consolidations week 4 text chap 17 & 18 consolidations week 4 text chap 17 & 18
TRANSCRIPT
CONSOLIDATIONSWEEK 4
TEXT CHAP 17 & 18
CONSOLIDATIONSWEEK 4
TEXT CHAP 17 & 18
Partial Ownership in Partial Ownership in SubsidiarySubsidiary
Ownership interest in a subsidiary other than the Ownership interest in a subsidiary other than the parent company is referred to asparent company is referred to as
‘ ‘ Outside Equity Interest’ (OEI)Outside Equity Interest’ (OEI)
80%80%
OEI 20%OEI 20%
H LTD
S LTD
Consolidation entriesConsolidation entries
Pre-acquisition entry only adjust Pre-acquisition entry only adjust proportionproportion Dividends only Dividends only proportionproportion Other entries (e.g. transfers. inventory & depreciable Other entries (e.g. transfers. inventory & depreciable
assets assets no changeno change)) O.E.I. adjustments - additional entriesO.E.I. adjustments - additional entries
1. at acquisition1. at acquisition
2. between acq date and beginning of2. between acq date and beginning of
current periodcurrent period
3. current period3. current period
Goodwill & adjustments to Goodwill & adjustments to Fair ValuesFair Values
On 1 July 2000, Vanity Ltd acquired 60% of the issued On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity capital of Fair Ltd for $46,600 when the shareholders equity of fair was:of fair was:
Capital 40,000Capital 40,000
General Reserve 2,000General Reserve 2,000
Retained Profits 2,000Retained Profits 2,000
Liabilities included Provision for Dividend $1000Liabilities included Provision for Dividend $1000
At 1 July 19x0 fair value of Fair Ltd assets :At 1 July 19x0 fair value of Fair Ltd assets :
Equipment (cost $250,000 acc depn $70,000 ) Equipment (cost $250,000 acc depn $70,000 )
Fair value $200,000 Fair value $200,000
Inventory (fair values $10,000 )Inventory (fair values $10,000 )
Equipment further 5 year life goodwill 5 yrsEquipment further 5 year life goodwill 5 yrs
Goodwill & adjustments to Goodwill & adjustments to Fair ValuesFair Values
On 1 July 2000, Vanity Ltd acquired 60% of the issued On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity capital of Fair Ltd for $46,600 when the shareholders equity of fair was:of fair was:
Capital 40,000Capital 40,000
General Reserve 2,000General Reserve 2,000
Retained Profits 2,000Retained Profits 2,000
Liabilities included Provision for Dividend $1000Liabilities included Provision for Dividend $1000
At 1 July 19x0 fair value of Fair Ltd assets :At 1 July 19x0 fair value of Fair Ltd assets :
Equipment (cost $250,000 acc depn $70,000 ) Equipment (cost $250,000 acc depn $70,000 )
Fair value $200,000 Fair value $200,000
Inventory (fair values $10,000 )Inventory (fair values $10,000 )
Equipment further 5 year life goodwill 5 yrsEquipment further 5 year life goodwill 5 yrs
F.V. ASSETS ACQ60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000COST OF ACQ 46,600-.6*1000 = 46 000GOODWILL $7,000
AMORTISATION per annum = 1400
Goodwill & adjustments to Goodwill & adjustments to Fair ValuesFair Values
On 1 July 2000, Vanity Ltd acquired 60% of the issued On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity capital of Fair Ltd for $46,600 when the shareholders equity of fair was:of fair was:
Capital 40,000Capital 40,000
General Reserve 2,000General Reserve 2,000
Retained Profits 2,000Retained Profits 2,000
Liabilities included Provision for Dividend $1000Liabilities included Provision for Dividend $1000
At 1 July 19x0 fair value of Fair Ltd assets :At 1 July 19x0 fair value of Fair Ltd assets :
Equipment (cost $250,000 acc depn $70,000 ) Equipment (cost $250,000 acc depn $70,000 )
Fair value $200,000 Fair value $200,000
Inventory (fair values $10,000 )Inventory (fair values $10,000 )
Equipment further 5 year life goodwill 5 yrsEquipment further 5 year life goodwill 5 yrs
F.V. ASSETS ACQ60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000COST OF ACQ 46,600-.6*1000 = 46 000GOODWILL $7,000
AMORTISATION per annum = 1400
1. REVALUATION ENTRYDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,0002.PRE-ACQ ENTRYDR CAPITAL 24,000DR GR 1,200DR R.P. 1,200DR A.R.R. 8,400DR GOODWILL 7,000DR INVENTORY 6,000DR PROV FOR DIV 600 CR D.T.L. 1,800 CR DIVIDEND REC 600 CR SHARES IN S 46,000
1. REVALUATION ENTRYDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,0002.PRE-ACQ ENTRYDR CAPITAL 24,000DR GR 1,200DR R.P. 1,200DR A.R.R. 8,400DR GOODWILL 7,000DR INVENTORY 6,000DR PROV FOR DIV 600 CR D.T.L. 1,800 CR DIVIDEND REC 600 CR SHARES IN S 46,000
Goodwill & adjustments to Goodwill & adjustments to Fair ValuesFair Values
On 1 July 2000, Vanity Ltd acquired 60% of the issued On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity capital of Fair Ltd for $46,600 when the shareholders equity of fair was:of fair was:
Capital 40,000Capital 40,000
General Reserve 2,000General Reserve 2,000
Retained Profits 2,000Retained Profits 2,000
Liabilities included Provision for Dividend $1000Liabilities included Provision for Dividend $1000
At 1 July 19x0 fair value of Fair Ltd assets :At 1 July 19x0 fair value of Fair Ltd assets :
Equipment (cost $250,000 acc depn $70,000 ) Equipment (cost $250,000 acc depn $70,000 )
Fair value $200,000 Fair value $200,000
Inventory (fair values $10,000 )Inventory (fair values $10,000 )
Equipment further 5 year life goodwill 5 yrsEquipment further 5 year life goodwill 5 yrs
F.V. ASSETS ACQ60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000COST OF ACQ 46,600-.6*1000 = 46 000GOODWILL $7,000
AMORTISATION per annum = 1400
1. REVALUATION ENTRYDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,0002.PRE-ACQ ENTRYDR CAPITAL 24,000DR GR 1,200DR R.P. 1,200DR A.R.R. 8,400DR GOODWILL 7,000DR INVENTORY 6,000DR PROV FOR DIV 600 CR D.T.L. 1,800 CR DIVIDEND REC 600 CR SHARES IN S 46,000
1. REVALUATION ENTRYDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,0002.PRE-ACQ ENTRYDR CAPITAL 24,000DR GR 1,200DR R.P. 1,200DR A.R.R. 8,400DR GOODWILL 7,000DR INVENTORY 6,000DR 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 000DR GENERAL RESERVE 800DR R P 800DR ARR 5 600 CR OEI 23 200
1. OEI ENTRY 40%DR CAPITAL 16 000DR GENERAL RESERVE 800DR R P 800DR ARR 5 600 CR OEI 23 200
Goodwill & adjustments to Goodwill & adjustments to Fair ValuesFair Values
On 1 July 2000, Vanity Ltd acquired 60% of the issued On 1 July 2000, Vanity Ltd acquired 60% of the issued capital of Fair Ltd for $46,600 when the shareholders equity capital of Fair Ltd for $46,600 when the shareholders equity of fair was:of fair was:
Capital 40,000Capital 40,000
General Reserve 2,000General Reserve 2,000
Retained Profits 2,000Retained Profits 2,000
Liabilities included Provision for Dividend $1000Liabilities included Provision for Dividend $1000
At 1 July 19x0 fair value of Fair Ltd assets :At 1 July 19x0 fair value of Fair Ltd assets :
Equipment (cost $250,000 acc depn $70,000 ) Equipment (cost $250,000 acc depn $70,000 )
Fair value $200,000 Fair value $200,000
Inventory (fair values $10,000 )Inventory (fair values $10,000 )
Equipment further 5 year life goodwill 5 yrsEquipment further 5 year life goodwill 5 yrs
F.V. ASSETS ACQ60%(40,000+2,000+2,000+.7(20,000 +10000) = 39,000COST OF ACQ 46,600-.6*1000 = 46 000GOODWILL $7,000
AMORTISATION per annum = 1400
1. REVALUATION ENTRY after 3 yearsDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000DR Depreciation Expense 4 000DR Retained Profits 8 000 CR Acc Depreciation 12 000DR DTL 3,600 CR Income Tax Expense 1,200 CR R P 2,400
2.PRE-ACQ ENTRYDR Goodwill expense 1,400DR CAPITAL 24,000DR GR 1,200DR R.P. 8,200DR A.R.R. 8,400DR GOODWILL 7,000 CR Acc Amortisation 4,200 CR SHARES IN S 46,000
1. REVALUATION ENTRY after 3 yearsDR ACC. DEPN 70,000 CR EQUIPMENT 50,000 CR DTL 6,000 CR A.R.R. 14,000DR Depreciation Expense 4 000DR Retained Profits 8 000 CR Acc Depreciation 12 000DR DTL 3,600 CR Income Tax Expense 1,200 CR R P 2,400
2.PRE-ACQ ENTRYDR Goodwill expense 1,400DR CAPITAL 24,000DR GR 1,200DR R.P. 8,200DR A.R.R. 8,400DR GOODWILL 7,000 CR Acc Amortisation 4,200 CR SHARES IN S 46,000
1. OEI ENTRY 40%DR CAPITAL 16 000DR GENERAL RESERVE 800DR R P 800DR ARR 5 600 CR OEI 23 200
1. OEI ENTRY 40%DR CAPITAL 16 000DR GENERAL RESERVE 800DR R P 800DR ARR 5 600 CR OEI 23 200
OEI Subsequent to OEI Subsequent to acquisition acquisition
Pre-acquisition profits Pre-acquisition profits (done)(done) Current profitsCurrent profits Profits from acquisition to beginning of current Profits from acquisition to beginning of current
periodperiod
Example OEIExample OEI
Over the next 3 years FAIR Ltd recorded the followingOver the next 3 years FAIR Ltd recorded the following
19x1 19x2 19x319x1 19x2 19x3
O.P. (after tax) 8,000 12,000 15,000O.P. (after tax) 8,000 12,000 15,000
R.P. (begin) 2R.P. (begin) 2,000 7,800 17,000,000 7,800 17,000
10,000 19,800 32,00010,000 19,800 32,000
Dividend Paid 1,000 1,200 1,500Dividend Paid 1,000 1,200 1,500
Dividend Provided Dividend Provided 1,200 1,600 2,0001,200 1,600 2,000
Retained Profits (end) Retained Profits (end) $7,800 $17,000 $28,500$7,800 $17,000 $28,500
Example OEIExample OEI
Over the next 3 years FAIR Ltd recorded the followingOver the next 3 years FAIR Ltd recorded the following
19x1 19x2 19x319x1 19x2 19x3
O.P. (after tax) 8,000 12,000 15,000O.P. (after tax) 8,000 12,000 15,000
R.P. (begin) 2R.P. (begin) 2,000 7,800 17,000,000 7,800 17,000
10,000 19,800 32,00010,000 19,800 32,000
Dividend Paid 1,000 1,200 1,500Dividend Paid 1,000 1,200 1,500
Dividend Provided Dividend Provided 1,200 1,600 2,0001,200 1,600 2,000
Retained Profits (end) Retained Profits (end) $7,800 $17,000 $28,500$7,800 $17,000 $28,500
Year 3 ::1. Current profits40% 15 000- depn adjustment revaluation entry 4000- 1200ie 40% (15 000-(4 000-1 200))DR OEI Share of Profit 4 880 CR OEI 4 880
Year 3 ::1. Current profits40% 15 000- depn adjustment revaluation entry 4000- 1200ie 40% (15 000-(4 000-1 200))DR OEI Share of Profit 4 880 CR OEI 4 880
Example OEIExample OEI
Over the next 3 years FAIR Ltd recorded the followingOver the next 3 years FAIR Ltd recorded the following
19x1 19x2 19x319x1 19x2 19x3
O.P. (after tax) 8,000 12,000 15,000O.P. (after tax) 8,000 12,000 15,000
R.P. (begin) 2R.P. (begin) 2,000 7,800 17,000,000 7,800 17,000
10,000 19,800 32,00010,000 19,800 32,000
Dividend Paid 1,000 1,200 1,500Dividend Paid 1,000 1,200 1,500
Dividend Provided Dividend Provided 1,200 1,600 2,0001,200 1,600 2,000
Retained Profits (end) Retained Profits (end) $7,800 $17,000 $28,500$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 760DR Retained Profits 3 760 CR OEI 3 760
Year 3::1. Pre-acq profits (excluding current year)= 17 000 - @acq 2 000 - preac entry( 8 000 - 2400) *40%= 3 760DR Retained Profits 3 760 CR OEI 3 760
OEI Post Acquisition OEI Post Acquisition DividendDividend
Dividends paid by Subsidiary $10 000Dividends paid by Subsidiary $10 000
dr Dividend revenue 8,000dr Dividend revenue 8,000
cr Dividends paid 8,000cr Dividends paid 8,000
(adjust based 80% $10,000)(adjust based 80% $10,000) OEI adjustmentOEI adjustment
dr OEI 2,000dr OEI 2,000
cr Dividends paid 2,000cr Dividends paid 2,000
(20% $10,000)(20% $10,000)
OEI Post Acquisition OEI Post Acquisition DividendDividend
Dividends declared by Subsidiary $ 15 000Dividends declared by Subsidiary $ 15 000
dr Dividend payable 12,000dr Dividend payable 12,000
cr Dividends declared 12,000cr Dividends declared 12,000
(adjust based 80% $15,000)(adjust based 80% $15,000)
dr Dividend revenue 12,000dr Dividend revenue 12,000
cr Dividends receivable 12,000cr Dividends receivable 12,000
(adjust based 80% $15,000)(adjust based 80% $15,000)
OEI adjustmentOEI adjustment
dr OEI 3,000dr OEI 3,000
cr dividends declared 3,000cr dividends declared 3,000
(20% $15,000)(20% $15,000)
Interentity eliminations- Interentity eliminations- oei ?oei ?
Inter company adjustments covered previously Inter company adjustments covered previously eliminate the total unrealised profit. However if there is eliminate the total unrealised profit. However if there is OEI then any adjustment has to take this into OEI then any adjustment has to take this into considerationconsideration
ieieOpening Stock adjustmentOpening Stock adjustmentClosing Stock AdjustmentClosing Stock AdjustmentUnrealised Profit on sale of Non-current AssetsUnrealised Profit on sale of Non-current Assets
Down stream adjustmentsDown stream adjustments
If asset sold down stream ie Holding coy sells to If asset sold down stream ie Holding coy sells to subsidiary > any adjustment to unrealised profit subsidiary > any adjustment to unrealised profit would be profit in the Holding Coy. OEI have no would be profit in the Holding Coy. OEI have no interest in this. No further adjustment.interest in this. No further adjustment.
80%80%
OEI 20%OEI 20%
H LTD
S LTD
Up stream adjustmentsUp stream adjustments
If asset sold up stream ie Subsidiary Coy sells to If asset sold up stream ie Subsidiary Coy sells to Holding Coy > any adjustment to unrealised profit Holding Coy > any adjustment to unrealised profit would be profit in the Subsidiary Coy. OEI do have would be profit in the Subsidiary Coy. OEI do have any interest ie they own % of company. Further any interest ie they own % of company. Further adjustment required.adjustment required.
80%80%
OEI 20%OEI 20%S LTD
H LTD
OEI & Inter-entity OEI & Inter-entity transactiontransaction
closing stockclosing stock Exercise in text Gum buys 80% of Tree= OEI 20%Exercise in text Gum buys 80% of Tree= OEI 20% Inventory (assume Tree sold to Gum Ltd)Inventory (assume Tree sold to Gum Ltd)
dr Sales 23 000dr Sales 23 000
cr Cost of Sales 21 500cr Cost of Sales 21 500
cr Inventory 1 500cr Inventory 1 500
dr DTA 450dr DTA 450
cr Tax expense 450cr Tax expense 450
(these entries still done as before on 100%)(these entries still done as before on 100%) OEI entry adjustmentOEI entry adjustment
dr OEI 210dr OEI 210
cr OEI share profit 210cr OEI share profit 210
(20% $1 050)(20% $1 050)
Note if Gum had sold to Tree Note if Gum had sold to Tree no OEI adjustmentno OEI adjustment
OEI & Inter-entity OEI & Inter-entity transactiontransaction
Opening stock adjustmentOpening stock adjustment Inventory (assume Tree sold to Gum Ltd)Inventory (assume Tree sold to Gum Ltd)
dr R.P. 4 000dr R.P. 4 000
cr Cost of Sales 4,000 cr Cost of Sales 4,000
dr Tax expense 1 200dr Tax expense 1 200
cr R.P. 1,200cr R.P. 1,200
(these entries still done as before on 100%)(these entries still done as before on 100%)
OEI entry adjustmentOEI entry adjustmentdr OEI share profit 560dr OEI share profit 560
cr R.P. 560cr R.P. 560
(20% (4,000-1,200)(20% (4,000-1,200)
note if Gum had sold to Tree note if Gum had sold to Tree no OEI adjustment no OEI adjustment
OEI & Inter-entity OEI & Inter-entity transactiontransaction
Transfer depreciable assetTransfer depreciable asset Assume that on 1 July 200X the Subsidiary sells a Assume that on 1 July 200X the Subsidiary sells a
depreciable asset to the Holding Company for $50 depreciable asset to the Holding Company for $50 000, the written down value of the asset being $40 000, the written down value of the asset being $40 000. Assume that the non current asset has a 000. Assume that the non current asset has a further 5 year life.further 5 year life.
Because this is an upstream transaction the OEI is Because this is an upstream transaction the OEI is affected. At 30 June 200Y the consolidation journal affected. At 30 June 200Y the consolidation journal entries would be:entries would be:
OEI & Inter-entity OEI & Inter-entity transactiontransaction
Elimination entry:Elimination entry: Revenue on sale of non current asset DR 50 000Revenue on sale of non current asset DR 50 000 Carrying amount of non current asset CR 40 000Carrying amount of non current asset CR 40 000 Non current asset CR 10 000Non current asset CR 10 000
Deferred Tax Asset DR 3 000Deferred Tax Asset DR 3 000 Income Tax Expense CR 3 000Income Tax Expense CR 3 000
OEI AdjustmentOEI Adjustment
OEI DR 1 400OEI DR 1 400 OEI – Share of Net Profit CR 1 400OEI – Share of Net Profit CR 1 400 (20% of (10 000 – 3 000)) (20% of (10 000 – 3 000))
OEI & Inter-entity OEI & Inter-entity transactiontransaction
Depreciation AdjustmentDepreciation Adjustment
Accumulated Depreciation – Non current asset DR 2 000Accumulated Depreciation – Non current asset DR 2 000 Depreciation Expense CR 2 000Depreciation Expense CR 2 000
Income Tax Expense DR 600Income Tax Expense DR 600 Deferred Tax Asset CR 600Deferred Tax Asset CR 600
OEI AjustmentOEI Ajustment
OEI - Share of Net Profit DR 280OEI - Share of Net Profit DR 280 OEI DR 280OEI DR 280 (2 000 – 600) x 20%(2 000 – 600) x 20%
Tutorial QuestionsTutorial Questions
Exercise 17.1 Exercise 17.1 Exercise 17.2Exercise 17.2 Problem 17.1Problem 17.1 Exercise 18.1Exercise 18.1 Exercise 18.2Exercise 18.2 Exercise 18.4Exercise 18.4