Advanced Financial Accounting (Tan, Lim & Kuah)

Chapter 6 solutions

Problem 6.25
Part (1): Consolidation entries for 20x6
CJE1: Elimination of investment in X Co
Dr Share capital 500,000
Dr Retained earnings 350,000
Dr Intangible assets 50,000
Dr Goodwill 210,000
Cr Deferred tax liability 10,000
Cr Investment in X 1,000,000
Cr Non-controlling interests 100,000
1,110,000 1,110,000

CJE2: Past accumulated amortization to opening RE (20x3,20x4,20x5) and current (20x6)

Dr Opening RE 34,200 90%*((50000*3/5)+8000)
Dr Non-controlling interests 3,800 10%*((50000*3/5)+8000)
Dr Amortization 6,000
Cr Write back of impairment 4000.00
Cr Accumulated amortization 40000.00
44,000 44,000
Legal entity Group entity Difference
Recoverable amount as at 31 Dec 20x5 112,000 112,000
Remaining net book value 100,000 120,000
Impairment loss 0 8000.00 8000.00
New carrying amount 100,000 112000.00 12000.00
Remaining useful life 1 Jan 20x6 2 2.00
Amortization during 20x6 50,000 56,000 6000.00
Revised carrying amount at 31 Dec 20x6 50,000 56,000
Recoverable amount as at 31 Dec 20x6 70,000 70000.00
Carrying amount without impairment loss (Note1) 50,000 60000.00
Write back 0 4000.00 4000.00
Note 1 300000/5

CJE3: Tax effects of CJE2

Dr Deferred tax liability 8,000 20%*40000
Cr Tax expense 400 20%*(6000-4000)
Cr Opening RE 6840.00 20%*34200
Cr Non-controlling interests 760.00 20%*3800

CJE4: Adjustment of unrealized profit on transfer of inventory

Dr Opening RE 9,000 90%*40%*25000
Dr NCI 1,000 10%*40%*25000
Cr Cost of sales 7,500 30%*25000
Cr Inventory 2,500 10%*25000
10,000 10,000

CJE5: Adjustment for tax on unrealized profit on transfer of inventory

Dr Tax expense 1,500 20%*7500
Dr Deferred tax asset 500 20%*2500
Cr Opening RE 1,800 20%*9000
Cr NCI 200 20%*1000

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 Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 6 solutions

Problem 6.25
CJE6: Allocate share of post-acquisition RE to NCI
Dr Opening RE 17,000
Cr NCI (BS) 17,000
RE at 1 Jan 20x6 520,000
RE at date of acquisition 350,000
Change in RE 170,000
NCI's share 17,000

CJE7: Eliminate dividends declared by X Co

Dr Dividend income 36,000
Dr Non-controlling interests 4,000
Cr Dividend declared 40,000

CJE8: Allocate share of current income to NCI

Dr Income to NCI 64,440
Cr NCI (BS) 64,440
NPAT of X Co 640,000
Less amortization (6,000)
Add tax on amortization 1,200
Add back write back of impairment 4,000
Less tax on write back of impairment (800)
Add realized profit on transfer of inventory 7,500
Less tax on profit on transfer of inventory (1,500)
Adjusted NPAT 644,400

CJE9: Elimination of intercompany balances

Dr Amount due from X Co 1,000,000
Cr Amount due to P Co 1,000,000

CJE10: Elimination of past capitalized profit in downstream transfer

Dr ORE 15,000 50000-35000
Cr Equipment 15,000

CJE11: Tax effects of CJE10

Dr DTA 3,000
Cr ORE 3,000

CJE12: Adjustment of depreciation on constructed fixed asset

Dr Accumulated depreciation 4,500 15000/5*1.5
Cr Depreciation expense 3,000
Cr ORE 1,500

CJE13: Tax effects on CJE12

Dr ORE 300
Dr Tax expense 600
Cr DTA 900

CJE15: Elimination of interest in current year

Dr Interest income 90,000

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 Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 6 solutions

Problem 6.25
Cr Interest expense 90,000

Part (2) follows after Part (3)

Part (3): Analytical check on Non-controlling interests:
Book value of net assets as at 31 Dec 20x6 1,620,000
Remaining balance of intangible asset (net of tax) 8,000 Note 1
Adjustment for unrealized profit in inventory (2,000) Note 2
Adjusted net assets as at 31 Dec 20x6 1,626,000
NCI's share of net assets 162,600
NCI's share of goodwill 11,000 Note 3
NCI balance as at 31 Dec 20x6 173,600

Note 1: (60000-50000)*80%
Note 2: 25000*10%*80%
Note 3: 100000-10%*(900000-(20%*50000))

Listings approach
CJE1: Elimination of investment in X Co 100,000
CJE2: Past accumulated amortization to opening RE (20x3,20x4,20x5) and current (20x (3,800)
CJE3: Tax effects of CJE2 760
CJE4: Adjustment of unrealized profit on transfer of inventory (1,000)
CJE5: Adjustment for tax on unrealized profit on transfer of inventory 200
CJE6: Allocate share of post-acquisition RE to NCI 17,000
CJE7: Eliminate dividends declared by X Co (4,000)
CJE8: Allocate share of current income to NCI 64,440
NCI balance as at 31 Dec 20x6 0 173,600

Part (2): Equity accounting entries for the year ended 31 Dec 20x6

EA1: Recognize share of post-acquisition RE of Z

Dr Investment in Z 30,000
Cr Opening RE 30,000
RE of Z as at 1 Jan 20x6 300,000
RE of Z as at date of acquisition 200,000
Change in RE 100,000
Share of Z's change in RE 30,000

EA2: Adjust for past cost of sales on under-valued inventory

Dr ORE 3,360 70%*80%*30%*(200000-180000)
Cr Investment in Z 3,360

EA3: Recognize share of OCI

Dr Share of current OCI 12,000
Cr OCI 9,000
Cr Investment in Z 3,000

EA4: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Z 30,000 (30%*100000)

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 Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 6 solutions

Problem 6.25

EA5: Recognize share of current profit after tax of Z

Dr Investment in Z 205,500
Cr Share of profit of Z 205,500
OR
Dr Investment in Z 205,500
Dr Share of tax of Z 54,750
Cr Share of profit of Z 260,250

Profit before tax of Z 900,000

Less unrealized profit on fixed asset transfer (30,000)
Add back excess depreciation 1,500 30000/10*1/2
Less cost of sales on under-valued inventory (4,000) 20%*20000
Adjusted profit before tax of Z 867,500
Share of adjusted profit before tax of Z 260,250

Tax expense of Z 189,000

Less tax on unrealized profit on transfer of fixed assets (6,000)
Add tax on excess depreciation 300
Less tax on cost of sales of under-valued inventory (800)
Adjusted tax of Z 182,500
Share of adjusted tax of Z 54,750

Part (4): Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,711,000

Add undervaluation of inventory 80%*10%*20000 1,600
Adjustment for unrealized profit in equipment 80%*30000*9.5/10 (22,800)

1,689,800

P's share of Z's identifiable net assets 506,940

Implicit goodwill in investment in Z:
Investment in Z 600,000
BV of net assets of Z at acq 1,010,000
Under-valued inventory 16,000 (200000-180000)*80%
FV of net assets of Z at acq 1,026,000
Less Share of FV of net assets of Z at acq 307,800
Goodwill in Z implicit in the investment in Z 292,200
799,140

Investment in Z, at cost 600,000

EA1: Recognize share of post-acquisition RE of Z 30,000
EA2: Adjust for past cost of sales on under-valued inventory (3,360)
EA3: Recognize share of OCI (3,000)
EA4: Reclassify dividend income as a reduction of investment (30,000)
EA5: Recognize share of current profit after tax of Z 205,500

Investment in Z as at 31 Dec 20x6 0 799,140

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 Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 6 solutions

Problem 6.25
Part (5): Consolidated Retained Earnings as at 31 Dec 20x6

P's retained earnings as at 31 Dec 20x6 3,120,000

P's share of X Co's post acq RE to 31 Dec 20x6 90%*(1120000-350000) 693,000
P's share of Z Co's post acq RE to 31 Dec 20x6 30%*(911000-200000) 213,300

P's share of amortization and impairment of intangible assets 90%*80%*40000 (28,800)

P's share of cost of sales of undervalued inventory 30%*80%*((90%*20000)) (4,320)

P's share of unrealized profit

Upstream sale 90%*80%*10%*25000 (1,800)
Downstream sale 80%*3.5/5*15000 (8,400)
Sale to Z Co 30%*80%*30000*9.5/10 (6,840)
3,976,140

Listings approach:
P's Retained Earnings as at 31 Dec 20x6 3,120,000
S's Retained Earnings as at 31 Dec 20x6 1,120,000
CJE1: Elimination of investment in X Co (350,000)
CJE2: Past accumulated amortization to opening RE (20x3,20x4,20x5) and current (20x6) (36,200)
CJE3: Tax effects of CJE2 7,240
CJE4: Adjustment of unrealized profit on transfer of inventory (1,500)
CJE5: Adjustment for tax on unrealized profit on transfer of inventory 300
CJE6: Allocate share of post-acquisition RE to NCI (17,000)
CJE7: Eliminate dividends declared by X Co 4,000
CJE8: Allocate share of current income to NCI (64,440)
CJE10: Elimination of past capitalized profit in downstream transfer (15,000)
CJE11: Tax effects of CJE10 3,000
CJE12: Adjustment of depreciation on constructed fixed asset 4,500
CJE13: Tax effects on CJE12 (900)
EA1: Recognize share of post-acquisition RE of Z 30,000
EA2: Adjust for past cost of sales on under-valued inventory (3,360)
EA4: Reclassify dividend income as a reduction of investment (30,000)
EA5: Recognize share of current profit after tax of Z 205,500

0.00 3,976,140

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