment loss - goodwill ($400 000
$220 000)
180 000
Cr Accumulated impairment losses - goodwill
180 000
Elimination of intercompany sales
As part of the consolidation adjustments and eliminations we need to eliminate the intragroup
sales because, from the perspective of the economic entity, no sales have in fact occurred.
This will ensure that we do not overstate the turnover of the economic entity.
Sale of inventory from Bronte Ltd to Maroubra Ltd
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31-11

(j) Dr Sales
8 000 000
Cr Cost of goods sold
8 000 000
Under the periodic inventory system, the above credit entry would be to purchases, which
would ultimately lead to a reduction in cost of goods sold. (Cost of goods sold equals
opening inventory plus purchases less closing inventory, hence any reduction in purchases
leads to a reduction in cost of goods sold.)
Elimination of unrealised profit in closing inventory
In this case, the unrealised profit in closing inventory amounts to $480 000, which represents
the profit on the total sales multiplied by the proportion of sales still on hand, that is ($8 000
000 - $6 400 000) x 30 per cent. In accordance with AASB 102 Inventories, we must value
the inventory at the lower of cost and net realisable value. Hence on consolidation we must
reduce the value of recorded inventory, as the amount shown in the accounts of Maroubra
Ltd exceeds what the inventory cost the economic entity.
(k) Dr Cost of goods sold
480 000
Cr Inventory
480 000
Under the periodic inventory system, the above debit entry would be to closing inventory profit and loss. We increase cost of goods sold by the unrealised profit in closing inventory
because reducing closing inventory effectively increases cost of goods sold. The effect of the
above entries is to adjust the value of inventory so that it reflects the cost of the inventory to
the group.
Consideration of the tax paid or payable on the sale of inventory that is still held within
the group
From the groups perspective, $480 000 has not been earned. However, from Bronte Ltds
individual perspective (as a separate legal entity), the full amount of the sale has been earned.
This will attract a tax liability in Bronte Ltds accounts of $144 000 (30% of $480 000).
However, from the groups perspective, some of this will represent a prepayment of tax, as
the full amount has not been earned by the group even if Bronte Ltd is obliged to pay the tax.
(l) Dr Deferred tax asset
144 000
Cr Income tax expense
144 000
($480 000 x 30 per cent)
Consideration of opening inventory
We are told that Bronte Ltds opening inventory included goods purchased from Clovelly Ltd
for $1 280 000. These goods originally cost Clovelly Ltd $1 960 000. Hence, unlike the
situation where opening inventory might include unrealised profit, in this case opening
inventory was acquired at less that the cost incurred by the selling entity, the loss on sale
being $680 000. At issue is whether we need to make an adjustment. To the extent that this
inventory was sold at less than cost, and if this sales price reflected a reduction in the net
realisable value of the inventory, then this loss could be considered to be realised within the
economic entity and no adjustment on consolidation would be required. This can be
contrasted with the situation where opening inventory includes unrealised profit. In such a
case an adjustment would be necessary, as the chapter indicates. For example, if it was
assumed that Bronte Ltds opening inventory include goods purchased from Clovelly for, say,
$2 280 000 (instead of $1 280 000), then the adjusting entry would be:
Dr Retained earnings - 1 July 2008
224 000
Dr Income tax expense
96 000
Cr Cost of sales
320 000
Again, it is emphasised that this adjustment is not required in this example and this additional
journal entry is provided merely for the purposes of illustration
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-12

Adjustments for intragroup sale of factory building


On 30 June 2009 Maroubra Ltd sold a factory building to Clovelly Ltd for $3 200 000 when
its carrying value in Maroubra Ltds accounts was $2 520 000 (cost of $3 600 000,
accumulated depreciation of $1 080 000). The building was being depreciated over a further
14 years, with no expected residual value.
Reversal of profit recognised on sale of asset and reinstatement of cost and accumulated
depreciation
The result of the sale of the factory building to Clovelly Ltd is that the profit of $680 000 the difference between the sales proceeds of $3 200 000 and the carrying amount of $2 520
000 - will be shown in Maroubra Ltds financial statements. However, from the economic
entitys perspective there has been no sale and, therefore, no gain on sale given that there has
been no transaction with a party external to the group. The following entry is necessary so
that the accounts will reflect the balances that would have applied had the intragroup sale not
occurred.
(n) Dr
Dr
Cr

Profit on sale of plant


Plant
Accumulated depreciation

680 000
400 000
1 080 000

The result of this entry is that the intragroup profit is removed and the asset and accumulated
depreciation account reverts to reflecting no sales transaction. The profit of $680 000 will be
recognised progressively in the consolidated financial report of the economic entity by
adjustments to the amounts of depreciation charged by Clovelly Ltd in its accounts. As the
service potential or economic benefits embodied in the asset are consumed, the $680 000
profit will be progressively recognised from the economic entitys perspective.
Impact of tax on profit on sale of factory building
From Maroubra Ltds individual perspective it would have made a profit of $680 000 on the
sale of the building and this gain would have been taxable. At a tax rate of 30 per cent, $204
000 would be payable by Maroubra Ltd. However, from the economic entitys perspective,
no gain has been made, which means that the related tax expense must be reversed and a
related deferred tax benefit be recognised. A deferred tax asset is recognised because, from
the economic entitys perspective, the amount paid to the Tax Office represents a prepayment
of tax.
(o) Dr
Cr

Deferred tax asset


Income tax expense

204 000
204 000

As the sale of the factory building occurred on consolidation date, there are no consolidation
worksheet journal entries required to adjust the depreciation of the factory building.
Dividends paid and proposed
We eliminate the dividends paid within the group. Only the dividends paid to parties outside
the entity (to the investors in the parent entity and to the direct minority interests) are to be
shown in the consolidated accounts.
Elimination of interim dividend (paid by Bronte Ltd to Clovelly Ltd)
(p) DR Dividend revenue ($440 000 x 0.6)
264 000
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31-13

CR

Interim dividend

264 000

Elimination of final dividend (declared by Clovelly Ltd to Maroubra Ltd)


(q) DR Dividend revenue ($360 000 x 0.7)
252 000
CR Final dividend
252 000
Elimination of intragroup debt: Maroubra Ltds share of Clovelly Ltds declared final
dividend
(r) DR Dividend payable ($360 000 x 0.7)
252 000
CR Dividend receivable
252 000
Having completed the consolidation adjustments and eliminations we can now calculate the
minority interests in current periods profits and in share capital and reserves. We will need to
consider direct and indirect ownership interests.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-14

Calculation of direct and indirect interests in Clovelly Ltd and Bronte Ltd
Clovelly Ltd
Bronte Ltd
Parent entity interest
Direct
70%
Indirect [.70 x .60]
Minority interest
Direct
Indirect [.30 x .60]

30%
.
100%

42%
40%
18%
100%

Minority interest in profit, dividends, and retained profits


We will determine the minority interests by breaking up the calculation into separate
components, these being the minority interests in:
profits for the year
opening retained earnings
dividends
share capital
other reserves

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-15

Clovelly Ltd Bronte Ltd


Minority interest in profits for year ending 30 June 2009
$
$
Reported profit after income tax expense (from the unadjusted
accounts of the separate entities)
672 000
768 000
Adjustment relating to inventory
Unrealised profit in closing inventory
(480 000)
Tax effect of unrealised profit in closing inventory
144 000
Fair value adjustment
Depreciation adjustment due to revaluing factory buildings to fair value
(32 000)
Tax effect of depreciation adjustment due to revaluing factory buildings
9 600
Intragroup dividends
Dividend revenue from within the group (paid by Bronte Ltd to Clovelly Ltd)
(264 000)
Goodwill impairment in organisation controlled by intermediate subsidiary
(20 000)
-______
Adjusted profit after income tax expense
388 000
409 600
Minority interest in adjusted profit after income tax expense (direct and indirect)
30%
58%
Minority interest in adjusted profit after income tax expense
116 400
237 568
If we look at the above calculations we see that they are the same form of adjustments that we made in
Chapter 30, which concentrated on minority interests. The only difference is that we have made an
adjustment for the dividends received by Clovelly Ltd from Bronte Ltd, and we have also made
adjustments for the impairment loss pertaining to the goodwill acquired in Bronte Ltd (which is
adjusted against the profits of Clovelly Ltd as Clovelly Ltd acquired the goodwill in Bronte Ltd).
Calculation of minority interest in (opening) retained profits 1 July 2008
Reported retained earnings - 1 July 2008
1 920 000
2 680 000
Pre-investment portion
960 000
1 280 000
Minority interest percentage (direct interests only)
30%
40%
Minority interest in pre-investment retained profit- 1 July 2008
288 000
512 000
Post-investment portion
960 000
1 400 000
Depreciation adjustment due to revaluing factory buildings
to fair value (in relation to the previous 3 years)
(96 000)
Tax effect of depreciation adjustment due to revaluing factory buildings
Impairment loss - goodwill (relating to purchase of Bronte by Clovelly Ltd)
Adjusted post-investment retained profit<em>1 July 2008
Minority interest in adjusted post-investment retained profit (direct and indirect)
Minority interest in adjusted post-investment retained profit - 1 July 2008
Calculation of minority interest in dividends
Interim dividend
dividends (direct only)
Minority interest in interim dividends
Final dividend
Minority interest in dividends (direct only)
Minority interest in final dividends
Total minority interest in retained earnings as at 30 June 2009
Calculation of minority interest in share capital
Share capital
Minority interest in share capital (direct only)
Minority interest in share capital

(152 960)
807 040
30%
242 112

28 800
________
1 332 800
58%
773 024

Total MI
$

353 968

800,000

1 015 136

-440 000 Minority interest in


30%
40%
176 000
(176,000)
360 000
30%
40%
108 000
(108,000)
1 885 104
2 240 000
30%
672 000

640 000
40%
256 000

928,000

Calculation of minority interest in revaluation reserve


Reported revaluation reserve
Add
Asset revaluation due to revaluing factory buildings to fair value at investment date
512 000
Tax effect of revaluing factory buildings to fair value
(153 600)
Adjusted pre-investment revaluation reserve
358 400
Minority interest in adjusted pre-investment revaluation reserve (direct only)
30%
40%
Minority interest in adjusted pre-investment revaluation reserve
143 360
143 360
Total minority interest in closing share capital and reserves
$2 956 464
A review of the above calculations reinforces the following:

Current period profits are allocated using the sum of direct and indirect ownership interests.

Pre-acquisition balances of reserves (in this example retained earnings and revaluation reserve) are allocated on the basis
of direct ownership interests only.

Post-acquisition movements in reserves are allocated on the basis of the sum of direct and indirect ownership interests.

Dividends are allocated on the basis of direct ownership interests only.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-16

Consolidation worksheet as at 30 June 2009

Cost of
goods sold

Maroubr
a Ltd
30 000
000
24 400
000

Clovelly
Ltd
16 000
000
13 040
000

Gross profit

5 600 000

2 960 000 2 400


000
(200 000) (72 000)

Sales

Depreciation (520 000)


Expense
Impairment
loss Goodwill

(1048
000)
-

Other
expenses
Dividend
revenue

(2 972
000)
252 000

(1 904
000)
264 000

Gain on sale
of factory
Profit before
tax
Income tax
expense

680 000

Profit after
tax
Retained
profit - 1 July
2008

3 040 000

1 280
000
(512
000)

1 824 000

672 000

768 000

2 880 000

1 920 000 2 680


000

(1 216
000)

Dr
8 000
000(j)
480
000(k)

Minorit
y

41 520 000

32 000(c)

(824 000)

20 000(g)
180
000(i)

(200 000)

264
000(0)
252
000(p)
680
000(m)

3 532 000
9 600(d)
144 000(l)
204 000(n)

96 000(c)
768
000(e)
152
960(f)
672
000(h)

640 000

353 968

(1 818 400)
1 713 600

(360
000)
2 232 000 3 008
000

8 000
000(j)

Consolidat
ed
52 000 000

10 480 000

(440
000)

2 240
000

Cr

(5 924 000)

1 120
000
(448 000)

Interim
(500 000)
dividend
Final dividend (1 040
000)
Retained
3 164 000
profit - 30
June 2009
Share capital 13 200
000
Revaluation
reserve

Bronte
Ltd
14 000
000
11 600
000

28 800(d)

5 819 840

1 815
136

264 000(o)

(676 000)

252 000(p)

(1 148 000)

(176
000)
(108
000)
1 885
104

5 709 440
384
000(e)
1 568
000(h)
153
600(b)
215

512 000(a)

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

14 128 000

928 000

143 360

143 360

31-17

040(e)
Total share
equity
Liabilities
Accounts
payable
Dividends
payable
Deferred tax
liability
Total
equities
Assets
Cash
Accounts
receivable
Dividends
receivable
Inventory

16 364
000

4 472
000

3 640 000

2 860 000 1276


000
360 000
-

Land
Plant and
equip

2 880 000
10 400
000

Accum.
depreciation

(520 000)

(3 600
000)

(576
000)

Investment in
Clovelly Ltd
Investment in
Bronte Ltd
Goodwill

2 640 000

1 680
000
-

Accum.
impairment
loss
Deferred tax
asset
Total assets

1 040 000
-

3648
000

19 980 800
7 776 000
252
000(q)
38 400(d)

1 148 000
153 600(b)

115 200

21 044
000

7 692 000 4 924


000

29 020 000

304 000
688 000

24 000
208 000

148 000
272 000

476 000
1 168 000

252 000

4 400 000

1 760 000 2 800


000
420 000
840 000
7200 000 1 440
000

512
000(a)
400
000(m)
288
000(a)

252 000(q)

480 000(k)

8 480 000

288 000(a)

4 140 000
19 664 000

128 000(c)
1 080
000(m)
2 640
000(h)
1 680
000(e)

312
960(e)
400
000(h)

21 044
000

7 692 000 4 924


000

144
000(l)
204
000(n)
16 788
960

712 960

152 960(f)
20 000(g)
180 000(i)
-

(5 616 000)

(352 960)
348 000

16 788 960 29 020 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-18

2 956
464

We can now prepare the consolidated financial statements.


Consolidated income statement of Maroubra Ltd and its subsidiaries
for the year ended 30 June 2009
$
52 000 000
41 200 000
10 800 000
824 000
200 000
5 924 000
3 852 000
1 914 400
1 937 600
353 968
1 583 632

Sales
Cost of goods sold
Gross profit
Depreciation expense
Impairment loss - goodwill
Other expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest
Consolidated balance sheet of Maroubra Ltd and its subsidiaries
as at 30 June 2009
$
$

Consolidated
Assets
Cash
Accounts receivable
Inventory
Land
Plant and equipment
less Accumulated depreciation
Goodwill
less Accumulated impairment losses
Deferred tax asset
Total assets

476 000
1 168 000
8 480 000
4 140 000
19 664 000
(5 616 000)
712 960
(352 960)
348 000
29 020 000

Liabilities
Accounts payable
Dividends payable
Deferred tax liability
Total liabilities
Net assets

7 776 000
1 148 000
115 200
9 039 200

19 980 800

Represented by:
Shareholder's equity
Parent entity
interest
Share capital
Revaluation reserve
Retained earnings - 30 July 2009 (x)

Minority
interest
13 200 000
3 824 336
17 024 336

928 000
143 360
1 885 104
2 956 464

14 128 000
143 360
5 709 440
19 980 800

Notes to and forming part of the consolidated accounts


Parent entity
interest
$
Note x: Retained earnings
Retained earnings -1 July 2008
Profit after income tax
Interim dividend
Final dividend
Retained earnings - 30 June 2009
31.14

3 780 704
1 583 632
(500 000)
(1 040 000)
3 824 336

Minority
interest
$

Consolidated
$

1 815 136
353 968
(176 000)
(108 000)
1 885 104

5 595 840
1 937 600
(676 000)
(1 148 000)
5 709 440

The consolidation journal entries required to revalue the building of Bronte Ltd as at the date
of Clovelly Ltds acquisition (the same date as that used in Question 31.13), to eliminate

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-19

Clovelly Ltds investment in Bronte Ltd and to recognise the impairment loss will be the same
as those provided at entries (a) to (g) in the solution to Question 31.13 and therefore they
will not be repeated here. However, changes will be required in relation to the elimination of
Maroubra Ltds investment in Clovelly Ltd.
Eliminate investment in Clovelly Ltd against Maroubra Limited s share of Clovelly
Ltds owners equity at investment date
Clovelly Ltd
Maroubra Ltd
70% interest
$
$
Share capital at acquisition date - 1 July 2006
2 240 000
1 568 000
Retained earnings at acquisition date - 1 July 2006 1 360 000
952 000
Share of post-acquisition retained earnings of
Bronte Ltd attributable to Clovelly Ltd prior to
Maroubra Ltds acquisition of Clovelly Ltd
Increase in retained earnings of Bronte Ltd from 30
June 2005 to 30 June 2006 = ($1 480 000
$1 280 000) x 60 per cent
120 000
Goodwill impairment in Bronte Ltd to 30 June 2006 (183 680)

84 000
(128 576)
2 475 424
2 640 000
164 576

Investment in Clovelly Limited


Goodwill on consolidation
(h) Dr
Dr
Dr
Cr

Share capital
Retained earnings - 1 July 2008
Goodwill
Investment in Clovelly Ltd

1 568 000
907 424
164 576
2 640 000

In the previous worked example we recognised an impairment loss on the goodwill acquired
in Clovelly Ltd because the carrying amount of goodwill was greater than its recoverable
amount. However, in this example, because the recoverable amount of goodwill as at 30 June
2009 is deemed to be $220 000, which is greater than its carrying amount, no consolidation
entry is required to recognise an impairment loss.
The balance of the journal entries (j) to (r) are the same as in the previous worked example
and therefore will not be repeated here.
As we know, we need to calculate the minority interests share in profits and capital and
reserves. The calculations undertaken in Question 31.13 for the minority interests share of
current periods profits, share capital, and dividends apply equally here. However, we will
need to recalculate the minority interests share of retained earnings as at 30 June 2008 (that
is, opening retained earnings).

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-20

Calculation of minority interest in (opening) retained profits 1 July 2008


Clovelly
Bronte
Ltd
Ltd
Reported retained earnings - 1 July 2008
1 920 000 2 680 000
Pre-investment portion
Adjustments
Impairment loss - goodwill (relating to purchase of
Bronte Ltd by Clovelly Ltd)
Minority interest in pre-investment retained profit
1 July 2008 (direct interests only)
Minority interest in pre-investment retained Earnings to
1July 2008

Total
MI

1 360 000 1 280 000


(183 680) ________
1 176 320 1 280 000
30%
352 896

40%
512 000 864 896

Post-investment portion
560 000 1 400 000
Adjustments
Depreciation adjustment due to revaluing factory buildings
to fair value (in relation to the previous 3 years)
(96 000)
Tax effect of depreciation adjustment due to revaluing
factory buildings
28 800
Unrealised profit in opening inventory (last years closing
inventory)
(320 000)
Tax effect of unrealised profit in opening inventory
96 000
Adjusted post-investment retained profit<em>1 July 2008 336 000 1 332 800
Minority interest in adjusted post-investment retained
earnings - 1 July 2008 (direct and indirect)
30%
58%
Minority interest in adjusted post-investment retained
earnings - 1 July 2008
100 800 773 024 873 824
Total minority interest in adjusted retained profit - 1 July 2008

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

1 738 720

31-21

Consolidation worksheet as at 30 June 2009

Cost of
goods sold

Maroubr
a Ltd
30 000
000
24 400
000

Clovelly
Ltd
16 000
000
13 040
000

Gross profit

5 600 000

Depreciation
Expense
Impairment
loss Goodwill
Other
expenses
Dividend
revenue

(520 000)

2 960 000 2 400


000
(200 000) (72 000)

32 000(c)

(824 000)

20 000(g)

(20 000)

(2 972
000)
252 000

(1 904
000)
264 000

(1048
000)
-

Gain on sale
of factory
Profit before
tax
Income tax
expense

680 000

Profit after
tax
Retained
earnings - 1
July 2008

Sales

3 040 000

Bronte
Ltd
14 000
000
11 600
000

1 280
000
(512
000)

1 824 000

672 000

768 000

2 880 000

1 920 000 2 680


000

Interim
(500 000)
dividend
Final dividend (1 040
000)
Retained
3 164 000
earnings - 30
June 2009

8 000
000(j)
480
000(k)

Cr

Consolidat
ed
52 000 000

8 000
000(j)
320
000(m)

41 200 000

Minorit
y

10 800 000

(5 924 000)

1 120
000
(448 000)

(1 216
000)

Dr

(440
000)

(360
000)
2 232 000 3 008
000

264
000(p)
252
000(q)
680
000(n)

4 032 000

96
000(m)

9 600(d)
144 000(l)
204 000(o)

421 168

(1 914 400)
2 117 600

96 000(c)
768
000(e)
152
960(f)
907
424(h)
224
000(m)

28 800(d)

5 360 416

1 738
720

264 000(p)

(676 000)

252 000(q)

(1 148 000)

(176
000)
(108
000)
1 875
888

5 654 016

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-22

Share capital

13 200
000

Revaluation
reserve

2 240
000
-

640 000

Total share
equity
Liabilities
Accounts
payable
Dividends
payable
Deferred tax
liability
Total
equities
Assets
Cash
Accounts
receivable
Dividends
receivable
Inventory

16 364
000

4 472
000

3 640 000

2 860 000 1276


000
360 000
-

Land
Plant and
equip

2 880 000
10 400
000

Accum.
depreciation

(520 000)

(3 600
000)

(576
000)

Investment in
Clovelly Ltd
Investment in
Bronte Ltd
Goodwill

2 640 000

1 680
000
-

Accum.
impairment
loss
Deferred tax
asset
Total assets

1 040 000
-

384
000(e)
1 568
000(h)
153
600(b)
215
040(e)

512 000(a)

3648
000

14 128 000

928 000

143 360

143 360

19 925 376
7 776 000
252
000(r)
38 400(d)

1 148 000
153 600(b)

115 200

21 044
000

7 692 000 4 924


000

28 964 576

304 000
688 000

24 000
208 000

148 000
272 000

476 000
1 168 000

252 000

4 400 000

1 760 000 2 800


000
420 000
840 000
7200 000 1 440
000

512
000(a)
400
000(n)
288
000(a)

252 000(r)

480 000(k)

8 480 000

288 000(a)

4 140 000
19 664 000

128 000(c)
1 080
000(n)
2 640
000(h)
1 680
000(e)

312
960(e)
164
576(h)

______

______

21 044
000

7 692 000 4 924


000

144
000(l)
204
000(o)
16 788
960

477 536

152 960(f)
20 000(g)
_______

(5 616 000)

_______

(172 960)
348 000
_______

16 788 960 29 964 576

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-23

______
2 947
248

We can now prepare the consolidated financial statements.


Consolidated income statement of Maroubra Ltd and its subsidiaries
for the year ended 30 June 2009
$
52 000 000
41 200 000
10 800 000
824 000
20 000
5 924 000
4 032 000
1 914 400
2 117 600
421 168
1 696 432

Sales
Cost of goods sold
Gross profit
Depreciation expense
Impairment loss - goodwill
Other expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Profit after income tax attributable to minority interest
Profit after income tax attributable to parent entity interest
Consolidated balance sheet of Maroubra Ltd and its subsidiaries
as at 30 June 2009
$
$

Consolidated
Assets
Cash
Accounts receivable
Inventory
Land
Plant and equipment
less Accumulated depreciation
Goodwill
less Accumulated impairment losses
Deferred tax asset
Total assets

476 000
1 168 000
8 480 000
4 140 000
19 664 000
(5 616 000)
477 536
(172 960)
348 000
28 925 376

Liabilities
Accounts payable
Dividends payable
Deferred tax liability
Total liabilities
Net assets

7 776 000
1 148 000
115 200
9 039 200

19 925 376

Represented by:
Shareholder's equity
Parent entity
interest
Share capital
Revaluation reserve
Retained earnings - 30 July 2009 (x)

Minority
interest
13 200 000
3 778 128
16 978 128

928 000
143 360
1 875 888
2 947 248

14 128 000
143 360
5 654 016
19 925 376

Notes to and forming part of the consolidated accounts


Parent entity
interest
$
Note x: Retained earnings
Retained earnings -1 July 2008
Profit after income tax
Interim dividend
Final dividend
Retained earnings - 30 June 2009

3 621 696
1 696 432
(500 000)
(1 040 000)
3 778 128

Minority
interest
$

Consolidated
$

1 738 720
421 168
(176 000)
(108 000)
1 875 888

5 360 416
2 117 600
(676 000)
(1 148 000)
5 654 016

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

31-24

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