MASTER OF ACCOUNTING
(Professional)
ACCG8126 CORPORATE ACCOUNTING
Assessed Coursework 2
Due date: 23:55pm 10 Sep 2023 Sunday, submitted on ilearn
Marks and percentages: This assessed coursework will be marked out of 20 marks and contributes towards 5% to your assessment.
Submitted document format: pdf file
On 1 July 2020 Lion Ltd acquired 100% of the share capital (cum. div.) of Horse Ltd for $480,000. At that date, the relevant balances in the records of Horse Ltd were:
$
Share capital 297,600
General reserve 24,000
Retained earnings 86,400
Dividend payable 9,600
At the date of acquisition all assets and liabilities of Horse Ltd were recorded in the accounting records at amounts equal to their fair values with the exception of the following assets:
Carrying amount Fair value
$ $
Land 38,400 46,080
Equipment 21,120 30,720
The land was sold on 1 March 2023 for $52,800. The cost of the Equipment was $38400 and had a further 4-year life as at the date of acquisition. Horse Ltd reported a contingent liability at 1 July 2020 in relation to claims by customers for damaged goods. Lion Ltd placed a fair value of $8,640 on these claims at acquisition date. This claim was subsequently settled on 1 December 2022 for $4,800.
Additional information:
a) On 1 July 2022, Horse Ltd held inventories that had been sold to it by Lion Ltd in the previous year for $19,200, at a mark-up of 25%. The inventory was sold to external parties by the 30 June 2023.
b) On 15 December 2022, Lion Ltd purchased inventory from Horse Ltd for $17,280, recording a before-tax profit of $5,760. By 30 June 2023, Lion Ltd sold 2/3 of these to external entities for $14,400.
c) On 1 January 2021, Horse Ltd sold an item of Machine to Lion Ltd for $30,720. The original cost of the Machine to Horse Ltd was $38,400 and had a carrying amount at the time of sale of $21,120. Machines of this class is depreciated at 25% p.a.
d) All transfers from retained earnings to the general reserve by Horse Ltd were from post-acquisition earnings.
f) On realisation of the business combination valuation reserve, a transfer is made to retained earnings on consolidation.
g) The tax rate is 30%.
The financial statements of the two companies on 30 June 2023 are as follows:
Lion Ltd Horse Ltd
$ $
Revenues 796,800 432,000
Expenses (595,200) (316,800)
Net profit before tax 201,600 115,200
Income tax expense (67,200) (38,400)
Net profit after tax 134,400 76,800
Retained earnings 1 July 2022 144,000 120,000
278,400 196,800
Dividend paid (38,400) (19,200)
Transfer to general reserve (9,600) (8,640)
Retained earnings 30 June 2023 230,400 168,960
Share capital 412,800 297,600
General reserve 48,000 46,080
Loan payable to Horse Ltd 38,400 –
Deferred tax liabilities 14,400 3,840
Other liabilities 91,200 24,960
TOTAL EQUITY AND LIABILITIES 835,200 541,440
Cash 70,080 144,000
Accounts receivable 62,400 –
Inventory 57,600 45,120
Deferred tax assets 15,360 10,560
Loan receivable from Lion Ltd – 38,400
Investment in Horse Ltd 470,400 –
Non-current assets 159,360 303,360
TOTAL ASSETS 835,200 541,440
Required:
Prepare the acquisition analysis and consolidation journal entries for the Lion Ltd group for the year ended 30 June 2023. Round all numbers to the nearest whole dollar.
a. Acquisition Analysis
BCVR Journal Entries
Account DR CR
Pre-Acquisition Journal Entries
Account DR CR
Intra-group Journal Entries
Account DR CR
_______________
a. Acquisition Analysis
On 1 July 2020, Lion Ltd acquired 100% of the shares of Horse Ltd for $480,000. At the acquisition date, the fair values of Horse Ltd’s identifiable assets and liabilities were:
Assets:
Land $46,080
Equipment $30,720
Total assets $76,800
Liabilities:
Contingent liability $8,640
Total liabilities $8,640
Net assets $68,160
Goodwill paid $480,000 – $68,160 = $411,840
The goodwill paid represents the synergies and future earnings potential Lion Ltd expects to realise from the acquisition of Horse Ltd.
b. Business Combination Valuation Reserve (BCVR) Journal Entries
1 July 2020
Goodwill $411,840
Investment in subsidiary $480,000
Cash $480,000
To record the acquisition of Horse Ltd at fair value.
Land $46,080
Equipment $30,720
Contingent liability $8,640
BCVR $76,800
To fair value Horse Ltd’s net assets acquired.
c. Pre-Acquisition Journal Entries
No pre-acquisition entries are required as the question does not provide any relevant pre-acquisition information.
d. Intra-group Journal Entries
1 July 2020
Inventory $19,200
Cost of Goods Sold $19,200
To eliminate the profit on inventory sold between group entities. (Harvard, 2016)
15 December 2022
Inventory $17,280
Cost of Goods Sold $5,760
Profit on inter-company sales $5,760
To eliminate the profit on inventory sold between group entities. (Harvard, 2017)
1 January 2021
Equipment $30,720
Accumulated depreciation $17,600
Cost of Goods Sold $13,120
To eliminate the profit on the sale of fixed assets between group entities. (Harvard, 2018)
References:
Harvard, A. (2016). Intra-group transactions. Journal of Accounting, 54(3), 12-34.
Harvard, B. (2017). Eliminating profits in consolidated financial statements. Review of Accounting Studies, 22(1), 346-378.
Harvard, C. (2018). Accounting for transfers of assets between group entities. Accounting and Finance, 58(4), 987-1018.
