Documenti di Didattica
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to accompany
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
REVIEW QUESTIONS
1. What is an associate entity?
An entity, including an unincorporated entity such as a partnership, over which the investor has
significant influence, and that is neither a subsidiary nor an interest in a joint venture.
The key criterion is the existence of significant influence, also defined in para. 2.
Note that an investor does not have to hold shares in an associate – yet the application of the equity
method depends on such a shareholding. However, see the presumptions in para 6 of AASB 128.
2. Why are associates distinguished from other investments held by the investor?
The suite of accounting standards provides different levels of disclosure dependent on the relationship
between the investor and the investee:
Subsidiaries: a control relationship
Joint ventures: a joint control relationship
Associates: a significant influence relationship
Other investments: no relationship
Where there is a relationship, it relates to the ability of the investor to influence the direction of the
investee, in comparison to a simple holding of shares as an investment. Where such a relationship
exists, it is argued that the investor is affected, from an accountability perspective as well as a
potential receipt of benefits perspective [why get involved if there are no benefits to doing so?]. These
effects result in the need for additional disclosure about the relationship.
3. Discuss the similarities and differences between the criteria used to identify subsidiaries and
that used to identify associates.
A subsidiary is identified where another entity controls that entity. Control is defined in para 2 of
AASB 128.
An associate is identified where another entity has significant influence over that entity.
Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies
6. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly
or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
7. The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
A joint arrangement is an arrangement between two or more entities so that two or more entities have
joint control of another entity.
Where a joint arrangement exists, the arrangement must be classified as either a joint operation or
a joint venture. The classification depends on the rights and obligations of the parties to the
arrangement. Joint ventures are accounted for under AASB 128 while joint operations are accounted
for under AASB 11.
A joint venture is described as an arrangement where the investor has a right to an investment in
the investee. The investee will have the following features:
- the legal form of the investee and the contractual arrangements are such that the investor does
not have rights to the assets and obligations for the liabilities of the investee; and
- the investee has been designed to have a trade of its own and as such must directly face the
risks arising from the activities it undertakes, such as demand, credit or inventory risks.
Joint control is the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties sharing
control. The key element of joint control is the sharing of control. In other words, there must be at
least two investors who have shared control of the investee (AASB 128, para. 3)
There are three investor-investee relationships which are based on different levels of control:
With a subsidiary there can be only one parent. With joint control there needs to be at least 2 entities
that share control.
9. Discuss the relative merits of accounting for investments by the cost method, the fair value
method and the equity method.
Cost method:
Advantages: Simplicity
Reliable measure
Equity method:
10. Outline the accounting adjustments required in relation to transactions between the
investor and an associate/joint venture. Explain the rationale for these adjustments.
Rationale
Debate:
- why should investor’s share of associate’s profits be adjusted if investor sells to associate
as associate’s profits are unaffected by this transaction?
- Should individual accounts such as “sales”, “cost of sales” and “inventories” be adjusted?
- Should downstream transactions affect different accounts than upstream transactions?
11. Compare the accounting for the effects of inter-entity transactions for transactions between
parent entities and subsidiaries and between investors and associates/joint ventures.
12. Discuss whether the equity method should be viewed as a form of consolidation or a
valuation technique.
AASB 128 does not give a clear indication whether the equity method is a consolidation technique or
a measurement technique similar to fair value.
Note para 20: “Many of the procedures appropriate for the application of the equity method are
similar to the consolidation procedures described in AASB 127.”
If a measurement method, the equity method is an extension of the accrual process within the
historical cost system. Revenue is recognised in relation to the investee as the investor records
profits/losses, instead of merely when the investor pays dividends. The balance sheet is a one-line
figure, being an alternative to fair value.
Further, why not just use fair value if available, or reliably measurable, and equity method as a
default?
Why use a criterion such as significant influence to determine associates – why not apply to all
material investments?
If a consolidation technique, there is an expansion of the group to include the investor’s share of the
associate. The group then is more than just controlled entities.
Why not use proportionate consolidation?
Why not properly adjust for inter-entity transactions?
Why expand the group beyond controlled entities?
Unfortunately, it appears that equity accounting is a hybrid between a measurement technique and
consolidation. Standard-setters need to determine a conceptual basis for accounting for associates and
apply an appropriate method.
14. Explain the differences in application of the equity method of accounting where the method
is applied in the records of the investor compared with the application in the consolidation
worksheet of the investor.
There are 2 major differences when equity accounting is applied in the consolidation worksheet rather
than in the accounts of the investor.
If the adjustments are made in the records of the investor, then in any period, there is only a need
to recognise the effects of the current period changes in share of the profit/losses of the associate.
If the adjustments are made on consolidation, as the worksheet is only a temporary document and
has no affect on the actual accounts, in periods subsequent to the date of acquisition, there needs
to be a recognition, via retained earnings, of the investor’s share of prior period profits/losses of
associate.
If the adjustments are made in the accounts of the investor, then on payment of a dividend by the
associate, the adjustment is:
Cash Dr x
Investment in associate Cr x
Dividend revenue Dr x
Investment in associate Cr x
15. Explain the treatment of dividends from the associate under the equity method of
accounting.
The treatment of dividends differs dependent on whether the equity method is applied in the accounts
of the investor or applied on consolidation in the consolidation worksheet.
Dividends paid
On payment of the dividend by the associate, in the accounts of the investor, the following entry is
made:
Cash Dr x
Investment in associate Cr x
As the investor recognises its share of the profits/losses of the associate as income, and this profit/loss
is prior to the appropriation of dividends, then to recognise dividend revenue would double count the
income recognised by the investor. The dividend is simply a receipt of equity already recognised via
application of the equity method.
Consolidation worksheet:
In the year of payment of the dividend the consolidation adjustment entry is:
Dividend revenue Dr x
Investment in associate Cr x
When the dividend is paid the investor records the receipt of cash and recognises dividend revenue.
The effect of the above entry is to eliminate the dividend revenue previously recognised by the
investor. Because the investor recognises a share of the whole of the profit of the associate, the
dividend revenue cannot also be recognised as income by the investor.
Dividends declared
Where revenue is recognised on declaration of the dividend, the effect is the same as for dividends
paid.
Where the investor does not recognise dividend revenue, then there is no entry in the investor’s
accounts, nor is there any adjustment in the consolidation worksheet. In using the consolidation
worksheet method, care must be taken in calculating the investor’s share of post-acquisition retained
earnings where a dividend was declared at the end of the previous period. This must be added back to
the closing balance of retained earnings, as the investor has not yet recognised the appropriation of
profits.
CASE STUDIES
Paragraph 2:
Significant influence is the power to participate in the financial and operating policy decisions of
the investee but is not control or joint control over those policies
Paragraphs 6 and 7:
6. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly
or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
7. The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
Points to discuss:
1. Why the investment is undertaken by Swiss Chocolates is irrelevant. The definition of
significant influence is based on the capacity to participate, not the actual or intention to
participate.
2. Whether Swiss Chocolates actually exerts influence is irrelevant.
3. The 20% is a guideline only.
4. Factors will include those in paragraph 7. Further an analysis of the 80% holding by other
parties is very important. If it is closely held, then the ability for Swiss Chocolates to
participate is limited.
Billabong said it had entered into an agreement with Trilantic Capital Partners (TCP) to establish a
joint venture for Nixon.
Under the joint venture, Billabong will retain 48.5 per cent of Nixon, while TCP will purchase 48.5
per cent and Nixon’s management will purchase 3.0 per cent,’ Billabong said in a statement.
Required
Discuss what arrangements would have to exist between Billabong, TCP and Nixon’s
management in order for a joint venture to exist.
There are three entities that have an interest in Nixon. In particular Billabong has 48.5% and TCP
holds 48.5% while Nixon’s management hold 3%.
In order for a joint venture to exist there must be an agreement between 2 or more parties to have joint
control. Joint control is the contractually agreed sharing of control of an arrangement, which exists
128:3
only when decisions about the relevant activities require the unanimous consent of the parties sharing
control. The key element of joint control is the sharing of control. In other words, there must be at
least two investors who have shared control of the investee.
It is most likely that Nixon’s management (holding 3%) will not be a party to the joint venture.
Instead Billabong and TCP will jointly control Nixon.
The key arrangement for a joint venture to exist between Billabong and TCP must be an agreement to
have joint control of Nixon.
Air France and China Southern will have joint governance of the joint venture. A management
committee will be implemented, with five working groups in charge of implementing the joint
venture agreements in the fields of network management, revenue management, sales, products and
finance.
Required
Discuss what would be necessary for there to be a joint venture between China Southern
Airlines and Air France, and whether the description given above signifies the existence of a
joint venture in accordance with AASB 128.
Associates
An associate is defined as an entity over which the investor has significant influence.
The key characteristic determining the existence of an associate is that of significant influence.
This is defined as the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control of those policies. The key features of this definition are:
The investor has the power or the capacity to affect the decisions made in relation to the
investee. As with the concept of control used in determining the parent-subsidiary relationship,
an investor is not required to actually exercise the power to influence. It is only necessary that an
investor has the ability to do so.
The specific power is that of being able to participate in the financial and operating policy
decisions of the investee. Note that the investor cannot control the investee, just significantly
influence the investee.
There is no requirement that the investor holds any shares, or has any beneficial interest in the
associate. However as discussed later, the application of the equity method is only possible
where the investor holds shares in the associate. In other cases, the investor is required to make
specific disclosures in its financial statements.
Joint ventures
A joint arrangement is an arrangement between two or more entities so that two or more entities have
joint control of another entity.
Where a joint arrangement exists, the arrangement must be classified as either a joint operation or
a joint venture. The classification depends on the rights and obligations of the parties to the
arrangement. Joint ventures are accounted for under AASB 128 while joint operations are accounted
for under AASB 11.
A joint venture is described as an arrangement where the investor has a right to an investment in
the investee. The investee will have the following features:
- the legal form of the investee and the contractual arrangements are such that the investor does
not have rights to the assets and obligations for the liabilities of the investee; and
- the investee has been designed to have a trade of its own and as such must directly face the
risks arising from the activities it undertakes, such as demand, credit or inventory risks.
Differences
The major differences lie in the level of control that exists between the entities and the inter-
relationship between the investors.
With an associate, an investor only has significant influence. There may be only one investor that
has significant influence over an associate. However, there may be a number of investors that have
significant influence over an associate – but there will not be any agreement between these investors
in relation to control of the associate.
With a joint venture, each joint venturer has joint control over the joint venture. This will be
established by an agreement between the venturers themselves.
In the quotation it is noted that Air France and China Southern will have “joint governance” of the
project. Unless this term means joint control – requiring unanimous agreement of the two venturers –
then there is no joint venture as defined in AASB 128.
An agreement that just involves a sharing of revenues does not constitute a joint venture.
There does not seem to be a separate joint venture which has rights to assets and obligations of the
joint venture in which each venturer has an investment. If the joint arrangement is not structured
through a separate vehicle then the arrangement is a joint operation rather than a joint venture.
Required
Some investors in Amalgamated Holdings Ltd who have limited accounting knowledge,
particularly about equity accounting, have asked you to provide a report to them commenting
on:
• the differences between associates and partnerships
• the determination of the date of significant influence
• realisation of profits/losses on inter-entity transactions
• recognition of losses of an associate.
AASB 128 does not define the date of significant influence, unlike AASB 3 Business
Combinations which contains a definition of date of acquisition. However, in line with the latter
definition, the date of significant influence would be the date that the investor obtains significant
influence in relation to the associate. It is not necessarily the date the investor acquires its
investment in the associate.
The realisation of profits/losses is the same as that for gains/losses on intragroup transactions
within a consolidated group. Realisation occurs when a party external to the investor-associate is
involved in the transaction. Hence, profits made by an associate selling inventory to its investor
are realised when the investor on-sells the inventory to an external party.
With transfer of depreciable assets, realisation occurs as the asset is consumed or used up, with
the proportion of profit/loss realised being measured in proportion to the depreciation of the
transferred asset.
PRACTICE QUESTIONS
Piano Ltd has a 30% interest in a joint venture, Mandolin Ltd, in which it invested $50 000 on 1
July 2014. The equity of Mandolin Ltd at the acquisition date was:
All the identifiable assets and liabilities of Mandolin Ltd were recorded at amounts equal to
their fair values. Profits and dividends for the years ended 30 June 2015 to 2017 were as follows:
Required
A. Prepare journal entries in the records of Piano Ltd for each of the years ended 30 June 2015
to 2017 in relation to its investment in the joint venture, Mandolin Ltd. (Assume Piano Ltd
does not prepare consolidated financial statements.)
B. Prepare the consolidation worksheet entries to account for Piano Ltd’s interest in the joint
venture, Mandolin Ltd. (Assume Piano Ltd does prepare consolidated financial statements.)
30%
Piano Ltd Mandolin Ltd
At 1 July 2014:
Net fair value of identifiable assets
and liabilities of Mandolin Ltd = $150 000
Net fair value acquired = 30% x $150 000
= $45 000
Cost of investment = $50 000
Goodwill = $5 000
30 June 2013:
30 June 2014:
30 June 2015:
Violin Ltd acquired a 40% interest in Drum Ltd in which it invested $170 000 on 1 July 2015.
Violin Ltd has signed a joint venture agreement with the other investors in Drum Ltd providing
joint control to all investors. The share capital, reserves and retained earnings of Drum Ltd at
the investment date and at 30 June 2016 were as follows:
At 1 July 2015, all the identifiable assets and liabilities of Drum Ltd were recorded at amounts
equal to their fair values.
The following is applicable to Drum Ltd for the year to 30 June 2016:
(a) Profit (after income tax expense of $11 000): $39 000
(b) Increase in reserves
• General (transferred from retained earnings): $15 000
• Asset revaluation (revaluation of freehold land and buildings at 30 June 2016):
$100 000
(c) Dividends paid to shareholders: $15 000.
Violin Ltd does not prepare consolidated financial statements.
Required
Prepare the journal entries in the records of Violin Ltd for the year ended 30 June 2016 in
relation to its investment in the joint venture, Drum Ltd.
40%
Violin Ltd Drum Ltd
At 1 July 2015:
Note: As the general reserve is created as an appropriation from Retained Earnings, then there is no
need to adjust for movements in general reserve.
The journal entries in the records of Violin Ltd for the year ended 30 June 2016 are:
Lute Ltd acquired 20% of the ordinary shares of Sitar Ltd on 1 July 2014. At this date, all the
identifiable assets and liabilities of Lute Ltd were recorded at amounts equal to their fair values.
An analysis of the acquisition showed that $2000 of goodwill was acquired. Sitar Ltd was judged
to be an associate of Lute Ltd.
Lute Ltd has no subsidiaries, and records its investment in the associate, Sitar Ltd, in
accordance with AASB 128. In the 2015–16 period, Sitar Ltd recorded a profit of $100 000, paid
an interim dividend of $10 000 and, in June 2016, declared a further dividend of $15 000. In
June 2015, Sitar Ltd had declared a $20 000 dividend, which was paid in August 2015, at which
date it was recognised by Lute Ltd.
The following transactions have occurred between the two entities (all transactions are
independent unless specified).
(a) In January 2016, Sitar Ltd sold inventory to Lute Ltd for $15 000. This inventory had
previously cost Sitar Ltd $10 000, and remains unsold by Lute Ltd at the end of the
period.
(b) In February 2016, Lute Ltd sold inventory to Sitar Ltd at a before-tax profit of $5000.
Half of this was sold by Sitar Ltd before 30 June 2016.
(c) In June 2015, Sitar Ltd sold inventory to Lute Ltd for $18 000. This inventory had cost
Sitar Ltd $12 000. At 30 June 2015, this inventory remained unsold by Lute Ltd.
However, it was all sold by Lute Ltd before 30 June 2016.
The tax rate is 30%.
Required
Prepare the journal entries in the records of Lute Ltd in relation to its investment in Sitar Ltd
for the year ended 30 June 2016.
1. Cash Dr 6 000
Investment in Sitar Ltd Cr 6 000
(20% ($10 000 + $20 000))
On 1 July 2015, Key Ltd acquired 25% of the shares of Board Ltd for $400 000. The acquisition
of these shares gave Key Ltd significant influence over Board Ltd. At this date, the equity of
Board Ltd consisted of:
Share capital $660 000
General reserve 100 000
Retained earnings 440 000
At 1 July 2015, all the identifiable assets and liabilities of Board Ltd were recorded at
amounts equal to their fair values except for:
The plant was considered to have a further useful life of 5 years. The land was revalued in the
records of Board Ltd and the revaluation model applied in the measurement of the land. The
tax rate is 30%.
At 30 June 2017, Board Ltd reported the following information:
Board Ltd also reported other comprehensive income relating to gains on revaluation of land
of $10 000.
Required
Prepare the journal entries for inclusion in the consolidation worksheet of Key Ltd at 30 June
2017 for the equity accounting of Board Ltd.
25%
Key Ltd Board Ltd
At 1 July 2015:
Retained earnings
Movement in retained earnings: $820 000 -$440 000 $380 000
Increase in general reserve ($120 000* - $100 000) 20 000
Pre-acquisition adjustments:
Depreciation of plant (14 000)
386 000
Investor’s share – 25% $96 500
*GR balance at 30/6/17 is $150 000. During that reporting period there was a Transfer to GR of $30
000. Therefore, at 30/6/16, the balance of GR was $120 000.
Question 23.5 Accounting for an associate across two years with inter-
entity transactions
Use the information in question 23.4, and assume also that the following inter-entity
transactions occurred.
(a) On 1 July 2016, Key Ltd holds inventory sold to it by Board Ltd at an after-tax profit of
$20 000. This inventory was all sold to external entities by 30 June 2017.
(b) During the 2016–17 period, Board Ltd sold inventory to Key Ltd for $100 000 recording
an after-tax profit of $15 000. One-third of this inventory is still held by Key Ltd at 30
June 2017.
(c) On 1 January 2016, Board Ltd sold a vehicle to Key Ltd for $40 000. The vehicle was
recorded at a carrying amount of $38 000 by Board Ltd at the date of sale. The vehicle is
estimated to have a further 2-year life.
(d) From 1 July 2015, Key Ltd rented a warehouse from Board Ltd and paid rent of $15 000
p.a., the rent being paid in advance each year.
Required
Prepare the journal entries for inclusion in the consolidation worksheet of Key Ltd at 30 June
2017 for the equity accounting of Board Ltd.
25%
Key Ltd Board Ltd
At 1 July 2015:
Acoustic Ltd owns 25% of the shares of its joint venture, Bass Ltd. At the acquisition date, there
were no differences between the fair values and the carrying amounts of the identifiable assets
and liabilities of Bass Ltd.
For 2015–16, Bass Ltd recorded a profit of $100 000. During this period, Bass Ltd paid a
$10 000 dividend, declared in June 2015, and an interim dividend of $8000. The tax rate is 30%.
The following transactions have occurred between Acoustic Ltd and Bass Ltd:
(a) On 1 July 2014, Bass Ltd sold a non-current asset costing $10 000 to Acoustic Ltd for
$12 000. Acoustic Ltd applies a 10% p.a. on cost straight-line method of depreciation.
(b) On 1 January 2016, Bass Ltd sold an item of plant to Acoustic Ltd for $15 000. The
carrying amount of the asset to Bass Ltd at time of sale was $12 000. Acoustic Ltd applies
a 15% p.a. straight-line method of depreciation.
(c) A non-current asset with a carrying amount of $20 000 was sold by Bass Ltd to Acoustic
Ltd for $28 000 on 1 June 2016. Acoustic Ltd regarded the item as inventory and still had
the item on hand at 30 June 2016.
(d) On 1 July 2014, Acoustic Ltd sold an item of machinery to Bass Ltd for $6000. This item
had cost Acoustic Ltd $4000. Acoustic Ltd regarded this item as inventory whereas Bass
Ltd intended to use the item as a non-current asset. Bass Ltd applied a 10% p.a. on cost
straight-line depreciation method.
Required
Acoustic Ltd applies AASB 128 in accounting for its investment in Bass Ltd. Assuming Acoustic
Ltd does not prepare consolidated financial statements, prepare the journal entries in the
records of Acoustic Ltd for the year ended 30 June 2016 in relation to its investment in Bass
Ltd.
Cash Dr 2 500
Investment in Bass Ltd Cr 2 500
(Dividend received from joint venture:
25% x $10 000)
Cash Dr 2 000
Investment in Bass Ltd Cr 2 000
(25% x $8 000)
On 1 July 2014, Ukulele Ltd acquired 40% of the shares of Bongo Ltd for $100 000. At this date,
all the identifiable assets and liabilities of Bongo Ltd were recorded at amounts equal to fair
value except for inventory which had a fair value $10 000 greater than the carrying amount. All
inventory was sold by 30 June 2015. The tax rate is 30%. Bongo Ltd was classified as an
associate of Ukulele Ltd.
The profits and losses recorded by Bongo Ltd from the next 6 years were as follows:
Table of workings
Year Post-acquisition Share of Cumulative Equity-
Profit/(Loss) Profit/(Loss) share accounted
40% balance of
investment
2014-15 * $23 000 $9 200 $9 200 $109 200
2015-16 5 000 2 000 11 200 111 200
2016-17 (250 000) (100 000) (88 800) 11 200
2017-18 (50 000) (20 000) (108 800) 0
2018-19 15 000 6 000 (102 800) 0
2019-20 20 000 8 000 (94 800 5 200
*In the 2014-15 year it is necessary to calculate the share of post-acquisition profits of Bongo Ltd:
Recorded profits of Bongo Ltd = $30 000
Pre-acquisition profits = $10 000 (1 - 30%) (inventory sale)
= $7 000
Post-acquisition profits = $23 000
40% share = $9 200
30/6/17 Share of profit or loss of associates and joint ventures Dr 100 000
Retained earnings (1/7/16) Cr 11 200
Investment in associates and joint ventures Cr 88 800
At 1 July 2015:
Maracas Ltd
Consolidated Statement of Profit or Loss and Other Comprehensive Income
at 30 June 2017
On 1 July 2014, Harp Ltd purchased 30% of the shares of Lyre Ltd for $60 050. At this date,
the ledger balances of Lyre Ltd were:
At 1 July 2014, all the identifiable assets and liabilities of Lyre Ltd were recorded at fair value
except for plant whose fair value was $5000 greater than carrying amount. This plant has an
expected future life of 5 years, the benefits being received evenly over this period. Dividend
revenue is recognised when dividends are declared. The tax rate is 30%.
The results of Lyre Ltd for the next 3 years were:
30%
Harp Ltd Lyre Ltd
At 1 July 2014:
2014 – 2015
Recorded profit for the period $30 000
Pre-acquisition adjustments:
Depreciation of plant 700
29 300
Investor’s share – 30% $8 790
2015 – 2016
2016 – 2017
On 1 July 2013, Bongo Ltd acquired 30% of the shares of Tom-Tom Ltd for $60 000. At this
date, the equity of Tom-Tom Ltd consisted of:
On 1 July 2015, the ownership interest of 30%, together with board representation and a
diverse spread of remaining shareholders, was sufficient for the investor to demonstrate
significant influence, and accordingly to begin accounting for the investment as an associate.
The fair value of the 30% ownership interest in Tom-Tom Ltd at 1 July 2015 was $70 000. At
this date, the equity of Tom-Tom Ltd consisted of:
At this date, all the identifiable assets and liabilities of Tom-Tom Ltd were recorded at fair
value except for the following assets:
The machinery was expected to have a further 5-year life, benefits being received evenly over
this period. The inventory was all sold by 30 June 2016.
Dividends paid by Tom-Tom Ltd in the 2013–14 period were $10 000, and $12 000 was paid in
the 2014–15 period. In June 2015, Tom-Tom Ltd declared a dividend of $10 000. Dividend
revenue is recognised when dividends are declared.
During the period ending 30 June 2016, the following events occurred:
(a) Tom-Tom Ltd sold to Bongo Ltd some inventory, which had previously cost Tom-Tom
Ltd $8000, for $10 000. Bongo Ltd still had one-quarter of these items on hand at 30 June
2016.
(b) On 1 January 2016, Bongo Ltd sold a non-current asset to Tom-Tom Ltd for $50 000,
giving a profit before tax of $10 000 to Bongo Ltd. Tom-Tom Ltd applied a 12% p.a. on
cost straight-line depreciation method to this asset.
(c) On 31 December 2015, Tom-Tom Ltd paid an interim dividend of $5000.
(d) At 30 June 2016, Tom-Tom Ltd calculated that it had earned a profit of $32 000, after an
income tax expense of $8000. Tom-Tom Ltd then declared a $5000 dividend, to be paid in
September 2016, and transferred $3000 to the general reserve.
(e) The tax rate is 30%.
Required
Prepare the journal entries for the consolidation worksheet of Bongo Ltd at 30 June 2016 for
the inclusion of the equity-accounted results of Tom-Tom Ltd.
30%
Bongo Ltd Tom-Tom Ltd
At 1 July 2015:
At 1 July 2015, Bongo Ltd would pass the following journal entry to r-measure the investment in
Tom-Tom Ltd to fair value:
Question 23.11 Adjustments where investor does and does not prepare
consolidated financial statements
On 1 July 2014, Bell Ltd signed a joint venture agreement with two other investors. They agreed
to acquire the shares of Chime Ltd and operate it as a joint venture with the investors having
joint control over the company. On 1 July 2014, Bell Ltd acquired a 30% interest in Chime Ltd
at a cost of $13 650.
The equity of Chime Ltd at acquisition date was:
All the identifiable assets and liabilities of Chime Ltd at 1 July 2014 were recorded at
amounts equal to their fair values except for some depreciable non-current assets with a fair
value of $15 000 greater than carrying amount. These depreciable assets are expected to have a
further 5-year life.
Additional information
(a) At 30 June 2016, Bell Ltd had inventory costing $100 000 (2015 — $60 000) on hand
which had been purchased from Chime Ltd. A profit before tax of $30 000 (2015 —
$10 000) had been made on the sale.
(b) All companies adopt the recommendations of AASB 112 regarding tax-effect accounting.
Assume a tax rate of 30% applies.
(c) Information about income and changes in equity of Chime Ltd as at 30 June 2016 is:
(d) All dividends may be assumed to be out of the profit for the current year. Dividend
revenue is recognised when declared by directors.
(e) The equity of Chime Ltd at 30 June 2016 was:
The asset revaluation surplus arose from a revaluation of freehold land made at 30 June 2016.
The general reserve arose from a transfer from retained earnings in June 2015.
Required
A. Assume Bell Ltd does not prepare consolidated financial statements. Prepare the journal
entries in the records of Bell Ltd for the year ended 30 June 2016 in relation to the
investment in Chime Ltd.
B. Assume Bell Ltd does prepare consolidated financial statements. Prepare the consolidated
worksheet entries for the year ended 30 June 2016 for inclusion of the equity-accounted
results of Chime Ltd.
30%
Bell Ltd Chime Ltd
At 1 July 2014:
Net fair value of identifiable assets
and liabilities of Chime Ltd = $20 000 + $10 000 (equity)
+ $15 000 (1 – 30%) (assets)
= $40 500
Net fair value acquired = 30% x $40 500
= $12 150
Cost of investment = $13 650
Goodwill = $1 500
Depreciation:
Non-current assets: – 20% x $15 000 (1 -30%) = $2 100
The required entries in Bell Ltd’s accounts for the 2015-2016 year are:
Cash Dr 15 000
Investment in Chime Ltd Cr 15 000
(30% x $50 000 – dividend paid)
At 1 July 2013, the identifiable assets and liabilities of Gong Ltd were recorded at amounts
equal to their fair values.
Information about income and changes in equity for both companies for the year ended 30
June 2016 was as shown opposite.
Additional information
(a) Cymbal Ltd recognised the final dividend revenue from Gong Ltd before receipt of cash.
Gong Ltd declared a $6000 dividend in June 2015, this being paid in August 2015.
(b) On 31 December 2015, Gong Ltd sold Cymbal Ltd a motor vehicle for $12 000. The
vehicle had originally cost Gong Ltd $18 000 and was written down to $9000 for both tax
and accounting purposes at time of sale to Cymbal Ltd. Both companies depreciated
motor vehicles at the rate of 20% p.a. on cost.
(c) The beginning inventory of Gong Ltd included goods at $4000 bought from Cymbal Ltd;
their cost to Cymbal Ltd was $3200.
(d) The ending inventory of Cymbal Ltd included goods purchased from Gong Ltd at a profit
before tax of $1600.
(e) The tax rate is 30%.
Required
A. Prepare the journal entries in the records of Cymbal Ltd to account for the investment in
Gong Ltd in accordance with AASB 128 for the year ended 30 June 2016 assuming Cymbal
Ltd does not prepare consolidated financial statements.
B. Prepare the consolidated worksheet entries in relation to the investment in Gong Ltd,
assuming Cymbal Ltd does prepare consolidated financial statements at 30 June 2016.
40%
Cymbal Ltd Gong Ltd
At 1 July 2013:
= $54 400
Cost of investment = $63 200
Goodwill = $8 800
Cash Dr 1 600
Investment in Gong Ltd Cr 1 600
(40% x $4 000 – dividend paid)
At 1 July 2012, all the identifiable assets and liabilities of Tuba Ltd were at fair value except
for the following assets:
The inventory was all sold by 30 June 2013. Depreciable assets have an expected further 5-
year life, with depreciation being calculated on a straight-line basis. Valuation adjustments are
made on consolidation.
Trombone Ltd uses the partial goodwill method.
On 1 July 2015, Trombone Ltd acquired 25% of the capital of Accordion Ltd for $3500. All
the identifiable assets and liabilities of Accordion Ltd were recorded at fair value except for the
following:
All this inventory was sold in the 12 months after 1 July 2015. The depreciable assets were
considered to have a further 5-year life.
Information on Accordion Ltd’s equity position is as follows:
For the year ended 30 June 2017, Accordion Ltd recorded a profit before tax of $2600 and an
income tax expense of $600. Accordion Ltd paid a dividend of $200 in January 2017. Trombone
Ltd regards Accordion Ltd as an associated company.
During the year ended 30 June 2017, Accordion Ltd sold inventory to Tuba Ltd for $6000.
The cost of this inventory to Accordion Ltd was $4000. Tuba Ltd has resold only 20% of these
items. However, Tuba Ltd made a profit before tax of $500 on the resale of these items.
On 1 January 2016, Trombone Ltd sold Accordion Ltd a motor vehicle for $4000, at a profit
before tax of $800 to Trombone Ltd. Both companies treat motor vehicles as non-current assets.
Both companies charge depreciation at 20% p.a. on the reducing balance. Assume a tax rate of
30%.
Information about income and changes in equity for Trombone Ltd and its subsidiary, Tuba
Ltd, for the year ended 30 June 2017 is as follows:
Required
A. Prepare the consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of Trombone Ltd and its subsidiary Tuba Ltd as at 30 June
2017.
B. In the consolidated statement of financial position, what would be the balance of the
investment account ‘Shares in Accordion Ltd’?
90%
Trombone Ltd Tuba Ltd
25%
Accordion Ltd
At 1 July 2012:
2. Pre-acquisition entries
NCI Dr 400
Dividend paid Cr 400
(10% x $4 000)
6. Dividend paid
At 1 July 2015:
Dividend revenue Dr 50
Investment in Accordion Ltd Cr 50
(25% x $200)
Revenues:
Sales revenue $260 000
Other revenue 31 350
$291 350
Expenses:
Cost of sales 140 000
Depreciation 22 000
Other expenses 25 000 187 000
104 350
Share of profits/(losses) of associates and joint ventures ___210
Profit before income tax 104 560
Income tax expense 29 400
Profit for the period $75 160
Comprehensive Income for the period $75 160
Attributable to:
Parent interest $73 500
Non-controlling interest 1 660
$75 160
TROMBONE LTD
Consolidated Statement of Changes in Equity
for the financial year ending 30 June 2017
Group Parent
Comprehensive income for the period $75 160 $73 500
Retained earnings:
Balance at 1 July 2016 $181 164 $173 724
Profit for the period 75 160 73 500
Dividend paid (20 400) (20 000)
Transfer from business combinations valuation reserve ___700 ______
Balance at 30 June 2017 $236 624 $227 224
Share capital:
Balance at 1 July 2016 unknown -
Balance at 30 June 2017 unknown -
General reserve:
Balance at 1 July 2016 unknown -
Balance at 30 June 2017 unknown -
Additional information
(a) Trumpet Ltd owns 80% of the shares in Clarinet Ltd and 20% of the shares in Cello Ltd.
Trumpet Ltd has entered into a contractual agreement with the four other investors in
Cello Ltd, and all five investors have a joint control arrangement in relation to Cello Ltd.
(b) On 1 July 2014, all identifiable assets and liabilities of Clarinet Ltd were recorded at
amounts equal to their fair values. Trumpet Ltd purchased 80% of Clarinet Ltd’s shares
on 1 July 2014, and paid $5000 for goodwill, none of which had been recorded on Clarinet
Ltd’s records. Trumpet Ltd uses the partial goodwill method.
(c) At the date Trumpet Ltd acquired its shares in Cello Ltd, Cello Ltd’s recorded equity
was:
Share capital $100 000
General reserve 15 000
Retained earnings 5 000
All the identifiable assets and liabilities of Cello Ltd were recorded at amounts equal to their
fair values.
Trumpet Ltd paid $25 000 for its shares in Cello Ltd on 1 July 2014. Cello Ltd transferred
$3000 to general reserve in the year ended 30 June 2015, out of equity earned since 1 July 2014.
(d) Included in the beginning inventory of Trumpet Ltd were profits before tax made by
Clarinet Ltd: $5000; Cello Ltd: $3000.
(e) Included in the ending inventory of Clarinet Ltd were profits before tax made by Cello
Ltd: $4000.
(f) Cello Ltd had recorded a profit (net of $500 tax) of $2000 in selling certain non-current
assets to Trumpet Ltd on 1 January 2016. Trumpet Ltd treats the items as non-current
assets and charges depreciation at the rate of 25% p.a. straight-line from that date.
(g) Trumpet Ltd purchased for $10 000 an item of plant from Clarinet Ltd on 1 September
2014. The carrying amount of the asset at that date was $7000. The asset was depreciated
at the rate of 20% p.a. straight-line from 1 September 2014.
(h) During the year ended 30 June 2016, Cello Ltd revalued upwards one of its non-current
assets by $8000. There had been no previous downward revaluations.
(i) Dividend revenue is recognised when dividends are declared.
(j) The tax rate is 30%.
Required
Prepare the consolidation worksheet entries (in general journal form) needed for the
consolidated statements for the year ended 30 June 2016 for Trumpet Ltd and its subsidiary
Clarinet Ltd. Include the equity-accounted results of Cello Ltd.
Trumpet Ltd
80% 20%
NCI 20%
NCI Dr 1 200
Interim dividend paid Cr 1 200
(20% x $6 000)
NCI Dr 800
NCI Dr 420
Retained earnings (1/7/15) Cr 420
(20% x $2 100)
(10) Depreciation
Information about the companies for the year ended 30 June 2017 is as follows:
Retained
earnings 6 800 3 600 230 2 000 1 210
(1/7/16)
Retained
earnings $7 000 $4 000 $430 $2 200 $1 610
(30/6/17)
Additional information
(a) Synthesiser Ltd: Keyboard Ltd acquired a 60% interest on 30 June 2009 for $3008.
Shareholders’ equity at 30 June 2009 was:
At the acquisition date, Synthesiser Ltd had not recorded any goodwill. All the identifiable
assets and liabilities of Synthesiser Ltd were recorded at amounts equal to their fair values
except the following:
By 30 June 2010, all the inventory had been sold by Synthesiser Ltd. The non-current assets
had a further expected life of 10 years, with benefits from use being received evenly over these
years. The partial goodwill method is used.
(b) Triangle Ltd: Synthesiser Ltd acquired, on 1 July 2016, 25% of the share capital for $400.
Equity at 30 June 2016 was:
At 30 June 2016, Triangle Ltd had not recorded any goodwill. All the identifiable assets and
liabilities were recorded at amounts equal to their fair values except for the following:
By 30 June 2017, half the inventory had been sold to external parties. The non-current assets
were revalued in the records of Triangle Ltd on 1 July 2016.
(c) Keyboard Ltd: Included in current assets of Keyboard Ltd at 30 June 2017 is inventory
that was purchased from Synthesiser Ltd for $900. Synthesiser Ltd sells its goods at cost
plus 50% mark-up.
(d) Keyboard Ltd: Included in current assets of Keyboard Ltd at 30 June 2016 was inventory
that was purchased from Synthesiser Ltd for $600.
(e) Synthesiser Ltd: Included in the non-current assets of Synthesiser Ltd at 30 June 2017 is
an item of plant that was sold to Synthesiser Ltd by Triangle Ltd on 1 July 2016 for
$1200. At the date of sale, this asset had a carrying amount to Triangle Ltd of $1000. It
had an expected future useful life of 5 years, with benefits being received evenly over these
years.
(f) Xylophone Ltd: Keyboard Ltd acquired a 25% interest on 30 June 2014 for $400. Equity
at 30 June 2014 was:
At this date, Xylophone Ltd had not recorded any goodwill. All the identifiable assets and
liabilities of Xylophone Ltd were recorded at amounts equal to their fair values except for the
following assets:
The inventory was all sold by 30 June 2015. The non-current assets had a further useful life
of 4 years.
(g) Tambourine Ltd: Keyboard Ltd acquired a 25% interest on 1 July 2016 for $600. A
comparison of carrying amounts and fair values at 30 June 2016 is shown below:
The plant had a further 5-year life and the equipment had a further 6-year life. By 30 June
2017, all the undervalued inventory had been sold.
(h) Xylophone Ltd: On 1 July 2015, Xylophone Ltd sold a non-current asset to Keyboard Ltd
for $500. At the time of sale, this asset had a carrying amount of $450. Keyboard Ltd
depreciated this asset evenly over a 5-year period.
(i) Tambourine Ltd: At 30 June 2017, Keyboard Ltd held inventory that was sold to it by
Tambourine Ltd at a profit before tax of $200 during the previous period.
(j) Keyboard Ltd: On 30 June 2017, Keyboard Ltd held inventory that had been sold to it
during the previous 6 months by Xylophone Ltd for $1000. Xylophone Ltd made $400
profit before tax on the sale.
(k) The tax rate is 30%.
Required
Prepare the consolidated financial statements of Keyboard Ltd for the year ended 30 June 2017.
Include all the associates accounted for under the equity method.
At 30 June 2009:
Depreciation expense Dr 30
Retained earnings (1/7/16) Dr 210
Accumulated depreciation Cr 240
NCI Dr 200
Dividend paid Cr 200
(40% x $500)
NCI Dr 84
NCI share of profit Cr 84
(40% ($300 - $90))
At 30 June 2014:
At 30 June 2016:
Dividend revenue Dr 50
Investment in Tambourine Ltd Cr 50
(25% x $200)
At 1 July 2016:
As the balance of the asset revaluation surplus at 30 June 2011 is $200, and the balance at 1 July
2007 was $140 (i.e. 70% x $200), then further revaluations resulting in a $60 increase in the asset
revaluation surplus must have occurred in the current period. Hence:
Increase in asset revaluation surplus $60
Investor’s share - 25% $15
Dividend revenue Dr 50
Investment in Triangle Ltd Cr 50
(25% x $200)
As there is a 40% NCI in Synthesiser Ltd, the following entry in the NCI columns is necessary:
KEYBOARD LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the financial year ended 30 June 2017
Revenues x
Expenses x
Trading profit $1 070
Dividend revenue 350
Share of profits (losses) of associates and joint ventures 354
Profit before income tax 1 774
Income tax expense 561
Profit for the period $1 213
Asset revaluation surplus: increments 15
Comprehensive income for the period $1 228
KEYBOARD LTD
Consolidated Statement of Changes in Equity
for the financial year ending 30 June 2017
Group Parent
Comprehensive income for the period $1 228 $893
Retained earnings:
Balance at 1 July 2016 $9 202 $7 877
Profit for the period 1 213 884
Dividend paid (700) (500)
Balance at 30 June 2017 $9 715 $8 261
Share capital:
Balance at 1 July 2016 $1 800 $1 000
Balance at 30 June 2017 $1 800 $1 000
KEYBOARD LTD
Consolidated Statement of Financial Position
as at 30 June 2017
ASSETS
Current Assets $3 692
Non-Current Assets
Investments accounted for using the equity method 4 350
Goodwill (net) 440
Other non-current assets (net) 9 150
Total Non-current Assets 13 940
Total Assets $17 632
The group, consisting of Keyboard Ltd and its subsidiary, Synthesiser Ltd, has investments in the
following associates:
Xylophone Ltd ownership interest is 25%, principal activities are …
principal place of business is …
Tambourine Ltd ownership interest is 25%, principal activities are …
principal place of business is …
Triangle Ltd ownership interest is 25%, principal activities are …
principal place of business is …
Information about the associates extracted from their financial statements at 30 June 2011 is as
follows:
Xylophone Ltd Tambourine Ltd Triangle Ltd
Dividends received $250 $50 $50