BKAR3043 Financial Accounting & Reporting IV

BKAR 3043 FINANCIAL ACCOUNTING AND REPORTING IV

TUTORIAL 1 INTERCOMPANY TRANSACTION

SUBMISSION DATE:

QUESTION 1

On 1 July 2016 Hallmark Bhd (Hallmark) acquired 80% of the ordinary share capital of
Sourplum Bhd (Sourplum) when retained earnings of Sourplum was RM5.4 million. On this
date, shares in Hallmark and Sourplum had a market value of RM8 and RM7·50 each
respectively. The financial statements for both companies are:

Statements of Profit or Loss and Other Comprehensive Income

for the year ended 30 June 2017
Hallmark Bhd Sourplum Bhd
RM’000 RM’000
Sales revenue 60,000 24,000
Cost of sales (42,000) (20,000)
Gross profit 18,000 4,000
Profit on sale of equipment 600 0
Dividend income 0 -
Operating expenses (6,000) (200)
Loan interest received (paid) 75 (200)
Profit before taxation 12,675 3,600
Tax expenses (3,000) (600)
Profit for the period 9,675 3,000
Retained profit brought forward 16,525 5,400
Retained profit carried forward 26,200 8,400

Statement of Financial Position as at 30 June 2017

Hallmark Bhd Sourplum Bhd
RM’000 RM’000

Land 8,000 1,500

Property, plant and equipment 11,920 6,500
Investment in Sourplum 10,280 -
30,200 8,000

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Current Assets
Inventories 8,000 1,150
Accounts receivable 2,750 4,880
Cash and bank balances 4,250 1,970
Total Current Assets 15,000 8,000
Total Assets 45,200 16,000

Equity and Liabilities

Ordinary shares of RM1 each 10,000 2,000
Retained earnings 26,200 8,400
36,200 10,400
Liabilities
Accounts payable 6,100 2,500
Deferred taxation 2,900 1,100
10% loan notes 0
2,000
Total Liabilities 9,000 5,600
Total Equity and Liabilities 45,200 16,000

Additional information:
1. The fair value of Sourplum’s assets were equal to their book values with the exception
that fair value of Sourplum’s land was RM3.7 in excess of its carrying amount.
Sourplum has not adjusted the value of its land as a result of the fair value exercise.
2. In the post-acquisition period Sourplum sold goods to Hallmark at a price of RM13
million at a mark-up on cost of 20%. During the year Hallmark had sold RM10
million (at cost to Hallmark) of these goods for RM15 million.
3. On 1 October 2016, Hallmark purchased an equipment from Sourplum for RM3
million. The equipment was bought by Sourplum on 1 April 2012 at a cost of RM4
million. The group policy is to depreciate this type of equipment on a straight-line
basis over an estimated useful life of 10 years and to provide a full year’s depreciation
if the equipment has been used for more than 6 months in the year.
4. Hallmark had a trade receivable balance owing from Sourplum of RM800,000 as at
30 June 2017. This differed to the equivalent trade payable of Sourplum due to a
payment by Sourplum of RM200,000 made in June 2017 which did not clear
Hallmark’s bank account until 4 July 2017. Hallmarks’s policy for cash timing
differences is to adjust the parent’s financial statements.
5. Hallmark’s policy is to value non-controlling interest at its fair value.
6. The tax effects on unrealized profit for inter-companies’ transactions need to be
accounted for.
7. The company’s income tax rate remains 25% throughout the years.

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REQUIRED:

(a) Prepare the relevant consolidation journal entries for the year ended 30 June 2017.

(b) Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive
Income for Hallmark Bhd and its subsidiary for the year ended 30 June 2017.

(c) Prepare the Consolidated Statement of Financial Position for Hallmark Bhd and its
subsidiary as at 30 June 2017.

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QUESTION 2

Sintok Bhd, a public limited company had acquired 80% interest in the equity capital of Teja
Bhd, which is also a public limited company, on 1 January 2012 for RM60,000,000. At the
acquisition date, the retained earnings of Teja Bhd were RM10,000,000 and the ordinary
shares were RM50,000,000. The remaining 20% of non-controlling interest was measured at
fair value for RM20,000,000. Sintok Bhd uses proportionate share of net assets method to
measure the non-controlling interest. The financial statements of both companies for the year
ended 31 December 2017 are as follows:

Statements of Profit or Loss and Other Comprehensive Income

for the year ended 31 December 2017
Sintok Bhd Teja Bhd
RM’000 RM’000
Turnover 50,000 20,000
Cost of sales (20,000) (10,000)
Gross profit 30,000 10,000
Others income 9,400 2,000
Operating expenses (25,900) (6,000)
Profit before taxation 13,500 6,000
Tax expenses (3,645) (1,620)
Profit for the period 9,855 4,380

Statements of Changes in Equity (Partial)

for the year ended 31 December 2017
Sintok Bhd Teja Bhd
RM’000 RM’000
Retained earnings brought forward 52,520 18,120
+ Profit for the period 9,855 4,380
– Proposed dividend (5,475) –
Retained earnings carried forward 56,900 22,500

Statement of Financial Position as at 31 December 2017

Sintok Bhd Teja Bhd
NON-CURRENT ASSETS RM’000 RM’000
Land 85,000 40,000
Properties, plants and equipments 75,000 34,000
Investments in Teja Bhd 60,000 –
220,000 74,000
CURRENT ASSETS
Inventories 30,000 15,500
Accounts receivable 12,500 9,660
Cash and bank balances 17,130 8,340
59,630 33,500
TOTAL 279,630 107,500

EQUITY AND LIABILITIES

Ordinary shares, RM1 each 100,000 50,000
Retained earnings 56,900 22,500

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Revaluation reserves 52,000 –

208,900 72,500

CURRENT LIABILITIES
Accounts payable 32,060 21,150
Deferred taxation 12,870 8,850
Dividend payable 25,800 –
70,730 30,000
TOTAL 279,630 107,500

Additional information:
1. Included in the fixed assets of Teja Bhd was a freehold land and equipment recorded
at cost of RM2,500,000 and 1,500,000 respectively. At acquisition date, the freehold
land and the equipment was said to have a fair value of RM5,000,000 and 1,000,000
respectively. No adjustment had been made in the both companies’ accounts to reflect
the fair values.
2. Teja Bhd purchased inventories from Sintok Bhd totaling RM3,500,000 during the
year 2017. Out of this amount, RM1,000,000 still remained in the ending inventories
of Teja Bhd at the year end. The corresponding ending inventories amount in the prior
year was RM800,000. The profit margin is 20% on selling price.
3. Assume the company’s income tax rate remains 27% throughout the years.
4. The tax effects on unrealized profit for intercompanies transactions need to be shown
in your answer.
5. Round off your answer to the nearest thousand, if any.

REQUIRED:

(a) Calculate the goodwill on consolidation.

(b) Prepare the relevant consolidation journal entries for the year ended 31 December
2017.

(c) Prepare the consolidated statement of Profit or Loss and Other comprehensive
income, the consolidated statements of changes in equity and the consolidated
statement of financial position for Sintok Bhd and its subsidiary for the year ended 31
December 2017.