Lyceum of the Philippines University ACCOUNTANCY REVIEW

Manggahan Road, General Trias, Cavite

ILLUSTRATIVE PROBLEM 1
Largey Ltd acquires 100 per cent of the shares of Smalley Ltd on 1 July 2014 for a consideration of $650 000. The
share capital and reserves of Smalley Ltd at the date of acquisition are:
Share capital $300 000
Retained earnings $150 000
Revaluation surplus $150 000
$600 000
The directors consider that any goodwill acquired has not been the subject of an impairment loss. There are no
transactions between the entities and all assets are fairly valued at the date of acquisition. The financial
statements of Largey Ltd and Smalley Ltd at 30 June 2015 (one year after acquisition) are:
Largey Ltd Smalley
($000) Ltd ($000
Reconciliation of opening and closing retained earnings
Profit before tax 300 150
Tax (100) (50)
Profit after tax 200 100
Retained earnings—1 July 2014 400 150
Retained earnings—30 June 2015 600 250
Statements of financial position
Shareholders’ equity
Retained earnings 600 250
Share capital 1 200 300
Revaluation surplus 300 200
Current liabilities
Accounts payable 100 100
Non-current liabilities
Loans 600 250
2 800 1 100
Current assets
Cash 100 145
Accounts receivable 350 155
Non-current assets
Land 700 200
Plant 1 000 600
Investment in Smalley Ltd 650 –
2 800 1 100
REQUIRED
Prepare the consolidated accounts for Largey Ltd and Smalley Ltd at 30 June 2015.

ILLUSTRATIVE PROBLEM 2
Sandy Ltd acquired 100 per cent of the issued capital of Beach Ltd on 30 June 2014 for $900 000, when the
statement of financial position of Beach Ltd was as follows:
Statement of financial position of Beach Ltd as at 30 June 2014
$000 $000
Assets Liabilities
Accounts receivable 70 Loan 300
Inventory 100
Land 400 Shareholders’ equity
Property, plant and equip. 700 Share capital 500
Accumulated depreciation (270) Retained earnings 200
1 000 1 000

Additional information
• The tax rate is 30 per cent.
• As at the date of acquisition, all assets of Beach Ltd were at fair value, other than the property, plant and
equipment, which had a fair value of $530 000. Beach Ltd adopts the cost model for measuring its property,
plant and equipment. The property, plant and equipment is expected to have a remaining useful life of 10
years, and no residual value.
• One year following acquisition it was considered that Beach Ltd’s goodwill had a recoverable amount of $60
000.
• Beach Ltd declared a dividend of $40 000 on 10 July 2014, with the dividends being paid from pre-acquisition
retained earnings.
• The statements of financial position and statements of comprehensive income of Sandy Ltd and Beach Ltd one
year after acquisition are as follows:
 Statements of financial position of Sandy Ltd and Beach Ltd as at 30 June 2015
Sandy Ltd Beach Ltd
($000) ($000)
Assets
Cash 80 40
Accounts receivable 50 50
Inventory 140 123
Land 600 400
Property, plant and equipment 900 700
Accumulated depreciation (300) (313)
Investment in Beach Ltd 900 –
Total assets 2 370 1 000
Liabilities
Accounts payable 100 10
Dividends payable 100 50
Loan 670 140
Shareholders’ equity
Share capital 1 000 500
Retained earnings 500 300
2 370 1 000
Reconciliation of opening and closing retained earnings
Profit after tax 400 190
Retained earnings—30 June 2014 300 200
Interim dividend (90) (40)
Final dividend (110) (50)
Retained earnings—30 June 2015 500 300

REQUIRED
Prepare the consolidated statement of financial position for the above entities as at 30 June 2015.
 Largey Smalley Elimination and Consolidated
adjustments statement
Dr Cr
$000 $000 $000 $000 $000
Statement of comprehensive income
together with reconciliation of opening
and closing retained earnings
Profit before tax 300 150 450
Tax (100) (50) 150
Profit after tax 200 100 300
Retained earnings at 1 July 2014 400 150 1501 400
Statement of financial position
Shareholders’ equity
Retained earnings at 30 June 2015 600 250 700
Share capital 1 200 300 3001 1 200
Revaluation surplus 300 200 1501 350
Current liabilities
Accounts payable 100 100 200
Non-current liabilities
Loans 600 250 850
2 800 1 100 3 300
Current assets
Cash 100 145 245
Accounts receivable 350 155 505
Non-current assets
Land 700 200 900
Plant 1 000 600 1 600
Investment in Smalley Ltd 650 — 6501 —
Goodwill 501 50
2 800 1 100 650 650 3 300
Consolidation adjustments
1. Dr Share capital 300 000
Dr Retained earnings 150 000
Dr Revaluation surplus 150 000
Dr Goodwill 50 000
Cr Investment in Smalley 650 000

Dividend declared out of pre-acquisition earnings

We are told in the question that Beach Limited declared a dividend of $40 000 on 10 July 2014 with the
dividends being paid from pre-acquisition retained earnings.
As we would expect, when we refer to the statement of financial position of Beach Ltd at 30 June 2014 we
see that there is no liability for dividends payable. This is the correct treatment as the dividend was not
declared and ratified as at 30 June 2014.
In relation to the requirement that dividend payments need to be ratified prior to recognition, and as Chapter
13 explains, Australian accounting standards prohibit the recognition of a dividend at the end of the reporting
period unless the dividend has been declared prior to year end and the payment of the dividend does not
require further ratification by other parties, such as by the shareholders at the annual general meeting (which
is typically held after the year end). AASB 110 Events After the Reporting Period specifically prohibits the
recognition of dividends as a liability at the end of the reporting period if the dividends have been declared
after the end of the reporting period. As paragraphs 12 and 13 state:
12. If an entity declares dividends to holders of equity instruments (as defined in AASB 132 Financial
Instruments: Presentation) after the reporting period, the entity shall not recognise those dividends as
a liability at the end of the reporting period.
13. If dividends are declared after the reporting period but before the financial statements are authorised
for issue, the dividends are not recognised as a liability at the end of the reporting period because no
obligation exists at that time. Such dividends are disclosed in the notes in accordance with AASB 101
Presentation of Financial Statements.
The rationale behind this is that dividends declared after the reporting period do not meet the definition of a
present obligation at the end of the reporting period because the entity has the discretion rather than an
unavoidable commitment at the end of the reporting period to pay the dividends.
When Sandy Ltd received the dividends from pre-acquisition earnings it treated the dividend receipt as part
of income rather than treating it as a reduction in the carrying amount of the investment in Beach Ltd.
Dividends paid by a subsidiary are recorded as dividend revenue in the parent entity’s financial statements,
regardless of what they are paid out of:
(a) pre-acquisition profits/equity (that is, paid out of profits earned by the subsidiary prior to the purchase by
the parent of the interest in the subsidiary) or
(b) post-acquisition profits/equity (that is, paid out of profits earned by the subsidiary after the purchase by
the parent entity of the interest in the subsidiary).
Because no impairment loss has been recognised in relation to the dividends received by Sandy Ltd there
will be no need to make any adjusting entries in relation to the dividends declared on 10 July 2014. Because
the consolidated financial statements are being prepared as at 30 June 2015 there would be no inter-entity
 payables or receivables existing in relation to the dividends as these dividends would have been paid by this
date.
The payment of dividends out of pre-acquisition earnings will not have an affect on the amount of goodwill
acquired.
Fair value adjustment
Property, plant and equipment—cost 700 000
Accumulated depreciation (270 000)
Carrying amount 430 000
Fair value 530 000
Fair value adjustment 100 000
(a) Dr Accumulated depreciation 270 000
Cr Property, plant and equipment 270 000
(b) Dr Property, plant and equipment 100 000
Cr Revaluation surplus 100 000
(c) Dr Revaluation surplus 30 000
Cr Deferred tax liability 30 000

Depreciation adjustment
The acquisition occurred one year ago. Beach Ltd would have been depreciating the asset over its remaining
useful life of 10 years at $43 000 per year. From the economic entity’s perspective the depreciation should
be $53 000 per year. This leads to the following consolidation adjustment:
(d) Dr Depreciation expense 10 000
Cr Accumulated depreciation 10 000
(e) Dr Deferred tax liability 3000
Cr Tax expense 3000
Elimination of investment
Beach Ltd
Share capital $500 000
Retained earnings $200 000
Revaluation surplus $70 000
Total pre-acquisition capital and reserves $770 000
Fair value of consideration $900 000
Goodwill on consolidation $130 000
Recoverable amount of goodwill at 30 June 2015 $60 000
Impairment expense to be recognised in 2015 $70 000
(f) Dr Share capital 500 000
Dr Retained earnings 200 000
Dr Revaluation surplus 70 000
Dr Goodwill 130 000
Cr Investment in Beach Ltd 900 000
Goodwill impairment
(g) Dr Impairment expense—goodwill 70 000
Cr Accumulated impairment—goodwill 70 000
Intragroup dividends
(h) Dr Profit after tax 40 000
Cr Interim dividend 40 000
(i) Dr Profit after tax 50 000
Cr Accounts receivable 50 000
(j) Dr Dividend payable 50 000
Cr Final dividend 50 000

Consolidation worksheet as at 30 June 2015

Sandy Beach Dr Cr Consolidate
d
Profit after income tax 400 000 190 000 10 000(d) 3000(e) 423 000
70 000(g)
40 000(h)
50 000(i)
Retained earnings— 1 July
2014 300 000 200 000 200 000(f) 300 000
Interim dividend (90 000) (40 000) 40 000(h) (90 000)
Final dividend (110 000) (50 000) 50 000(j) (110 000)
Retained earnings— 30
June 2015 500 000 300 000 523 000
Share capital 1 000 000 500 000 500 000(f) 1 000 000
Revaluation surplus - - 30 000(c) 100 000(b) -
70 000(f)
Total shareholder equity 1 500 000 800 000 1 523 000
Accounts payable 100 000 10 000 110 000
Dividends payable 100 000 50 000 50 000(j) 100 000
Loan 670 000 140 000 810 000
Deferred tax liability - - 3000(e) 30 000(c) 27 000
Total equities 2 370 000 1 000 000 2 570 000
Cash 80 000 40 000 120 000
Accounts receivable 50 000 50 000 50 000(i) 50 000
Inventory 140 000 123 000 263 000
Land 600 000 400 000 1 000 000
Property, plant and
equipment 900 000 700 000 100 000(b) 270 000(a) 1 430 000
Accum. depreciation (300 000) (313 000) 270 000(a) 10 000(d) (353 000)
Investment in Beach Ltd 900 000 - 900 000(f) -
Goodwill - - 130 000(f) 130 000
Accum. impairment losses - - ________ 70 000(g) (70 000)
Total assets 2 370 000 1 000 000 1 523 000 1 523 000 2 570 000

Consolidated statement of financial position of Sandy Ltd and its subsidiaries

as at 30 June 2015
$ $
Assets
Cash 120 000
Accounts receivable 50 000
Inventory 263 000
Land 1 000 000
Property, plant and equipment 1 430 000
less Accumulated depreciation (353 000) 1 077 000
Goodwill 130 000
less Accumulated impairment losses (70 000) 60 000
Total assets 2 570 000
Liabilities
Accounts payable 110 000
Dividends payable 100 000
Loans 810 000
Deferred tax liability 27 000
Total liabilities 1 047 000
Shareholder's equity
Share capital 1 000 000
Retained earnings 523 000
Total shareholder’s equity 1 523 000
Total equities 2 570 000

Retained earnings
Retained profits 1 July 2014 300 000
Profit after income tax expense 423 000
Interim dividend (90 000)
Final dividend (110 000)
Retained profits 30 June 2015 523 000