Financial Accounting Management Business Operations

Question: Discuss about the Financial Accounting for Management Business Operations. Answer: 1: A. Acquisition Analysis and Consolidation Journal Entries Acquisition Analysis for the year ending 30 June, 2016. Amount $ Fair value of Net assets acquired Total Assets Acquired 627,000.00 Less: Total Liabilities (221,300.00) Net Assets 405,700.00 Purchase Consideration 356,000.00 Capital Reserve (Net Assets- Purchase consideration) 49,700.00 Table 1: Acquisition analysis (Source: Created by author) Joan Ltd had acquired 100% shares of Jewel Ltd in the financial year 2011 against the purchase consideration $356,000. As the companys acquired net asset was more than the consideration, the difference is considered as a capital reserve on consolidation. Since then the management of has analyzed consistent rise in the retained earnings of the group company. Liabilities and other dues on long term loan were also consistent in the past five years. Apart from these, the products of Jewel Ltd providing a good share in the current market and by acquiring it to further 100%, management is of the view that it would lead to the growth of the business as a whole. Upon examining the product line, business operations, organizational members structure of both the companies, it has been concluded that there is compatibility in the operating functions and the acquisition would not lead to incur high expenses whether in relation to arrangement needs or sale of labor. Further, it was agreed between the companies that the holding company Joan Ltd would be abide Corporation Law and principles of accounting standards to recognize the consolidated financial statements (Yang et al. 2015). Accordingly, any intercompany sales and accounts balance would be settled as per the accounting standard on consolidation of IFRS. Journal Entries For the year ended 30 June 2016 For the group Joan Ltd and Jewel Ltd Amount $ Particulars Debit Credit 1 Jewel Ltd Dr 42,000.00 To Sale of Inventory 42,000.00 (Being inventory sold by Joan Ltd to Jewel Ltd during the year 30 June 2016) 2 Joan Ltd Dr 65,000.00 To Sale of Inventory 65,000.00 (Being inventory sold by Jewel Ltd to Joan Ltd during the year 30 June 2016) 3 Unrealized Profit Dr 13,000.00 To Inventory 13,000.00 (Being Inventory produced by Jewel Ltd at $20,000 that was sold to Joan Ltd $33,000) 4 Unrealized profit Dr 2,000.00 To Inventory 2,000.00 (Being Inventory produced by Joan Ltd at $5,000 that was sold to Jewel Ltd $7,000) 5 Bank A/c Dr 20,000.00 To Inventory 20,000.00 (Being inventory sold by the Joan and Jewel group to the external parties cost of which was $15,000) 6 Inventory A/c Dr 5,000.00 To Profit on sale on inventory 5,000.00 (Being profit incurred on sale on inventory assuming the sales had taken place at the recorded value) 7 Unrealized profit Dr 36,000.00 To Plant and machinery 36,000.00 (Being an item of plant sold to Joan Ltd By Jewel Ltd in the beginning of the year at $116,000 whereas the carrying cost was $80,000) 8 Joan Ltd Dr 26,500.00 To Bank A/c 26,500.00 (Being management fees paid by Jewel Ltd to Joan Ltd during the year 30 June 2016) 9 Full Goodwill method Goodwill A/c Dr 0.00 Asset A/c Dr 627,000.00 To Liabilities A/c 221,300.00 To Non- controlling interest 0.00 To Capital Reserve 49,700.00 (Being capital reserve determined and recognized as Full Goodwill Method) Table 2: Journal Entries (Source: Created by author) Note 1: Since the acquisition of shares by Joan Ltd was on 1st July 2016 therefore it is assumed that the acquisition journal entries have already been made in the financial year 2011- 2012. Note 2: As the acquisition is of 100% between Joan Ltd and Jack Ltd, hence minority interest or non- controlling interest would not arise. Note 3: The determination of goodwill or capital reserve will be same in both the Full Goodwill Method and Partial Goodwill Method because the acquisition is of 100% and there is no minority interest exists. B. Consolidation Worksheet Financial Statement (Extract) Particulars Joan Jewel Combine Elimination Current assets Accounts receivable 55,400.00 84,500.00 139,900.00 Inventory 105,000.00 38,000.00 143,000.00 (143,000.00) Non-current assets Land and buildings 278,000.00 326,000.00 604,000.00 Plant - at cost 299,850.00 355,800.00 655,650.00 (135,000.00) Less: Accumulated depreciation (85,750.00) (138,800.00) (224,550.00) 55,000.00 Investment in Jewel Ltd 356,000.00 - 0.00 Equity Retained earnings 358,000.00 244,200.00 602,200.00 Share capital 350,000.00 - 350,000.00 Current liabilities Accounts payable 81,700.00 76,300.00 158,000.00 Tax payable 66,300.00 25,000.00 91,300.00 Non-current liabilities Loans 152,500.00 120,000.00 272,500.00 Table 3: Financial position combination (Source: Created by author) Appropriation of Profit Particulars Capital Profit $ Revenue Profit $ Balance as on 1 .07.2011 xxx 80,000.00 Less: Unrealized Profit - 51,000.00 Add: Unrealized Loss - - Total 29,000.00 Holding co. (100%) 29,000.00 Cost of Control Investment 356,000.00 Less: Share capital 200,000.00 (200,000*100%) Less: Pre acquisition Profits - Goodwill 156,000.00 Table 4: Consolidation workings (Source: Created by author) 2: A. Relationship between Bosco Ltd and Circus Ltd According to International Financial Reporting Standard (IFRS) 10, definition of subsidiary includes a company controlled by another company. Such control can be gained if the holding of shares or voting rights is more than 50%. The parent company will have the power to control and govern the financial and operational part of the subsidiary for better business decision. On the contrary, associate is defined in International Accounting Standard (IAS) 28 as the significant influence of the investor over an associate company (Exner et al. 2015). It means that the investor has the right to participate in the business and financial decision but cannot control the policies and regulations. Such significant influence is gained by purchasing shares or voting rights for more than 20% but less than 50%. In the given case, Bosco acquired 80% of the issued securities of Circus Ltd on 1 July 2014. Considering the principles of IFRS and IAS the relationship between Bosco and Circus Ltd is that of parent- subsidiary because the acquired voting right by Bosco is more than 50%. It is not necessary to acquire 100% securities for having parents- subsidiary relationship as acquisition of 100% securities would mean wholly owned subsidiary of the acquirers. B. Acquisition Analysis and Consolidation Journal Entries Acquisition Analysis for the year ending 30 June, 2016. Amount $ Fair value of Net assets acquired Total Assets Acquired 1,400,000.00 Less: Total Liabilities 223,000.00 Net Assets 1,177,000.00 Purchase Consideration (80%) 890,000.00 Capital Reserve (Net Assets- Purchase consideration) 287,000.00 Table 5: Acquisition analysis (Source: Created by author) Bosco Ltd acquired 80% of the issued securities of Circus Ltd on 1 July 2014 for consideration of $ 890,000. On acquisition the company gained capital reserve because the value of net asset is more than the purchase consideration. It was observed that the Circus Ltd had good market share and acquiring the company by Bosco Ltd would provide a positive impact on the growth and sustainability for the group company. Observing the acquisition price it was noted that the stocks of Circus Ltd indicates true and fair price and there was no inflation been added to the stocks or assets of the company. all the events between the companies post consolidation was agreed to be taken under mutual consent and the companies agreed to abide by the regulations of Corporation Law and Accounting Standards. Journal Entries For the year ended 30 June 2016 For the group Bosco Ltd and Circus Ltd Amount $ Particulars Debit Credit 1 Circus Ltd Dr 43,000.00 To Sale of Inventory 43,000.00 (Being inventory sold by Bosco Ltd to Circus Ltd during the year 30 June 2016) 2 Bosco Ltd Dr 120,000.00 To Sale of Inventory 120,000.00 (Being inventory sold by Circus Ltd to Bosco Ltd during the year 30 June 2016) 3 Unrealized profit Dr 14,000.00 To Inventory 14,000.00 (Being Inventory produced by Circus Ltd at $70,000 that was sold to Bosco Ltd $84,000) 4 Goodwill impairment loss Dr 5,000.00 To Investment in Circus Ltd 5,000.00 (Being impairment on acquired goodwill recognized by the group on consolidation) 5 Unrealized profit Dr 88,000.00 To Plant and machinery 88,000.00 (Being an item of plant sold to Circus Ltd By Bosco Ltd in the beginning of the year at $190,000 whereas the carrying cost was $102,000) 6 Circus Ltd Dr 300,000.00 To Bank A/c 300,000.00 (Being loan provided to Circus Ltd by Bosco Ltd during the year 30 June 2016) Bank A/c Dr 9,000.00 To Interest on loan 9,000.00 (Being interest on loan received from Circus Ltd for the year 30 June 2016) 7 Partial goodwill method Goodwill A/c Dr 0.00 Asset A/c Dr 1,400,000.00 To Liabilities A/c 223,000.00 To Non- controlling interest 400,000.00 To purchase consideration 890,000.00 To Bargain purchase (113,000.00) (Being bargain purchase determined and recognized as Full Goodwill Method) 8 Income to non- controlling interest Dr 164,600.00 To Non- controlling interest 164,600.00 (Being profit on minority shareholding on consolidation recognized in the books of group company) Table 6: Journal Entries (Source: Created by author) Consolidation Worksheet Appropriation of Profit Particulars Capital Profit $ Revenue Profit $ Balance as on 1 .07.2014 xxx 425,000.00 Less: Unrealized Profit - 102,000.00 Add: Unrealized Loss - - Total 323,000.00 Holding co. (80%) 258,400.00 Non- controlling interest (20%) 64,600.00 Cost of Control Investment 890,000.00 Less: Share capital 400,000.00 (500,000*80%) Less: Pre acquisition Profits - Goodwill 490,000.00 Minority Interest Share Capital (20%) 100,000.00 Profits of Subsidiary 64,600.00 Total 164,600.00 Table 7: Working notes (Source: Created by author) C. Acquisition Analysis under Full Goodwill Method Acquisition analysis using full goodwill method For the year ended 30 June 2016 Amount $ Fair value of net identifiable assets of Circus Ltd 1,177,000.00 (1,400,000- 223,000) Less: Fair value of non- controlling interest 200,000.00 Net asset acquired 977,000.00 Less: Purchase consideration 890,000.00 Bargain purchase/ (Goodwill) 87,000.00 Table 8: Acquisition analysis (Source: Created by author) 3: Acquisition Analysis Cricket Ltd invested in 40% of the issued share capital of Charlie Ltd for an amount of $160,000. Since the acquisition is of 40%, Cricket Ltd gained significance influence over Charlie Ltd and is required to recognize the financial information by following equity method of AASB 128. It has been observed that the investee company, Charlie Ltd had retained earnings of $95,000 which increased to $257,000 in the year 2016 post investment. Apart from that, the investee company also has good market share as well as better investment opportunity for wealth maximization (Yang et al. 2015). Acquisition Analysis Amount $ Investment 160,000.00 Cricket's share on income after tax and before dividend payment of Charlie Ltd ($2791,000 * 40%) 1,116,400.00 Cricket's share on dividend payment by Charlie Ltd ($200,000 * 40%) 80,000.00 Table 9: Acquisition analysis (Source: Created by author) Journal entries for accounting Cricket Ltd's investment in Charlie Ltd For the year ended 30 June 2017 Amount $ Debit Credit 1 Investment on 1 July 2015 Investment in Charlie Ltd Dr 160,000.00 To Bank A/c 160,000.00 (Being 40% shares acquired and invested in Charlie Ltd) 2 Income on Investment 30 June 2016 Investment in Charlie Ltd Dr 1,013,600.00 To Income from Equity 1,013,600.00 ($2,534,000 * 40%) (Being share of income @40% has been recognized) 3 Dividend received 80,000.00 Bank A/c Dr 80,000.00 To Investment in Charlie ltd (Being share of dividend received has been recognized during the year) 4 Income on Investment 30 June 2017 Investment in Charlie Ltd Dr 1,036,400.00 To Income from Equity 1,036,400.00 ($2,591,000 * 40%) (Being share of income @40% has been recognized) 5 Tax Expenses Income tax expense Dr 639,000.00 To Bank A/c 24,000.00 To Deferred tax liability 615,000.00 (Being tax expenses at the rate of 30% recognized for dividends received and income on investment during the year) 6 Unrealized profits Investment in Charlie Ltd Dr 2,000.00 To Inventory A/c 2,000.00 (Being profit on sale of inventory costing at $4,000 to Cricket Ltd for $6,000 has been eliminated and recognized) 7 Consolidated income A/c Dr 3,000.00 To Investment in Charlie ltd 3,000.00 (Being unrealized profit on sale of inventory to Charlie Ltd for $12000, costing $9,000 has been cancelled) Table 10: Journal Entries (Source: Created by author) Working Notes: Appropriation of Profit Particulars Capital Profit $ Revenue Profit $ Balance as on 1 .07.2015 xxx 95,000.00 Less: Unrealized Profit - 3,000.00 Add: Unrealized Loss - - Total 92,000.00 Holding co. (40%) 36,800.00 Table 11: Analysis of profit (Source: Created by author) Cost of Control Investment $160,000.00 Less: Share capital $80,000.00 (200,000*40%) Less: Pre acquisition Profits - Goodwill $80,000.00 Table 12: Cost of control (Source: Created by author) Reference List: Exner, A., Bartels, L.E., Windhaber, M., Fritz, S., See, L., Politti, E. and Hochleithner, S., 2015. Constructing landscapes of value: Capitalist investment for the acquisition of marginal or unused landThe case of Tanzania.Land Use Policy,42, pp.652-663. Yang, L., Grossmann, I.E., Mauter, M.S. and Dilmore, R.M., 2015. Investment optimization model for freshwater acquisition and wastewater handling in shale gas production.AIChE Journal,61(6), pp.1770-1782.