1. When there is a dividend payable by the subsidiary at acquisition date, under what conditions should the existence of this dividend be taken into consideration in preparing the pre-acquisition entries?
Discuss:
- the difference between ex div and cum div acquisitions
- the effects on the acquisition journal entry in the records of the parent under each circumstance. Assume for example that A Ltd acquires all the issued shares of B Ltd for $500 000 when at acquisition date B Ltd has recorded a dividend payable of $10,000.
- the effects on the acquisition analysis
- the differences in the pre-acquisition entries at acquisition date if the acquisition is cum div versus ex div. [ the cum div entry will need to eliminate the dividend receivable raised by the parent and the dividend payable raised by the subsidiary]
2. At the date the parent acquires a controlling interest in a subsidiary, if the carrying amounts of the subsidiary's assets are not equal to fair value, explain why adjustments to these assets are required in the preparation of the consolidated financial statements.
AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary be shown at fair value. The standard-setters believe that the fair value of the assets and liabilities provides the most relevant information to users.
Even though the standard refers to an allocation of the cost of a business combination, the standard does not require the identifiable assets and liabilities acquired to be recorded at cost.
The only asset acquired that is not measured at fair value is goodwill.
The fair value approach is emphasised by the required accounting for any bargain purchase on combination. It is not accounted for as a reduction in the fair values of the identifiable assets and liabilities acquired such that these items are recorded at cost. Instead, the fair values are unchanged and the excess is recognised as a gain.
3. Using an example, explain how the business combination valuation entries affect the pre- acquisition entries.
Assume at acquisition date, the subsidiary has land recorded at a carrying amount of $10 000 and having a fair value of $15 000. The tax rate is 30%.
At acquisition date, the BCVR entries will recognise an increment to land of $5 000, a deferred tax liability of $1 500 and a BCVR of $3 500. This BCVR is pre-acquisition equity. Hence in the pre- acquisition entry, if prepared at acquisition date, there would be a debit adjustment to BCVR to eliminate the balance of pre-acquisition equity.
In subsequent periods, if the land is sold, in the BCVR entries, on sale of the land, there would be a credit adjustment to "Transfer from BCVR", as the reserve is transferred to retained earnings. In preparing the pre-acquisition entries in the year of sale, the initial entry carried forward from the previous period will still include the BCVR relating to land. A further entry is then required debiting the "Transfer from BCVR" account - hence eliminating pre-acquisition equity - and crediting the BCVR account as this account no longer exists.
4. Why are some adjustment entries in the previous period's consolidation worksheet also made in the current period's worksheet?
The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not affect the underlying financial statements or the accounts of the parent or the subsidiary. Hence, if last year's profits required to be adjusted on consolidation, then potentially retained earnings needs to be adjusted in the current period.
Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in the consolidation worksheet for each year that the land remains in the subsidiary. The entry does not change from year to year. Again the reason is that the adjustment to the carrying amount of the land is only made in a worksheet and not in the actual records of the subsidiary itself.
Question 1- Pre-acquisition entries at acquisition date and one year later, no fair value/carrying amount differences at acquisition date
On 1 July 2016, Max Ltd acquired all the issued shares of Rodney Ltd for $200 000. The financial statements of Rodney Ltd showed the equity of Rodney Ltd at that date to be:
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Share capital - 20 000 $5 shares
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$100 000
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General reserve
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40 000
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Retained earnings
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60 000
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All the assets and liabilities of Rodney Ltd were recorded at amounts equal to their fair values at that date.
During the year ending 30 June 2017, Rodney Ltd undertook the following actions.
- On 10 September 2016, paid a dividend of $20 000 from the profits earned prior to 1 July 2016.
- On 28 June 2017, declared a dividend of $20 000 to be paid on 15 August 2017.
- On 1 January 2017, transferred $15 000 from the general reserve existing at 1 July 2016 to retained earnings.
Required-
A. Prepare the pre-acquisition entries at 1 July 2016.
B. Prepare the pre-acquisition entries at 30 June 2017.
Question 2- Worksheet entries at acquisition date and at subsequent year end, no fair value/carrying amount differences at acquisition date, existing goodwill at acquisition date
On 1 January 2017, Graham Ltd acquired all the issued shares (cum div.) of Leslie Ltd for $263 000. At that date the equity of Leslie Ltd was recorded at:
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Share capital
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$150 000
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Reserves
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40 000
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Retained earnings
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60 000
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On 1 January 2017, the records of Leslie Ltd also showed that the company had recorded the asset goodwill at cost of $5000. Further Leslie Ltd had a dividend payable liability of $10 000, the dividend to be paid in March 2017. All other assets and liabilities were carried at amounts equal to their fair values.
Required-
A. Prepare the consolidation worksheet entries on 1 January 2017, immediately after combination.
B. Prepare the consolidation worksheet entries at 30 June 2017.
C. Prepare the consolidation worksheet entries at 1 January 2017 assuming the consideration transferred was $259 000.
Question 3- Preparation of worksheet subsequent to acquisition, no fair value/carrying amount differences at acquisition date
On 1 July 2015, Adam Ltd acquired all the issued shares (ex div.) of Luke Ltd. At this date the financial statements of Luke Ltd showed the following balances in its accounts:
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Share capital
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$150 000
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General reserve
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40 000
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Retained earnings
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80 000
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Dividend payable
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20 000
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Goodwill
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10 000
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At 1 July 2015, all the identifiable assets and liabilities of Luke Ltd were recorded at amounts equal to their fair values.
The financial statements of Adam Ltd and Luke Ltd at 30 June 2016 contained the following information:
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Adam Ltd
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Luke Ltd
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Profit for the period
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35 000
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25 000
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Retained earnings (1/7/15)
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90 000
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80 000
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Transfer from general reserve
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0
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10 000
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Retained earnings (30/6/16)
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125 000
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115 000
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Share capital
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700 000
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150 000
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General reserve
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92 000
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30 000
|
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Total equity
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917 000
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295 000
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Provisions
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30 000
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20 000
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Payables
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15 000
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25 000
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Long-term loans
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50 000
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110 000
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Total liabilities
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95 000
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155 000
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Total equity and liabilities
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$1 012 000
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$ 450 000
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Plant
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600 000
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820 000
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Accumulated depreciation
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(295 000)
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(650 000)
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Fixtures
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300 000
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120 000
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Accumulated depreciation
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(180 000)
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(80 000)
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Land
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200 000
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140 000
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Brands
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50 000
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30 000
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Shares in Luke Ltd
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272 000
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0
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Goodwill
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0
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10 000
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Inventory
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45 000
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40 000
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Cash
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5 000
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7 000
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Receivables
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15 000
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13 000
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Total assets
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$1 012000
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$ 450000
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Required- Prepare the consolidated financial statements at 30 June 2016.