Consolidations (23 Marks) On 1 January 2010, Westlake Industries acquired 100% of the shares of Eastside Limited for $1,650,000. The balance sheet for Eastside Limited at acquisition date was as follows; Eastside Limited - Balance Sheet As At 31 December 2009 Current Assets Current Liabilities Cash 65,000 Accounts Payables 45,000 Inventory 120,000 Trade Creditors 85,000 Leased Asset 130,000 Non-Current Assets Term Liabilities Plant 560,000 Mortgage 740,000 Land 1,100,000 Buildings 665,000 Owners Equity Contributed Capital 1,000,000 Retained Earnings 450,000 Revaluation Surplus 60,000 2,510,000 2,510,000 Notes
• Eastside and Westlake use Straight line depreciation and use the cost model for plant and buildings. Both companies have a balance date of 31 December each year.
• Accumulated Depreciation on buildings $335,000, with remaining useful life of 20 years.
• Accumulated depreciation on the plant is $140,000 with a remaining useful life of 8 years. The company uses straight line depreciation.
• Corporate Tax rate 30% (Ignore GST) All the assets and liabilities of Eastside were fairly valued at acquisition date. During the year ended 31 December 2010 the following transactions occurred between the two companies including a number of directors' resolutions. a) Eastside sold inventory to Westlake for 100,000 including a 25% mark-up. At the end of the year Westlake had on-sold 60% of the inventory purchased from Eastside. b) On 1 July 2010, Eastside borrowed $80,000 from Westlake based on a 12% p.a. interest only loan for five years. By the end of the financial year, no interest payments had been made. (Interest paid annually in arrears)
c) Six months after the acquisition date, Eastside sold an item of plant to Westlake for 250,000. The item had an original cost of 280,000 two years ago with accumulated depreciation of 56,000. Westlake Limited intends to keep the plant for the assets expected 8 year remaining useful life. d) The directors of Westlake believe that the goodwill following the acquisition has been impaired by $25,000. e) Eastside Limited declared a $40,000 dividend to Westlake. At year end this had not yet been paid. Westlake declared a dividend to its shareholders a week after balance sheets date of $60,000. f) Westlake charged Eastside $35,000 for management fees. By the end of the financial year this amount had been paid. Intercompany transaction for the year ended 31 December 2011. g) Eastside paid interest to Westlake for the intercompany loan for the year end 30 June 2010. h) Management impaired good will by a further 10,000. i) 20% of the inventory purchased in note
(a) remained unsold by the end of the financial year. j) Eastside declared and paid a $30,000 dividend to Westlake but this time from pre-acquisition profits. Required: 1) Prepare the consolidation journal entries for Westlake Industries and its controlled entities for the year ended 31 December 2010. 1-Jan-10 Dr Contributed Equity 1,000,000 Dr Retained Earnings 450,000 Dr Revaluation Surplus 60,000 Dr Goodwill 140,000 Cr Investment in the subsidiary 1,650,000 2 (Elimination of investment in the sub) 31-Dec-10 Dr Sales 100,000 Cr Purchases 100,000 1 (elimination of intercoy sale of inventory) Dr Cost of Sales 8,000 Cr Inventory 8,000
1 (Elimination of unrealised profit on intercoy sales of stock) Dr Deferred tax 2,400 Cr Tax expense 2,400 1 (elimination of tax paid on unrealised profit) Dr Interest Income 4,800 Dr Interest Payable 4,800 Cr Interest Expense 4,800 Cr Interest Receivables 4,800 1 (Elimination of 6 months accrued interest on intercoy loan) Dr Plant 30,000 Dr Gain on Sale 26,000 Cr Accumulated Depreciation 56,000 1 Dr Accumulated Depreciation 1,625 Cr Depreciation Exp 1,625 1 Dr Deferred Tax Asset 7,313 Cr Tax expense 7,313 1 (Elimination of intercoy sale of fixed asset) Dr Goodwill Impairment Exp 25,000 Cr Accumulated Impairment of Goodwill 25,000 1 (Impairment of goodwill) Dr Dividend Income 40,000 Dr Dividend Payable 40,000 Cr Dividend Declared 40,000 Cr Dividend Receivable 40,000 1 ( Elimination of dividend from post acquisition profits) Dr Other Income 35,000 Cr Management Fees exp 35,000
1 ( Elimination of management fees expense) 12 2) Prepare the consolidation journal entries for Westlake Industries and its controlled entities for the year ended 31 December 2011. (11 Marks) 30-Jun-12 Dr Contributed Equity 1,000,000 Dr Retained Earnings 450,000 Dr Revaluation Surplus 60,000 Dr Goodwill 140,000 Cr Investment in the subsidiary 1,650,000 1 (Elimination of investment in the sub) Dr Opening Retained Earnings 8,000 Cr Cost Of Sales 8,000 1 ( Elimination of profit on opening stock) Dr Deferred tax asset 2,400 Cr Opening Retained Earnings 2,400 1 Dr Tax Expense 2,400 Cr Deferred tax asset 2,400 1 Dr Cost of Sales 1,600 Cr Inventory 1,600 1 Dr Deferred tax asset 480 Cr Tax expense 480 1 Dr Retained Earnings 25,000 Dr Goodwill impairment exp 10,000 Cr Accumulated Imp of Goodwill 35,000 1 (Further impairment of goodwill) Dr Interest Income 9,600 Dr Interest payable 4,800 Cr Interest Expense 9,600 Cr Interest Rec 4,800 3 (Elimination of interest on intercoy loan) Dr Investment in the Sub 30,000 Cr Dividend Expense 30,000 1 11.