ACCT 2 5 4 2

th
5 Class Test for 2010
QUESTION ONE

What is the definition of control that is used to identify the corporate group?

QUESTION TWO

On 1 July 20X6 A Ltd acquired all the ordinary voting shares of B Ltd in exchange for cash
consideration of $550,000. At the acquisition date the balance sheets of A Ltd and B Ltd and fair
values of B Ltds assets and liabilities are as follows:

A Ltd B Ltd

Carrying Carrying Fair Value

Amount Amount
$ $
Equity
Share capital 550,000 300,000
Retained profits 350,000 140,000
Liabilities
Provisions 30,000 60,000 60,000
Accounts payable 27,000 34,000 34,000
Tax liabilities 10,000 6,000 6,000
Total Equity and Liabilities 967,000 540,000

Assets
Cash 15,000 5,000 5,000
Inventory 42,000 75,000 95,000
Plant at cost 620,000 480,000 360,000
Accumulated depreciation (380,000) (170,000)
Land at cost 120,000 150,000 180,000
Investment in B Ltd 550,000 -
Total Assets 967,000 540,000

Additional information

x The company income tax rate is 30%.

REQUIRED

(A) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.

(B) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the
acquisition date of 1 July 20X6.
QUESTION ONE SOLUTION (10 marks)

Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. (2 marks)

QUESTION TWO SOLUTION

PART (A)
Acquisition analysis
$ $
Cost of business combination to A Ltd 550,000 1/2
Book net assets (equity) of B Ltd
Share capital 300,000
Retained profits 1/7/X6 140,000 440,000 1/2

Fair value adjustments:

Inventory (20,000 x 0.7) 14,000 1/2
Plant (50,000 x 0.7) 35,000 1/2
Land (30,000 x 0.7) 21,000 70,000 1/2
Identifiable net assets acquired at fair value 510,000
Difference Purchased Goodwill 40,000 1/2

PART (B)
Consolidation Journal Entries 1 July 20X6

$ $
(1) Dr. Inventory 20,000
Cr. Deferred tax liability 6,000 1
Cr. Business combination valuation reserve 14,000

(2) Dr. Land 30,000

Cr. Deferred tax liability 9,000 1
Cr. Business combination valuation reserve 21,000

(3) Dr. Accumulated depreciation 170,000

Cr. Plant at cost 120,000
Cr. Deferred tax liability 15,000 1
Cr. Business combination valuation reserve 35,000

(4) Dr. Goodwill 40,000

Cr. Business combination valuation reserve 40,000 1

(5) Dr. Share capital 300,000

Dr. Retained profits 1/7/X6 140,000
Dr. Business combination valuation reserve 110,000 1
Cr. Investment in B Ltd 550,000
ACCT 2 5 4 2
2
 5th Class Test for 2010
QUESTION ONE

What factors would usually indicate whether one company has control of another?

QUESTION TWO

On 1 July 20X6 A Ltd acquired all the ordinary voting shares of B Ltd in exchange for cash
consideration of $570,000. At the acquisition date the balance sheets of A Ltd and B Ltd and fair
values of B Ltds assets and liabilities are as follows:

A Ltd B Ltd

Carrying Carrying Fair Value

Amount Amount
$ $
Equity
Share capital 550,000 300,000
Retained profits 350,000 140,000
Liabilities
Provisions 30,000 60,000 60,000
Accounts payable 27,000 34,000 34,000
Tax liabilities 30,000 6,000 6,000
Total Equity and Liabilities 987,000 540,000

Assets
Cash 15,000 5,000 5,000
Inventory 42,000 75,000 90,000
Plant at cost 620,000 480,000 340,000
Accumulated depreciation (380,000) (170,000)
Land at cost 120,000 150,000 200,000
Investment in B Ltd 570,000 -
Total Assets 987,000 540,000

Additional information

x The company income tax rate is 30%.

REQUIRED

(C) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.

(D) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the
acquisition date of 1 July 20X6.

3
QUESTION ONE SOLUTION (10 marks)

Capacity to cast the majority of votes using the decision-making arms of the company, i.e. the
shareholders in general meeting and the board of directors in meeting (2 marks)

QUESTION TWO SOLUTION

PART (A)
Acquisition analysis
$ $
Cost of business combination to A Ltd 570,000 1/2
Book net assets (equity) of B Ltd
Share capital 300,000
Retained profits 1/7/X6 140,000 440,000 1/2

Fair value adjustments:

Inventory (15,000 x 0.7) 10,500 1/2
Plant (30,000 x 0.7) 21,000 1/2
Land (50,000 x 0.7) 35,000 66,500 1/2
Identifiable net assets acquired at fair value 506,500
Difference Purchased Goodwill 63,500 1/2

PART (B)
Consolidation Journal Entries 1 July 20X6

$ $
(1) Dr. Inventory 15,000
Cr. Deferred tax liability 4,500 1
Cr. Business combination valuation reserve 10,500

(2) Dr. Land 50,000

Cr. Deferred tax liability 15,000 1
Cr. Business combination valuation reserve 35,000

(3) Dr. Accumulated depreciation 170,000

Cr. Plant at cost 140,000
Cr. Deferred tax liability 9,000 1
Cr. Business combination valuation reserve 21,000

(4) Dr. Goodwill 63,500

Cr. Business combination valuation reserve 63,500 1

(5) Dr. Share capital 300,000

Dr. Retained profits 1/7/X6 140,000
Dr. Business combination valuation reserve 130,000 1
Cr. Investment in B Ltd 570,000

4
 ACCT 2 5 4 2
th
5 Class Test for 2010
QUESTION ONE

Is it possible to have control of a company with less than 50% ownership? Explain how.

QUESTION TWO

On 1 July 20X6 A Ltd acquired all the ordinary voting shares of B Ltd in exchange for cash
consideration of $560,000. At the acquisition date the balance sheets of A Ltd and B Ltd and fair
values of B Ltds assets and liabilities are as follows:

A Ltd B Ltd

Carrying Carrying Fair Value

Amount Amount
$ $
Equity
Share capital 550,000 300,000
Retained profits 350,000 140,000
Liabilities
Provisions 30,000 60,000 60,000
Accounts payable 27,000 34,000 34,000
Tax liabilities 20,000 6,000 6,000
Total Equity and Liabilities 977,000 540,000

Assets
Cash 15,000 5,000 5,000
Inventory 42,000 75,000 105,000
Plant at cost 620,000 480,000 350,000
Accumulated depreciation (380,000) (170,000)
Land at cost 120,000 150,000 170,000
Investment in B Ltd 560,000 -
Total Assets 977,000 540,000

Additional information

x The company income tax rate is 30%.

REQUIRED

(E) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.

(F) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the
acquisition date of 1 July 20X6.

5
QUESTION ONE SOLUTION (10 marks)

Yes this is described as effective control. It would occur where there is dispersed ownership and a
significant proportion of shareholders do not vote at meetings. (2 marks)

QUESTION TWO SOLUTION

PART (A)
Acquisition analysis
$ $
Cost of business combination to A Ltd 560,000 1/2
Book net assets (equity) of B Ltd
Share capital 300,000
Retained profits 1/7/X6 140,000 440,000 1/2

Fair value adjustments:

Inventory (30,000 x 0.7) 21,000 1/2
Plant (40,000 x 0.7) 28,000 1/2
Land (20,000 x 0.7) 14,000 63,000 1/2
Identifiable net assets acquired at fair value 503,000
Difference Purchased Goodwill 57,000 1/2

PART (B)
Consolidation Journal Entries 1 July 20X6

$ $
(1) Dr. Inventory 30,000
Cr. Deferred tax liability 9,000 1
Cr. Business combination valuation reserve 21,000

(2) Dr. Land 20,000

Cr. Deferred tax liability 6,000 1
Cr. Business combination valuation reserve 14,000

(3) Dr. Accumulated depreciation 170,000

Cr. Plant at cost 130,000
Cr. Deferred tax liability 12,000 1
Cr. Business combination valuation reserve 28,000

(4) Dr. Goodwill 57,000

Cr. Business combination valuation reserve 57,000 1

(5) Dr. Share capital 300,000

Dr. Retained profits 1/7/X6 140,000
Dr. Business combination valuation reserve 120,000 1
Cr. Investment in B Ltd 560,000
ACCT 2 5 4 2
6
 5th Class Test for 2010
QUESTION ONE

X Ltd holds 60% of the shares in Y Ltd. X Ltd is a passive investor and takes no part in the
management of Y Ltd. Does X Ltd have control of Y Ltd? Explain

QUESTION TWO

On 1 July 20X6 A Ltd acquired all the ordinary voting shares of B Ltd in exchange for cash
consideration of $580,000. At the acquisition date the balance sheets of A Ltd and B Ltd and fair
values of B Ltds assets and liabilities are as follows:

A Ltd B Ltd

Carrying Carrying Fair Value

Amount Amount
$ $
Equity
Share capital 550,000 300,000
Retained profits 350,000 140,000
Liabilities
Provisions 30,000 60,000 60,000
Accounts payable 27,000 34,000 34,000
Tax liabilities 40,000 6,000 6,000
Total Equity and Liabilities 997,000 540,000

Assets
Cash 15,000 5,000 5,000
Inventory 42,000 75,000 90,000
Plant at cost 620,000 480,000 370,000
Accumulated depreciation (380,000) (170,000)
Land at cost 120,000 150,000 190,000
Investment in B Ltd 580,000 -
Total Assets 997,000 540,000

Additional information

x The company income tax rate is 30%.

REQUIRED

(G) Prepare an acquisition analysis for A Ltds acquisition of B Ltd.

(H) Prepare the consolidation journal entries needed for the consolidation of A Ltd and B Ltd at the
acquisition date of 1 July 20X6.

7
QUESTION ONE SOLUTION (10 marks)

Yes a passive investment can yield control because the definition refers only to the power to govern
it does not require the active exercise of that power. (2 marks)

QUESTION TWO SOLUTION

PART (A)
Acquisition analysis
$ $
Cost of business combination to A Ltd 580,000 1/2
Book net assets (equity) of B Ltd
Share capital 300,000
Retained profits 1/7/X6 140,000 440,000 1/2

Fair value adjustments:

Inventory (15,000 x 0.7) 10,500 1/2
Plant (60,000 x 0.7) 42,000 1/2
Land (40,000 x 0.7) 28,000 80,500 1/2
Identifiable net assets acquired at fair value 520,500
Difference Purchased Goodwill 59,500 1/2

PART (B)
Consolidation Journal Entries 1 July 20X6

$ $
(1) Dr. Inventory 15,000
Cr. Deferred tax liability 4,500 1
Cr. Business combination valuation reserve 10,500

(2) Dr. Land 40,000

Cr. Deferred tax liability 12,000 1
Cr. Business combination valuation reserve 28,000

(3) Dr. Accumulated depreciation 170,000

Cr. Plant at cost 110,000
Cr. Deferred tax liability 18,000 1
Cr. Business combination valuation reserve 42,000

(4) Dr. Goodwill 59,500

Cr. Business combination valuation reserve 59,500 1

(5) Dr. Share capital 300,000

Dr. Retained profits 1/7/X6 140,000
Dr. Business combination valuation reserve 140,000 1
Cr. Investment in B Ltd 580,000