L Consolidations WEEK 1 TEXT CHAP 13 & 14 AASB 1024 TEXT CHAP 13 & 14 AASB 1024

ConsolidationsWEEK 1

TEXTCHAP 13 & 14

AASB 1024

TEXTCHAP 13 & 14

AASB 1024

Investments in other companies

Cost method A Ltd purchases shares in B Ltd $100 000

DR Investment in B Ltd 100 000

CR Cash 100 000 Balance Sheet

Investments (note 6) 100 000 Consolidation is how do we record this amount

when A Ltd has substantial ownership/control in B Ltd

Investments in other companies

Cost method

– records asset at cost & records dividends received

Equity method

– where company has a significant influence over another company AASB 1016/ AAS14

Consolidation method

– where one company gains “control” of another company

Consolidation Where a company gains control of another

company -referred to as the parent or chief entity - it is required to prepare consolidated accounts of its affairs & the entities under its control - subsidiaries (The company will still use cost method & then do adjustments to comply with requirements for consolidation)

Consolidated accounts as per AASB 1024 & Corporations law

Consolidated Profit & Loss

Consolidated Balance Sheet

Consolidated Cash Flow Statement

Consolidated accounts are prepared by adding together the accounts of the entities comprising the economic entity

Consolidated accounts are required in addition to the individual accounts

CONSOLIDATIONCONSOLIDATION

Parent entity/ Subsidiary

e.g. company A controls company B

Company A is required to prepare consolidated accounts for A & its subsidiary B ( A is the parent and B is the subsidiary)

Control as per corporations law

controls composition of the board

controls maximum number of votes

holds more than 50% of issued capital AASB control

capacity of an entity to dominate the decision-making .....of another entity

Definitions

Consolidation process

Firstly, to identify the parent entity and all of its subsidiaries (i.e. the economic entity)

Control is assumed to exist in this course if one company owns more than 50% of another company

– please note that in practice control may not exist with 50% ownership but may in fact exist with less

Entity concept of consolidation

O.E.I.

O.E.I. is the equity of the entity other than

that of theparent entity

Adjustment entries on consolidation

Two major types of adjustments� Eliminate the investment ‘Shares in subsidiary’

(referred to as the pre-acquisition entry)

Two major types of adjustments� Eliminate the investment ‘Shares in subsidiary’

� Eliminations of inter-company transactions

( future weeks)

Two major types of adjustments

� Eliminate the investment ‘Shares in subsidiary’

� Eliminations of inter-company transactions

( future weeks)

Two major types of adjustments

� Eliminate the investment ‘Shares in subsidiary’

� Eliminations of intercompany transactions

( future weeks)

Assumptions Week 1

1) Wholly Owned Subsidiaries2) Net Assets Acquired at Fair Values

Assumptions Week 1

1) Wholly Owned Subsidiaries2) Net Assets Acquired at Fair Values

Pre-acquisition adjustment Assume that H Ltd gains control of S Ltd by

purchasing all of its issued capital for $20,000 cash on 1 July 19x0 and that , immediately prior to purchase the Balance Sheets of H Ltd & S Ltd were :-

H LTD S LTD

CAPITAL 30,000 15,000

RETAINED PROFITS 15,000 5,000

$45,000 $20,000

CASH 20,000 -

OTHER ASSETS 25,000 20,000

$45,000 $20,000

H LTD S LTD

CAPITAL 30,000 15,000

$45,000 $20,000

CASH 20,000 -

$45,000 $20,000SHARES IN S LTD IMMEDIATELY AFTER

ACQUISITIONBALANCE SHEETS

IMMEDIATELY AFTERACQUISITION

BALANCE SHEETS

PRE-ACQUISITION ADJUSTMENT

Assume that H Ltd gains control of S Ltd by purchasing all of its issued capital for $20,000 cash on 1 July 19x0 and that , immediately prior to purchase the Balance Sheets of H Ltd & S Ltd were :-

H LTD S LTD

CAPITAL 30,000 15,000

$45,000 $20,000

SHARES IN S LTD 20,000 -

$45,000 $20,000

WHAT DID H LTD ACQUIRE

FOR ITS $20,000NET ASSETS OF S LTD

i.e.CAPITAL $15,000&

RETAINED PROFITS $5,000

WHAT DID H LTD ACQUIRE

FOR ITS $20,000NET ASSETS OF S LTD

i.e.CAPITAL $15,000&

RETAINED PROFITS $5,000

H LTD S LTD

CAPITAL 30,000 15,000

$45,000 $20,000

EQUITY ACQUIREDCAPITAL 15,000RETAINED PROFITS 5,000COST OF EQUITY 20,000

H LTD S LTD

CAPITAL 30,000 15,000

$45,000 $20,000

EQUITY ACQUIREDCAPITAL 15,000RETAINED PROFITS 5,000COST OF EQUITY 20,000

EQUITY ACQUIREDCAPITAL 15,000RETAINED PROFITS 5,000COST OF EQUITY 20,000 Consolidation entry::

DR CAPITAL 15,000DR RET. PROFITS 5,000 CR SHARES IN S LTD 20,000

Consolidation entry::DR CAPITAL 15,000DR RET. PROFITS 5,000 CR SHARES IN S LTD 20,000

Consolidation Worksheet H LTD S LTD ADJUST’S CONS

DR CRCAPITAL 30,000 15,000

RETAINED PROF 15,000 5,000

$45,000 $20,000

SHARES IN S LTD 20,000

$45,000 $20,000

DR CRCAPITAL 30,000 15,000 15,000

RETAINED PROF 15,000 5,000 5,000

$45,000 $20,000

SHARES IN S LTD 20,000 20,000

$45,000 $20,000

DR CRCAPITAL 30,000 15,000 15,000 30,000

RETAINED PROF 15,000 5,000 5,000 15,000

$45,000 $20,000 $45,000

SHARES IN S LTD 20,000 20,000 -

OTHER ASSETS 25,000 20,000 45,000

$45,000 $20,000 $45,000

Worksheet - after one year H LTD S LTD ADJUST’S CONS

DR CRCAPITAL 30,000 15,000 15,000 30,000

RETAINED PROF 25,000 12,000 5,000 32,000

$55,000 $27,000 $62,000

SHARES IN S LTD 20,000 20,000 -

OTHER ASSETS 35,000 27,000 62,000

$55,000 $27,000 $62,000

In following years Adj entrywill be the same i.e.based on Acq date

Pre-acquistion Dividends 3 cases

(1) Dividend payable at date of acquisition

(2) Dividend paid subsequent to acquisition

(3) Dividend payable since acquisition

DIVIDENDSFROM PROFITS

BEFOREACQUISITION

DIVIDENDSFROM PROFITS

BEFOREACQUISITION

Pre-acquisition dividends Dividend Payable @ acq

Assume H Ltd acquired 100% of S Ltd for $20,000 cash, the Balance Sheet of S Ltd at that date was :-

CAPITAL 15,000

RETAINED PROFITS 3,500

DIVIDEND PAYABLE 1,500

$20,000

ASSETS $20,000

CAPITAL 15,000

$20,000

ASSETS $20,000

entry::

Equity AcquiredCapital 15,000Retd. Profits 3,500Divid. Payable 1,500

Cost $20,000(includes dividend receivable $1 500)

Pre-acquisition dividendsDividend Payable @ acq

CAPITAL 15,000

$20,000

ASSETS $20,000Purchase entry in books:-DR Shares in Sub 18 500DR Dividend Receivable 1 500 CR Cash 20 000(Pre-acq dividend : reduction in carrying amount of investment)

Purchase entry in books:-DR Shares in Sub 18 500DR Dividend Receivable 1 500 CR Cash 20 000(Pre-acq dividend : reduction in carrying amount of investment)

CAPITAL 15,000

$20,000

ASSETS $20,000

entry::

Capital 15,000Retd. Profits 3,500Div. Payable 1,500 Div Receivable 1,500 Shares in Sub 18,500(Pre-acq entry)

entry::

Equity AcquiredCapital 15,000Retd. Profits 3,500Divid. Payable 1,500

Cost $20,000(includes dividend receivable $1 500)

Purchase entry in books:-DR Shares in Sub 18 500DR Dividend Receivable 1 500 CR Cash 20 000(Pre-acq dividend : reduction in carrying amount of investment)

Pre-acquisition dividendsDividend Payable @ acq

CAPITAL 15,000

$20,000

ASSETS $20,000

consolidation entry:: SUBSEQUENT YEARS

CAPITAL 15,000RETD. PROFITS 3,500 Shares in Sub 18,500

entry::

Capital 15,000Retd. Profits 3,500Div. Payable 1,500 Div Receivable 1,500 Shares in Sub 18,500(Pre-acq entry)

Pre-acquisition dividendsDividend Paid after acq

CAPITAL 15,000

$20,000

ASSETS $20,000

Since acquisition S Ltd pays a dividend $3,000 from pre-acquisition profits

CAPITAL 15,000

$20,000

ASSETS $20,000

CONSOLIDATION ENTRY::DR CAPITAL 15,000DR RET.PROFITS 5,000 CR SHARES IN SUB 20,000(Pre-acq @ acquisition date)

CAPITAL 15,000

$20,000

ASSETS $20,000

SINCE AcquisitionENTRY in Books::SubsidiaryDR RET.PROFITS 3,000 (Dividend Paid) CR Bank 3,000

Holding CoyDR Bank 3,000 Cr Shares in Sub 3,000

CAPITAL 15,000

$20,000

ASSETS $20,000

SINCE ACQUISITION S LTD PAYS A DIVIDEND $3,000 FROM PRE-ACQUISITION PROFITS

ENTRY::DR CAPITAL 15,000DR RET.PROFITS 5,000 CR DIVIDEND PAID 3,000 CR SHARES IN SUB 17,000

CONSOLIDATION ENTRY::DR CAPITAL 15,000DR RET.PROFITS 5,000 CR SHARES IN SUB 20,000(Pre-acq @ acquisition date)

CAPITAL 15,000

$20,000

ASSETS $20,000

SINCE ACQUISITION H LTD PAYS A DIVIDEND $3,000 FROM PRE-ACQUISITION PROFITS

ENTRY::DR CAPITAL 15,000DR RET.PROFITS 5,000 CR DIVIDEND PAID 3,000 CR SHARES IN SUB 17,000

ENTRY::DR CAPITAL 15,000DR RET.PROFITS 5,000 CR DIVIDEND PAID 3,000 CR SHARES IN SUB 17,000SUBSEQUENT YEARS::

DR CAPITAL 15,000DR RET. PROFITS 2,000 CR SHARES IN SUBS 17,000

SUBSEQUENT YEARS::DR CAPITAL 15,000DR RET. PROFITS 2,000 CR SHARES IN SUBS 17,000

Pre-acquisition dividends declared but not paid

CAPITAL 15,000

$20,000

ASSETS $20,000

Since acquisition S Ltd provides for a dividend $3,000 from pre-acquisition profits

CAPITAL 15,000

$20,000

ASSETS $20,000

Pre-acq adjustment:Dr Capital 15 000DR R P 5 000 Cr Shares in Sub 20 000

CAPITAL 15,000

$20,000

ASSETS $20,000

Entries in Books ::Subsidiary CoyDr Retained Profits 3 000 ( Dividend Provided) CR Provision for Dividend 3 000Holding CoyDR Dividend Receivable 3 000 Cr Shares in Subsidiary 3 000

CAPITAL 15,000

$20,000

ASSETS $20,000

Pre-acq adjustment:Dr Capital 15 000DR R P 5 000Dr Provision for Div 3 000 Cr Dividend Provided 3 000 Cr Dividend Receivable 3 000 Cr Shares in Sub 17 000

Pre-acq adjustment:Dr Capital 15 000DR R P 5 000 Cr Shares in Sub 20 000

Entries in Books ::Subsidiary CoyDr Retained Profits 3 000 ( Dividend Provided) CR Provision for Dividend 3 000Holding CoyDR Dividend Receivable 3 000 Cr Shares in Subsidiary 3 000

CAPITAL 15,000

$20,000

ASSETS $20,000

Following year:Dr Capital 15 000DR R P 2 000 Cr Shares in Sub 17 000

Pre-acq adjustment:Dr Capital 15 000DR R P 5 000Dr Provision for Div 3 000 Cr Dividend Provided 3 000 Cr Dividend Receivable 3 000 Cr Shares in Sub 17 000

Goodwill / Discount on acquisition

Goodwill

Fair values of assets acquired less than the fair value of assets given up

(must be written off over a maximum of 20 years)

Discount

Fair values of assets acquired greater than fair values of assets given up

(must be written off fair values of non-monetary assets)

Goodwill

At 1 July 19x0 Green Ltd acquired control of Trees Ltd by purchasing all of its issued shares for $100,000. At this date the accounts of Trees Ltd contained the following balances :-

CAPITAL 60,000

GENERAL RESERVE 10,000

RET. PROFITS 20,000

Any goodwill acquired amortised over 10 years.

GOODWILLAt 1 July 19x0 Green Ltd acquired control of Trees

Ltd by purchasing all of its issued shares for $100,000. At this date the accounts of Trees Ltd contained the following balances :-

CAPITAL 60,000

GENERAL RESERVE10,000

RET. PROFITS 20,000

entry at date acquisition::DR CAPITAL 60,000DR GEN RESERVE10,000DR RET. PROFITS 20,000DR GOODWILL 10,000 CR SHARES IN S 100,000

CAPITAL 60,000

General Reserve 10,000

RET. PROFITS 20,000

entry after 1 year:DR OPER. PROF 1,000DR CAPITAL 60,000DR G.R. 10,000DR R.P. 20,000DR GOODWILL 10,000 CR Acc Amortisation 1,000 CR SHARES IN S 100,000

CAPITAL 60,000

SHARE PREMIUM 10,000

RET. PROFITS 20,000

Any goodwill acquired amortised over 10 years..

entry AFTER 2 YEARS ::DR OPER. PROFIT 1,000DR CAPITAL 60,000DR GEN RESERVE10,000DR RET. PROFITS 21,000DR GOODWILL 10,000 CR Acc amortisation 2,000 CR SHARES IN S 100,000

entry after 1 year:DR OPER. PROF 1,000DR CAPITAL 60,000DR G.R . 10,000DR R.P. 20,000DR GOODWILL 10,000 CR Acc Amortisation 1000 CR SHARES IN S 100000

Discount on AcquisitionAssume that on 1 July 19x0, H Ltd acquires all the

issued shares of S Ltd for $17,000. The share capital section of S Ltd at that date was :

CAPITAL 15,000

RESERVES 3,000

RET. PROFITS 2,000

CURRENT ASSETS 5,000

LAND 10,000

EQUIPMENT 5,000

EQUITY ACQUIRED: CAPITAL 15,000 RESERVES 3,000 RET PROFITS 2,000 20,000COST OF SUBS 17,000DISCOUNT $3,000

DISCOUNT ON ACQUISITIONAssume that on 1 July 19x0, H Ltd acquires all the

CAPITAL 15,000

RESERVES 3,000

RET. PROFITS 2,000

LAND 10,000

EQUIPMENT 5,000

DISCOUNT AGAINST FAIR VALUES NON-MONETARY ASSETS BV Gross* TaxLAND 10,000 (10/15 $3,000) 2,000 2,857 ( 857)EQUIP 5,000 ( 5/15 ) 1,000 1,429 (429) $3,000* Divide by.7

CAPITAL 15,000

RESERVES 3,000

RET. PROFITS 2,000

LAND 10,000

EQUIPMENT 5,000

DR CAPITAL 15,000DR RESERVES 3,000DR RET. PROFITS 2,000 CR LAND 2,857Dr Deferred Tax Asset 857 CR EQUIPMENT 1,429Dr Deferred Tax Asset 429 CR SHARES IN S 17,000

DISCOUNT AGAINST FAIR VALUES NON-MONETARY ASSETS BV Gross* TaxLAND 10,000 (10/15 $3,000) 2,000 2,857 ( 857)EQUIP 5,000 ( 5/15 ) 1,000 1,429 (429) $3,000* Divide by.7

CAPITAL 15,000

RESERVES 3,000

RET. PROFITS 2,000

LAND 10,000

EQUIPMENT 5,000

ENTRY AFTER 1 YEAR ASSUME EQUIP 10 YEARS LIFE CR DEPREC 143DR ACC DEPN 143DR Tax Expense 43DR CAPITAL 15,000DR RESERVES 3,000DR RET. PROFITS 2,000 CR LAND 2,857Dr Deferred Tax Asset 857 CR EQUIPMENT 1,429Dr Deferred Tax Asset 386 CR SHARES IN S 17,000

DR CAPITAL 15,000DR RESERVES 3,000DR RET. PROFITS 2,000 CR LAND 2,857Dr Deferred Tax Asset 857 CR EQUIPMENT 1,429Dr Deferred Tax Asset 429 CR SHARES IN S 17,000

CAPITAL 15,000

RESERVES 3,000

RET. PROFITS 2,000

LAND 10,000

EQUIPMENT 5,000

ENTRY AFTER 1 YEAR ASSUME EQUIP 10 YEARS LIFE CR DEPREC 143DR ACC DEPN 143DR Tax Expense 43DR CAPITAL 15,000DR RESERVES 3,000DR RET. PROFITS 2,000 CR LAND 2,857Dr Deferred Tax Asset 857 CR EQUIPMENT 1,429Dr Deferred Tax Asset 386 CR SHARES IN S 17,000

ENTRY AFTER 2 YEARs ASSUME EQUIP 10 YEARS LIFE CR DEPREC 143DR ACC DEPN 286DR Tax Expense 43DR CAPITAL 15,000DR RESERVES 3,000DR RET. PROFITS 1,900 CR LAND 2,857Dr Deferred Tax Asset 857 CR EQUIPMENT 1,429Dr Deferred Tax Asset 343 CR SHARES IN S 17,000

Accumulated Depreciationat acquisition

The accumulated balances on acquisition should be written off:

as the consolidation is adjusting to fair values therefore write off accumulated depreciation

eg P Ltd purchases S Ltd & on that date balances as follows

Plant 80 000

Acc Depn 22 000 58 000

Furniture 32 000

Acc Depn 12 000 20 000

Accumulated Depreciationat acquisition

The accumulated balances on acquisition should be written off:

as the consolidation is adjusting to fair values therefore write off accumulated depreciation

eg P Ltd purchases S Ltd & on that date balances as follows

Plant 80 000

Acc Depn 22 000 58 000

Furniture 32 000

Acc Depn 12 000 20 000

DR Acc Depn - Plant 22 000 Cr Plant 22 000

Dr Acc Depn - Furn 12 000 Cr Furniture 12 000

Tutorial Questions

Exercise 14.1 Exercise 14.2 Exercise 14.4 Problem 14.1 Problem 14.2

L Consolidations WEEK 1 TEXT CHAP 13 & 14 AASB 1024 TEXT CHAP 13 & 14 AASB 1024

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