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CONSOLIDATIONS WEEK 4 TEXT CHAP 17 & 18

CONSOLIDATIONS WEEK 4 TEXT CHAP 17 & 18. Partial Ownership in Subsidiary. Ownership interest in a subsidiary other than the parent company is referred to as ‘ Outside Equity Interest’ (OEI) 80%

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CONSOLIDATIONS WEEK 4 TEXT CHAP 17 & 18

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  1. CONSOLIDATIONS WEEK 4 TEXT CHAP 17 & 18

  2. Partial Ownership in Subsidiary • Ownership interest in a subsidiary other than the parent company is referred to as ‘ Outside Equity Interest’ (OEI) 80% OEI 20% H LTD S LTD

  3. Consolidation entries • Pre-acquisition entry only adjust proportion • Dividends only proportion • Other entries (e.g. transfers. inventory & depreciable assets no change) • O.E.I. adjustments - additional entries 1. at acquisition 2. between acq date and beginning of current period 3. current period

  4. Goodwill & adjustments to Fair Values • On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity of fair was: Capital 40,000 General Reserve 2,000 Retained Profits 2,000 Liabilities included Provision for Dividend $1000 At 1 July 19x0 fair value of Fair Ltd assets : Equipment (cost $250,000 acc depn $70,000 ) Fair value $200,000 Inventory (fair values $10,000 ) Equipment further 5 year life goodwill 5 yrs

  5. Goodwill & adjustments to Fair Values F.V. ASSETS ACQ 60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000 COST OF ACQ 46,600-.6*1000 = 46 000 GOODWILL $7,000 AMORTISATION per annum = 1400 • On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity of fair was: Capital 40,000 General Reserve 2,000 Retained Profits 2,000 Liabilities included Provision for Dividend $1000 At 1 July 19x0 fair value of Fair Ltd assets : Equipment (cost $250,000 acc depn $70,000 ) Fair value $200,000 Inventory (fair values $10,000 ) Equipment further 5 year life goodwill 5 yrs

  6. Goodwill & adjustments to Fair Values F.V. ASSETS ACQ 60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000 COST OF ACQ 46,600-.6*1000 = 46 000 GOODWILL $7,000 AMORTISATION per annum = 1400 • On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity of fair was: Capital 40,000 General Reserve 2,000 Retained Profits 2,000 Liabilities included Provision for Dividend $1000 At 1 July 19x0 fair value of Fair Ltd assets : Equipment (cost $250,000 acc depn $70,000 ) Fair value $200,000 Inventory (fair values $10,000 ) Equipment further 5 year life goodwill 5 yrs 1. REVALUATION ENTRY DR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000 2.PRE-ACQ ENTRY DR CAPITAL 24,000 DR GR 1,200 DR R.P. 1,200 DR A.R.R. 8,400 DR GOODWILL 7,000 DR INVENTORY 6,000 DR PROV FOR DIV 600 CR D.T.L. 1,800 CR DIVIDEND REC 600 CR SHARES IN S 46,000

  7. Goodwill & adjustments to Fair Values F.V. ASSETS ACQ 60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000 COST OF ACQ 46,600-.6*1000 = 46 000 GOODWILL $7,000 AMORTISATION per annum = 1400 • On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity of fair was: Capital 40,000 General Reserve 2,000 Retained Profits 2,000 Liabilities included Provision for Dividend $1000 At 1 July 19x0 fair value of Fair Ltd assets : Equipment (cost $250,000 acc depn $70,000 ) Fair value $200,000 Inventory (fair values $10,000 ) Equipment further 5 year life goodwill 5 yrs 1. REVALUATION ENTRY DR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000 2.PRE-ACQ ENTRY DR CAPITAL 24,000 DR GR 1,200 DR R.P. 1,200 DR A.R.R. 8,400 DR GOODWILL 7,000 DR INVENTORY 6,000 DR PROV FOR DIV 600 CR D.T.L. 1,800 CR DIVIDEND REC 600 CR SHARES IN S 46,000 1. OEI ENTRY 40% DR CAPITAL 16 000 DR GENERAL RESERVE 800 DR R P 800 DR ARR 5 600 CR OEI 23 200

  8. Goodwill & adjustments to Fair Values 1. REVALUATION ENTRY after 3 years DR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000 DR Depreciation Expense 4 000 DR Retained Profits 8 000 CR Acc Depreciation 12 000 DR DTL 3,600 CR Income Tax Expense 1,200 CR R P 2,400 2.PRE-ACQ ENTRY DR Goodwill expense 1,400 DR CAPITAL 24,000 DR GR 1,200 DR R.P. 8,200 DR A.R.R. 8,400 DR GOODWILL 7,000 CR Acc Amortisation 4,200 CR SHARES IN S 46,000 F.V. ASSETS ACQ 60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000 COST OF ACQ 46,600-.6*1000 = 46 000 GOODWILL $7,000 AMORTISATION per annum = 1400 • On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity of fair was: Capital 40,000 General Reserve 2,000 Retained Profits 2,000 Liabilities included Provision for Dividend $1000 At 1 July 19x0 fair value of Fair Ltd assets : Equipment (cost $250,000 acc depn $70,000 ) Fair value $200,000 Inventory (fair values $10,000 ) Equipment further 5 year life goodwill 5 yrs 1. OEI ENTRY 40% DR CAPITAL 16 000 DR GENERAL RESERVE 800 DR R P 800 DR ARR 5 600 CR OEI 23 200

  9. OEI Subsequent to acquisition • Pre-acquisition profits (done) • Current profits • Profits from acquisition to beginning of current period

  10. Example OEI Over the next 3 years FAIR Ltd recorded the following 19x1 19x2 19x3 O.P. (after tax) 8,000 12,000 15,000 R.P. (begin) 2,000 7,800 17,000 10,000 19,800 32,000 Dividend Paid 1,000 1,200 1,500 Dividend Provided 1,200 1,600 2,000 Retained Profits (end) $7,800 $17,000 $28,500

  11. Example OEI Over the next 3 years FAIR Ltd recorded the following 19x1 19x2 19x3 O.P. (after tax) 8,000 12,000 15,000 R.P. (begin) 2,000 7,800 17,000 10,000 19,800 32,000 Dividend Paid 1,000 1,200 1,500 Dividend Provided 1,200 1,600 2,000 Retained Profits (end) $7,800 $17,000 $28,500 Year 3 :: 1. Current profits 40% 15 000- depn adjustment revaluation entry 4000- 1200 ie 40% (15 000-(4 000-1 200)) DR OEI Share of Profit 4 880 CR OEI 4 880

  12. Example OEI Over the next 3 years FAIR Ltd recorded the following 19x1 19x2 19x3 O.P. (after tax) 8,000 12,000 15,000 R.P. (begin) 2,000 7,800 17,000 10,000 19,800 32,000 Dividend Paid 1,000 1,200 1,500 Dividend Provided 1,200 1,600 2,000 Retained Profits (end) $7,800 $17,000 $28,500 Year 3:: 1. Pre-acq profits (excluding current year) = 17 000 - @acq 2 000 - preac entry( 8 000 - 2400) *40% = 3 760 DR Retained Profits 3 760 CR OEI 3 760

  13. OEI Post Acquisition Dividend • Dividends paid by Subsidiary $10 000 dr Dividend revenue 8,000 cr Dividends paid 8,000 (adjust based 80% $10,000) • OEI adjustment dr OEI 2,000 cr Dividends paid 2,000 (20% $10,000)

  14. OEI Post Acquisition Dividend • Dividends declared by Subsidiary $ 15 000 dr Dividend payable 12,000 cr Dividends declared 12,000 (adjust based 80% $15,000) dr Dividend revenue 12,000 cr Dividends receivable 12,000 (adjust based 80% $15,000) OEI adjustment dr OEI 3,000 cr dividends declared 3,000 (20% $15,000)

  15. Interentity eliminations- oei ? • Inter company adjustments covered previously eliminate the total unrealised profit. However if there is OEI then any adjustment has to take this into consideration • ie • Opening Stock adjustment • Closing Stock Adjustment • Unrealised Profit on sale of Non-current Assets

  16. Down stream adjustments If asset sold down stream ie Holding coy sells to subsidiary > any adjustment to unrealised profit would be profit in the Holding Coy. OEI have no interest in this. No further adjustment. 80% OEI 20% H LTD S LTD

  17. Up stream adjustments If asset sold up stream ie Subsidiary Coy sells to Holding Coy > any adjustment to unrealised profit would be profit in the Subsidiary Coy. OEI do have any interest ie they own % of company. Further adjustment required. 80% OEI 20% H LTD S LTD

  18. OEI & Inter-entity transactionclosing stock • Exercise in text Gum buys 80% of Tree= OEI 20% • Inventory (assume Tree sold to Gum Ltd) dr Sales 23 000 cr Cost of Sales 21 500 cr Inventory 1 500 dr DTA 450 cr Tax expense 450 (these entries still done as before on 100%) • OEI entry adjustment dr OEI 210 cr OEI share profit 210 (20% $1 050) • Note if Gum had sold to Tree no OEI adjustment

  19. OEI & Inter-entity transaction • Opening stock adjustment • Inventory (assume Tree sold to Gum Ltd) dr R.P. 4 000 cr Cost of Sales 4,000 dr Tax expense 1 200 cr R.P. 1,200 (these entries still done as before on 100%) • OEI entry adjustment dr OEI share profit 560 cr R.P. 560 (20% (4,000-1,200) • note if Gum had sold to Tree no OEI adjustment

  20. OEI & Inter-entity transaction • Transfer depreciable asset • Assume that on 1 July 200X the Subsidiary sells a depreciable asset to the Holding Company for $50 000, the written down value of the asset being $40 000. Assume that the non current asset has a further 5 year life. • Because this is an upstream transaction the OEI is affected. At 30 June 200Y the consolidation journal entries would be:

  21. OEI & Inter-entity transaction • Elimination entry: • Revenue on sale of non current asset DR 50 000 • Carrying amount of non current asset CR 40 000 • Non current asset CR 10 000 • Deferred Tax Asset DR 3 000 • Income Tax Expense CR 3 000 • OEI Adjustment • OEI DR 1 400 • OEI – Share of Net Profit CR 1 400 • (20% of (10 000 – 3 000))

  22. OEI & Inter-entity transaction • Depreciation Adjustment • Accumulated Depreciation – Non current asset DR 2 000 • Depreciation Expense CR 2 000 • Income Tax Expense DR 600 • Deferred Tax Asset CR 600 • OEI Ajustment • OEI - Share of Net Profit DR 280 • OEI DR 280 • (2 000 – 600) x 20%

  23. Tutorial Questions • Exercise 17.1 • Exercise 17.2 • Problem 17.1 • Exercise 18.1 • Exercise 18.2 • Exercise 18.4

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