MAA716 Financial Accounting

Assignment Part 3 Consolidation (32 marks/16%)

T1 2015
Section A
Consolidation Journal Entries
On 1 July 2010, Taylor Ltd acquired 100% of the issued shares of Durand Ltd for
$300,000. At the date of acquisition, the shareholders equity of Durand Ltd
consisted of:
Share capital $200,000
General reserve 40,000
Retained earnings 20,000

All identifiable assets and liabilities of Durand are recorded at fair value at this
date. Further information concerning the year ended 30 June 2014 is as follows:
i. Goodwill had been impaired by 10% in the first year following the
acquisition. During the year to 30 June 2014 it was considered that the
goodwill had been further impaired by an amount of $800.
ii. The interim dividend paid by Durand Ltd is $4,000 and Durand Ltd also
declared $6,000 dividend from the current years profits.
iii. Durand Ltd holds debentures in Taylor Ltd amounting to $3,200. Taylor
Ltd paid the 10% annual interest on debentures on 30 June 2014.
iv. During the 2013-2014 period, Durand sold inventory to Taylor Ltd for
$9,200, recording a profit before tax of $1,200. Taylor Ltd has sold half
of these items to Sam Ltd.
v. During the 2013-2014 period, Taylor Ltd sold inventory to Durand Ltd for
$7,200, recording a profit before tax of $800. Durand Ltd has not sold
any of the inventory to other entities.
vi. The opening inventory of Taylor Ltd includes unrealised profit of $1,600
on inventory sold from Durand Ltd during the prior financial year. The
inventory was all sold to an external entity by Taylor Ltd during the year
ended 30 June 2014.
vii. On 1 July 2012, Durand Ltd sold a plant to Taylor Ltd for $22,000. Durand
Ltd recorded a profit of $8,000 before tax. Taylor Ltd applies a 10% p.a.
straight-line method of depreciation in relation to this plant.
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viii. On 1 June 2014, Durand Ltd paid $4,000 to Taylor Ltd for services
rendered.
ix. The tax rate is 30%.

Required:
In accordance with AASB 10 Consolidation Financial Statements, prepare
consolidated journal entries for the year ended 30 June 2014 (24 marks).
(Please note that no narrations required for journal entries).

Section B
Concept of Control
Ord Ltd owns 40% of the shares of Derwent Ltd, and holds the only substantial
block of shares in that entity, no other party owning more than 3% of the
shares. The annual general meeting of Derwent Ltd is to be held in a months
time. Two situations that may arise are:
Ord Ltd will be able to elect a majority of Derwent Ltds board of
directors as a result of exercising its votes as the largest holder of shares.
As only 75% of shareholders voted in the previous years annual meeting,
Ord Ltd may have the majority of the votes that are cast at the meeting.
By obtaining the proxies of other shareholders and, after meeting with
other shareholders who normally attend general meetings of Derwent
Ltd, by convincing these shareholders to vote with it, Ord Ltd may obtain
the necessary votes to have its nominees elected as directors of the
board of Derwent Ltd, regardless of the attendance at the general
meeting.
Required:
Discuss the potential for Derwent Ltd being classified as a subsidiary of Ord
Ltd, with reference to AASB 10 Consolidated Financial Statements. You need
to discuss the two situations above separately (4 + 4 = 8 marks).