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BAP32 Corporate Accounting

Question

Answered

Question:

You will be required to investigate 2 (two) ASX listed companies corporate reporting on Fair Value.

Instruction for the case study:

You are required to download the financial reports of any two selected companies and identify the required information from the notes on fair value disclosures. You need to compare as to how two companies’ fair value disclosures are made.

In your answer, you need to identify and report on comparative fair value hierarchies and methods used for differing classes of assets by the selected two companies.

Case 1: Accounting by the acquirer

The trial balance of Packman Ltd at 1 January 2019 was as follows:

 

Debit

Credit

Share capital

 

 

Preference - 15 000 fully paid shares

 

15000

Ordinary - 70 000 fully paid shares

 

70000

Retained earnings

 

43000

Equipment

84000

 

Accumulated depreciation - equipment

 

20000

Inventories

36000

 

Accounts receivable

33000

 

Investments

12000

 

Patents

7000

 

Debentures

 

8000

Accounts payable

 

16000

 

172000

172000

 
At this date, all the assets and liabilities of Packman Ltd are sold to Zaba Ltd, with Packman Ltd going into voluntary liquidation. The terms of acquisition are:

  • Zaba Ltd is to take over all the assets of Packman Ltd, as well as the accounts payable of Packman Ltd.
  • Costs of liquidation of $700 are to be paid by Packman Ltd with funds supplied by Zaba Ltd.
  • Preference shares in Packman Ltd are to receive two fully paid shares in Zaba Ltd for every three shares held, or alternatively, $0.80 per share in cash payable at the acquisition date.
  • Ordinary shareholders of Packman Ltd are to receive two fully paid ordinary shares in Zaba Ltd for every share held or, alternatively, $2.50 in cash payable half at the acquisition date and half in one year’s time.
  • Debenture holders of Packman Ltd are to be paid in cash out of funds provided by Zaba Ltd. The debentures have a fair value of $102 per $100 debenture.
  • All shares issued by Zaba Ltd have a fair value of $1.20 per share.
  • Costs of issuing and registering the shares issued by Zaba Ltd amount to $80 for the preference shares and $200 for the ordinary shares.
  • Legal and accounting costs associated with the acquisition of Packman Ltd amount to $2000.

The two parties agree on the terms of the arrangement, and holders of 6 000 preference shares and 10 000 ordinary shares elect to receive cash.

Zaba Ltd assesses the fair values of the identifiable assets and liabilities of Packman Ltd to be as follows:

Equipment

72000

Inventories

40000

Accounts receivable

29000

Patents

8000

Investments

12000

Accounts payable

16000


Zaba Ltd has an incremental borrowing rate of 10%.

Required

  • Prepare the acquisition analysis in relation to the above acquisition by Zaba Ltd.
  • Prepare the journal entries in the records of Zaba Ltd at the date of acquisition.
  • Prepare the journal entry for the payment of the deferred consideration in one year’s time.

Case 2: Consolidation worksheet, previously held investment in subsidiary

On 1 August 2018, ITP Syd Ltd acquired 10% of the shares in Peters Ltd for $8000. ITP Syd Ltd used the fair value method to measure this investment with movements in fair value being recognised in profit or loss. At 1 July 2017, the fair value of this investment was $15 400. The original investment in Peters Ltd was due to the fact that Peters Ltd was undertaking research into particular microbiological elements that could influence the profitability of ITP Syd Ltd. With the continuing success of this research, ITP Syd Ltd decided to acquire the remaining shares (cum div.) in Peters Ltd.

On 1 July 2017, ITP Syd Ltd made an offer to buy the remaining shares in Peters Ltd for $151 000 cash. This offer was accepted by the shareholders of Peters Ltd. On 1 July 2017, immediately after the business combination, the statement of financial position of Peters Ltd was as follows:

 

 

ITP Syd Ltd

Peters Ltd

Share capital

 

 

130,000

 

90,000

General reserve

 

56,500

 

12,000

Retained earnings

 

93,500

 

36,000

 

Total equity

 

280,000

 

138,000

Dividend payable

 

25,000

 

12,600

Other liabilities

 

75,000

 

25,000

 

Total liabilities

 

100,000

 

37,600

Total equity and liabilities

 

380,000

 

175,600

Cash

 

 

11,000

 

20,600

Receivables

 

 

25,200

 

20,000

Other assets

 

 

10,000

 

8,000

Shares in

Peters Ltd

 

153,800

 

-

Inventories

 

 

55,000

 

42,000

Plan and equipment

 

210,000

 

107,000

Accumulated depreciation

-

85,000

-

22,000

Total assets

 

 

380,000

 

175,600

 
On analysing the financial statements of Peters Ltd, ITP Syd Ltd determined that all the assets and liabilities recorded by Peters Ltd were shown at amounts equal to their fair values except for:

The plant and equipment is expected to have a further 4-year life and is depreciated on a straight-line basis. The inventory was all sold by 30 June 2018.

Peters Ltd had expensed all the outlays on research and development. ITP Syd Ltd placed a fair value of $12 000 on this asset. Peters Ltd also had reported a contingent liability at 30 June 2017 in relation to claims by customers for damaged goods. ITP Syd Ltd placed a fair value of $3000 on these claims. The research and development is amortised evenly over a 10-year period. The claims by customers were settled in May 2018 for $2800.

The company tax rate is 30%.

Required

  • Prepare the consolidated financial statements of ITP Syd Ltd at 1 July 2017, immediately after the business combination.
  • Prepare the consolidation worksheet entries at 30 June 2018.

Case 3: Intragroup transactions

Ammi Ltd owns all of the shares of VStone Ltd. In relation to the following intragroup transactions, all parts of which are independent unless specified, prepare the consolidation worksheet adjusting entries for preparation of the consolidated financial statements as at 30 June 2019. Assume an income tax rate of 30%.

  • On 1 January 2018, Ammi Ltd sold inventory costing $6000 to VStone Ltd at a transfer price of $9000. On 1 September 2018, VStone Ltd sold half these items of inventory back to Ammi Ltd, receiving $3000 from Ammi Ltd. Of the remaining inventory kept by VStone Ltd, half was sold in January 2019 to Goanna Ltd at a loss of $200.
  • On 1 January 2019, VStone Ltd sold an item of plant to Ammi Ltd for $2000. Immediately before the sale, VStone Ltd had the item of plant on its accounts for $3000. VStone Ltd depreciated items at 5% p.a. on the diminishing balance and Ammi Ltd used the straight-line method over 10 years.
  • On 1 July 2018, Ammi Ltd sold a motor vehicle to VStone Ltd for $12 000. This had a carrying amount to Ammi Ltd of $9600. Both entities depreciate motor vehicles at a rate of 10% p.a. on cost.
  • During the 2017–18 period, Ammi Ltd sold inventory to VStone Ltd for $9000, recording a before-tax profit of $1800. Half this inventory was unsold by VStone Ltd at 30 June 2018.
  • VStone Ltd sells second-hand machinery. Ammi Ltd sold one of its depreciable assets (original cost $80 000, accumulated depreciation $64 000) to VStone Ltd for $10 000 on 1 January 2019. VStone Ltd had not resold the item by 30 June 2019.
  • On 1 May 2019, VStone Ltd sold inventory costing $300 to Ammi Ltd for $380 on credit. On 30 June 2019, only half of these goods had been sold by Ammi Ltd, but Ammi Ltd had paid $280 back to VStone Ltd.

BAP32 Corporate Accounting

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