SOLUTION PRACTICE 5: CONSOLIDATIONS 2

Question 19.13 Consolidation worksheet, consolidated financial

statements

Griffin Ltd is a major Australian company operating in the manufacture of women’s clothing.
One of its major competitors was Frank Ltd whose business was established by a French family
over 30 years ago. It had won numerous awards for its designs and has established a number of
brands that have been successful, especially with the teenage market.
In order to expand its business as well as to reduce the number of players in the market, on
1 July 2013 Griffin Ltd acquired all the issued shares (cum div.) of Frank Ltd for $330 000. At
this date the equity of Frank Ltd was as follows:

Share capital $200 000

General reserve 20 000
Retained earnings 50 000

All the identifiable assets and liabilities of Frank Ltd were recorded at amounts equal to their
fair values except for the following:

Carrying amount Fair value

Plant (cost $220 000) $180 000 $186 000
Land 190 000 210 000
Inventory 20 000 28 000

The plant’s expected remaining useful life was 5 years with benefits being expected evenly over
that period. The plant was sold on 1 January 2016 for $87 000. The land was sold in February
2015 for $250 000. Of the inventory, 90% was sold by 30 June 2014 and the rest by 30 June
2015.
At 1 July 2013, Frank Ltd had recorded a dividend payable of $10 000 that was paid in
September 2013. Frank Ltd also had some unrecorded assets, in particular the brands relating
to the successful clothing sold in the teenage market. Griffin Ltd valued these brands at $12 000
and assessed them to have an indefinite life. In its financial statements at 30 June 2013, Frank
Ltd raised a contingent liability relating to a guarantee it had made to one of its related
companies. Griffin Ltd assessed the fair value of the guarantee payable at $10 000. In August
2015, Frank Ltd was required to pay $2500 in relation to the guarantee.
All transfers to the general reserve made by Frank Ltd have been from retained earnings
earned prior to 1 July 2013. The tax rate is 30%.
The financial information provided by the two companies at 30 June 2016 is as follows:
Required
Prepare the consolidated financial statements of Griffin Ltd at 30 June 2016.
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Frank Ltd
Consideration transferred
Goodwill
= $200 000 + $20 000 + $50 000 (equity)
+ $8 000 (1 – 30%) (inventory)
+ $20 000 (1 – 30%) (land)
+ $6 000 (1 – 30%) (plant)
- $10 000 (1 – 30%) (guarantee liability)
+ $12 000 (1 – 30%) (brands)
= $295 200
= $330 000 - $10 000 (divs. receivable)
= $320 000
= $24 800

1. Business combination valuation entries at 30 June 2016

Depreciation expense Dr 600

Gain on sale of plant Dr 3 000
Income tax expense Cr 1 080
Retained earnings (1/7/15) Dr 1 680
Transfer from business combination
valuation reserve Cr 4 200
(Final adjustment for Plant & Depn to date of sale)

Brands Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400

Transfer from business combination

valuation reserve Dr 7 000
Income tax expense Dr 3 000
Gain on guarantee Cr 7 500
Guarantee expense Cr 2 500

Goodwill Dr 24 800
Business combination valuation reserve Cr 24 800
QUESTION 19.13 (cont’d)

2. Pre-acquisition entries

At 1/7/2013:

Retained earnings (1/7/13) Dr 50 000

Share capital Dr 200 000
General reserve Dr 20 000
Business combination valuation reserve Dr 50 000
Shares in Frank Ltd Cr 320 000

At 30 June 2016:

This entries are affected by:

- sale of land in February 2015 – prior period
- sale of inventory by 30 June 2015 – prior period
- sale of plant in January in current period
- settlement of guaranteed loan in current period
- transfer to general reserve of $15 000 in current period.
- transfer to general reserve of $13 000 in prior period

Retained earnings (1/7/15) * Dr 56 600

Share capital Dr 200 000
General reserve Dr 33 000
Business combination valuation reserve Dr 30 400
Shares in Perseus Ltd Cr 320 000

* $50 000 + $14 000 (BCVR land) + $5 600 (BCVR inventory) - $13 000 gen reserve

Business combination valuation reserve Dr 7 000

Transfer from business combination
valuation reserve Cr 7 000
(Settlement of loan)

Transfer from business combination

valuation reserve Dr 4 200
Business combination valuation reserve Cr 4 200
(Sale of plant)

General reserve Dr 15 000

Transfer to general reserve Cr 15 000
QUESTION 19.13 (cont’d)
Griffin Frank Adjustments Group
Ltd Ltd Dr Cr
Revenues 190 000 110 000 7 500 1 307 500
Expenses 80 000 76 000 1 600 2 500 1 154 100
110 000 34 000 153 400
Gains on sale of non- 5 000 4 000 1 3 000 6 000
current assets
Profit before tax 115 000 38 000 159 400
Tax expense 40 000 6 000 1 3 000 1 080 1 47 920
Profit 75 000 32 000 111 480
Retained earnings 80 000 88 000 1 1 680 109 720
(1/7/15) 2 56 600
Transfer from BCVR 0 0 1 7 000 4 200 1 0
2 4 200 7 000 2
155 000 120 000 221 200
Dividend paid 34 000 0 34 000
T’fer to gen reserve 0 15 000 15 000 2 0
34 000 15 000 34 000
Ret earn. (30/6/16) 121 000 105 000 187 200
Share capital 280 000 200 000 2 200 000 280 000
General reserve 20 000 48 000 2 33 000 20 000
2 15 000
Business comb. 0 0 2 30 400 8 400 1 0
valuation reserve 2 7 000 24 800 1
4 200 2
421 000 353 000 487 200
Asset reval surplus 12 000 0 12 000
(1/7/15)
Increment 12 000 0 12 000
Asset reval surplus 24 000 0 24 000
(30/6/16)
445 000 353 000 511 200
Provisions 15 000 12 000 27 000
Payables 40 000 8 000 48 000
Defer. tax liability 0 0 3 600 1 3 600
500 000 373 000 589 800
Shares in Frank Ltd 320 000 0 320 000 2 0
Cash 12 000 30 000 42 000
Accounts receivable 28 000 12 000 40 000
Inventory 30 000 51 000 81 000
Plant 230 000 320 000 550 000
Accum depreciation (120 000) (40 000) (160 000)
Goodwill 0 0 1 24 800 24 800
Brands 0 0 1 12 000 12 000
500 000 373 000 398 280 398 280 589 800
QUESTION 19.13 (cont’d)

GRIFFIN LTD

Consolidated Statement of Profit or Loss and Other Comprehensive Income

for year ended 30 June 2016

Revenues $307 500

Expenses 154 100
153 400
Gains on sale of non-current assets 6 000
Profit before income tax 159 400
Income tax expense 47 920
Profit for the period 111 480
Other comprehensive income:
Gains on revaluation of assets 12 000
Comprehensive income for the period $123 480

GRIFFIN LTD
Consolidated Statement of Changes in Equity
for year ended 30 June 2016

Comprehensive income for the period $123 480

Retained earnings balance at 1 July 2015 $109 720

Profit for the period 111 480
Dividend paid (34 000)
Retained earnings balance at 30 June 2016 $187 200

Share capital balance at 1 July 2015 $280 000

Share capital balance at 30 June 2016 $280 000

General reserve balance at 1 July 2015 $20 000

General reserve balance at 30 June 2016 $20 000

Asset revaluation surplus at 1 July 2015 $12 000

Gains 12 000
Asset revaluation surplus at 30 June 2016 $24 000
QUESTION 19.13 (cont’d)

GRIFFIN LTD
Consolidated Statement of Financial Position
as at 30 June 2016

Current Assets
Cash $42 000
Accounts receivable 40 000
Inventory 81 000
Total Current Assets 163 000

Non-current Assets
Property, plant, and equipment $550 000
Accumulated depreciation (160 000) 390 000
Goodwill 24 800
Intangibles: Brands 12 000
Total Non-current Assets 426 800

Total Assets $589 800

Equity
Share capital $280 000
Reserves: General reserve 20 000
Asset revaluation surplus 24 000
Retained earnings 187 200
Total Equity 511 200
Current Liabilities
Payables 48 000
Provisions 27 000
Total Current Liabilities 75 000
Non-current Liabilities
Deferred tax liability __3 600
Total Liabilities 78 600
Total Equity and Liabilities $589 800