TEST 3 - FAC4862/NFA4862/ZFA4862 - SUGGESTED SOLUTION

QUESTION 1

(a) Prepare the pro forma consolidation journal entries to account for the investment in
RoyalPalm Ltd in the consolidated financial statements of the PalmTree Ltd Group for the
year ended 31 March 2022. Journal entries related to deferred taxation are also required.

Dr Cr
R R
J1 Mark-to-market reserve (SCE)
((150 000 x 15% x (85,00 – 65,75)) x 77,6%) 336 105 (3)
Retained earnings (SCE) 336 105 (1)
Transfer of fair value adjustments previously recognised in
mark-to-market reserve to retained earnings with
measurement of equity interest previously held, at group
level in accordance with IFRS 9.B5.7.1
J2 Share capital (SCE) 250 000
Retained earnings (SCE) 9 521 039
Mark-to-market reserve (SCE) 755 005 (1)
Intangible asset: patent (SFP) 985 600 (1)
Inventory (SFP) 15 800 (1)
Deferred tax ((985 600 – 15 800) x 28%) (SFP) 271 544 (1)
Non-controlling interest (SFP) ((250 000 + 9 521 039 +
755 005 + 985 600 – 15 800 – 271 544) x 45%) 5 050 935 (2)
Investment in RoyalPalm Ltd (SFP) (4 875 000 +
(150 000 x 15% x 85,00)) 6 787 500 (2)
Goodwill (balancing) (SFP) 614 135 (1)
At acquisition elimination journal on 1 September 2021
J3 Inventory (SFP) 15 800
Cost of sales (P/L) 15 800 (1)
Reversal of fair value adjustment at acquisition
J4 Income tax expense (P/L) (15 800 x 28%) 4 424
Deferred tax (SFP) 4 424 (1)
Deferred tax on reversal of fair value adjustment
J5 Amortisation: intangible asset (P/L)
(985 600/6 x 7/12) 95 822 (2)
Accumulated amortisation: intangible asset (SFP) 95 822 (1)
Amortisation on the intangible asset for 7 months
J6 Deferred tax (SFP) (95 822 x 28%) 26 830
Income tax expenses (P/L) 26 830 (1)
Recognition of deferred tax on amortisation
J7 Non-controlling interests (P/L) (((10 891 005 – 9 521 039) +
15 800 [J3] – 4 424 [J4] – 95 822 [J5] + 26 830 [J6]) x 45%) 590 558 (4)
Non-controlling interests (OCI) ((783 015 – 755 005) x 45%) 12 605 (1)
Non-controlling interest (SFP) 603 163 (1)
Share of profit and other comprehensive to NCI in the
current year for 7 months
J8 Other income (P/L) [C1] 49 161 (3)
Property, plant and equipment (SFP) 49 161 (1)
Elimination of unrealised profit in the intragroup transaction
 2 FAC4862/TEST 3

Dr Cr
R R
J9 Deferred tax (SFP) (49 161 x 28%) 13 765
Income tax expense (P/L) 13 765 (1)
Tax implications on the elimination of the intragroup
transaction
J10 Accumulated depreciation (SFP) (49 161/ (96 – 58) x 5) 6 469 (1)
Cost of sales: depreciation (P/L) 6 469 (1)
Realisation of the unrealised profit of the intragroup
transaction
J11 Income tax expense (P/L) (6 469 x 28%) 1 811
Deferred tax (SFP) 1 811 (1)
Tax implication of the realisation of the unrealised profit of
the intragroup transaction
Total (33)
Maximum (29)
Communication skills: presentation and layout (1)

CALCULATIONS

C1. Unrealised profit with intragroup transaction

Selling price of machinery 448 600 [1]

Less: carrying amount (399 439)
Cost price 825 950
Accumulated depreciation ((825 950 – 120 000)/96 months x 58 months) (426 511) [2]
49 161
[3]
 3 FAC4862/TEST 3

C2. Analysis of owners' equity of RoyalPalm Ltd (only for completeness)

PalmTree 55%
Total NCI
At Since
Share capital 250 000
Retained earnings 9 521 039
Mark-to-market reserve 755 005
Intangible asset (patent) 985 600
Deferred tax (985 600 x 28%) (275 968)
Inventory (15 800)
Deferred tax (15 800 x 28%) 4 424
11 224 300 6 173 365 5 050 935
Goodwill 614 135 614 135 -
Consideration and NCI
(4 875 000 + (150 000 x 15%
x 85,00)) 11 838 435 6 787 500 5 050 935

Current year
Profit after tax 1 312 350 721 793 590 558
Profit after tax (10 891 005 –
9 521 039) 1 369 966
Amortisation (patent)
(985 600/6 x 7/12 x 72%) (68 992)
Inventory reversal
(15 800 x 72%) 11 376

Mark-to-mark reserve
((783 015 – 755 005) 28 010 15 406 12 605
13 178 795 6 787 500 737 199 5 654 098
 4 FAC4862/TEST 3

(b) Assume PalmTree Ltd acquired an additional 12% interest in Imikindo Ltd on
1 February 2022 for a market-related cash consideration. Discuss, with reasons and
calculations, the correct accounting treatment of the additional 12% interest in the
consolidated financial statements of PalmTree Ltd Group for the year ended
31 March 2022.

With the acquisition of the additional 12% interest in Imikindo Ltd the original 68%
controlling interest will be increased to 80% controlling interest. (1)

Paragraph 23 of IFRS 10 determines that changes in a parent’s interest (PalmTree Ltd)

in a subsidiary (Imikindo Ltd) that does not result in a loss of control are accounted for as
an equity transation. (1)

When the proportion of the equity held by non-controlling interests changes,

PalmTree Ltd should adjust the carrying amounts of the controlling and non-controlling
interests to reflect the additional 12% interests in Imikindo Ltd.

PalmTree Ltd will recognise directly in equity any difference between the amount by
which the non-controlling interests are adjusted and the fair value of the consideration
paid or received, and attribute it to the owners’ equity of PalmTree Ltd. (IFRS 10.B96). (2)

The accounting treatment prescribed by IFRS 10 between PalmTree Ltd and the
non-controlling shareholders is an equity transaction as both are owners of the subsidiary (1)

The adjustment to non-controlling interests is calculated as follows:

On 1 February 2022, total non-controlling interests will be calculated based on their

original 32% and new 20% interest. The difference between the two values will be the
change in equity.

Total Non-controlling Non-controlling Change in

interests at 32% interests at 20% equity

R R R R
Share capital 365 000
Retained
earnings 8 445 010
Net asset
value 8 810 010 2 819 203 1 762 002 1 057 201 (3)

Going forward from 1 February 2022 the non-controlling interest included in the
consolidated financial statements is calculated at 20%. (1)

The gain or loss on such a transaction will be recognised directly in equity. (1)

No change in the carrying values of Imikindo Ltd’s assets or liabilities (including goodwill)
should be recognised as a result of such transactions. (2)

The transaction will reflect in the consolidated statement of changes in equity. (1)
Total (13)
Maximum (9)
Communication skills: presentation and layout (1)